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