If you’ve not been investing in the world’s main securities markets for more than about 12 years, you may never have experienced the kind of downturn that’s been afflicting them for the past year or so. That may also mean you are not familiar with some of the terminology used in such circumstances.

Here, then, is a guide to those terms. It does not claim to be exhaustive – finance professionals are forever inventing new jargon – but we hope it’s comprehensive enough to make the financial press and the periodic reports of fund managers easier for you to understand.

Bear: An investor who thinks that share prices for a particular stock, sector, or the entire market will fall. The term may also describe a pessimist about the economy.

Bear market: A 20% or more fall in a stock index over an average period of 9 months. Similarly sized sudden falls with a quick return to an upward trajectory are not bear markets, but are “bull market corrections.” The chart shows how both types of events have affected the MSCI World Index.

Bull market correction and bear market examples, MSCI World Index
Source: Yahoo Finance

Some say the term comes from bearskin traders in America’s frontier days. If prices were weak, these middlemen sold skins they had not received or paid for, hoping to buy them from hunters at lower prices. However, market custom holds that the term arises from the fact that a bear attacks by slashing downward.

Bear squeeze (short squeeze): This is when short-sellers are forced to buy back their shares to cut their losses when prices unexpectedly jump. Sometimes this can be caused by other traders who notice a large short position in a thinly traded issue and buy aggressively to force the short sellers to cover their positions. That can yield a quick profit to the traders who create the bear squeeze.

Bear trap: During a rising market, a temporary downturn or reversal may delude investors into selling or going short (q.v., below). If the reversal ends and the uptrend resumes, those bears may be squeezed or trapped in a loss-making trade.

Bubble: When asset prices rise to levels far above their intrinsic value, it’s often called a bubble. Bubbles burst, eventually, and prices tumble. One of the most recent examples is Bitcoin from 2020 to 2022.

Bitcoin price history from November 2014 to December 2022
Source: CoinDesk

Correction: When an asset price reverses direction by not more than about 10% before resuming its upward or downward trend, it’s called a correction. However, as our first chart shows, even a brief correction can be 20% or more.

Drawdown: The percentage peak-to-trough fall in an asset price over, usually, a specified period. Most often, it refers to hedge fund returns but also applies to any asset. The frequency and length of drawdowns are measures of the volatility of asset prices and, therefore, of their investment risk.

FUD: It means “fear, uncertainty, and doubt” and usually refers to spreading dubious or false information about a business, startup, or cryptocurrency project, suggesting the criticism is wrongheaded. People who spread FUD are called “fudsters.”

Hedge: An investor can protect a stock position against possible loss by applying a “hedge”: for example, by taking a “short” position (borrowing shares in order to sell them) that’s equal to all or part of the “long” holding. If the share price falls, the profit made on the short (q.v., below) will offset the loss. Options and futures can be used to similar effect, without needing to borrow stock. It’s not new; bookmakers and gamblers have been “hedging their bets” for centuries.

Note that the hedge should never offset the original trade completely, otherwise no profit will be made if the original trade works as planned.

Hedge fund: These funds are, usually, established in tax havens. Light to unregulated, they are only accessible to wealthy investors and use more aggressive strategies than regulated funds. The strategies include long-short equity, market-neutral, global macro, and arbitrage. Usually, they tend to have quite a good performance record in a bear market (q.v., above). They can be quite opaque and often have tight restrictions on withdrawals.

HODL: “Hold on for dear life,” a popular acronym in the crypto community, is not just about hanging on to one’s assets no matter how far prices fall. It’s also a cult-like belief in an eventual return to profitability, however long that takes, as well as an implied rejection of skeptics – or “fudsters.” See also FUD, above.

Margin call: A margin account allows traders to borrow money from a broker to buy shares. The loans are secured by the stocks purchased or by cash. If the share prices fall by more than a certain percentage, the broker can issue a margin call. It requires the trader to deposit more cash or shares to cover the price movement. If the trader fails to do this promptly, the broker can sell the stocks – or any others in the trader’s account – to clear the position.

Market-wide circuit breaker: This is an exchange-wide temporary halt to trading. For example, if before 3.25 p.m. on any trading day, the S&P 500 Index suffers a single-day fall which triggers any one of three thresholds, the corresponding trading halts are triggered: 7% (Level 1: trading halted for 15 minutes); 13% (Level 2; trading also halted for 15 minutes), and 20% (Level 3: trading suspended for the rest of the day). The rule is designed to calm the market and minimize panic selling (q.v., below).

Overbought or oversold: If an asset price – or the market as a whole – has a sustained move upwards or downwards without any corrections, observers may describe the asset as overbought or oversold, respectively. It’s an opinion, however, not an analysis.

Panic selling: An unexpected negative development in an industry, a listed business, politics, regulation, or anything that affects share prices, can trigger panic among investors. If their efforts to sell are thwarted by a sharp downturn, they may try to sell at any price. This can feed on itself as more falls on their selling trigger wider panic, and prices crash.

The cycle of stock market emotions
Source: Forbes

Such emotional extremes are the norm in public markets. The chart above illustrates the typical cycle of investor emotions.

Risk-on/risk-off: This describes whether investors are generally investing in riskier assets (risk-on) or in safer assets (risk-off). In turbulent markets, investors may become “risk-off” by selling higher-risk assets, such as equities, to buy lower-risk ones, such as government bonds. A “risk-on” strategy is the opposite.

Safe haven: Investments that traders believe can protect them against loss in troubled markets are termed “safe havens.” Examples include government bonds, gold, and, for some investors (until recently), crypto-assets. As the performance of all three of those assets demonstrated over the past 2 years, no investment is completely safe.

Sell-off: This is what happens when investors sell heavily and aggressively, causing prices to fall sharply. See also panic selling, above.

Short/shorting: As a noun (“I've taken out a short”), this is when an investor borrows shares and sells them, expecting to buy them back later at a lower price. As a verb (“I've shorted that stock”), it’s the action taken to do this. This is something that is also used by long-short hedge funds (q.v., above) to protect capital in market downturns.

Wallpaper: This is a market jargon for worthless securities, as the certificates are only good for turning into wallpaper (or eye-catching lampshades). Share certificates of defunct mining exploration companies have been a prime source of “wallpaper” for many decades, while older examples include bonds issued by Victorian railway companies, the pre-Communist Chinese government, and a number of South American countries that went bankrupt before World War II.

Ironically, the high quality of engraving on some of these is such that they are now quite valuable, too much so for wallpaper or even lampshades.

Observant readers may have noticed that one of our charts, showing the cycle of stock market emotions, includes two rectangles, highlighting the highest and lowest levels of that index. However, there’s no explanation for their significance. Here, again, is the same chart, with the explanatory captions included.

The areas of maximum financial risk and opportunity
on the cycle of stock market emotions

Source: Forbes

What this means is that investors should regard the extremes of bull and bear market cycles as exceptional opportunities for, respectively, selling and buying.

Or, as Warren Buffett, the world’s most successful investor, put it: “I will tell you how to become rich... Be fearful when others are greedy. Be greedy when others are fearful.”

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