Topic: How To Invest

Stock broker jargon is a bad guide to investment decisions

Stock broker jargon is a bad guide to investment decisions

Every industry and group has its own special jargon. This specialized language always has the same purpose. It simplifies communications within the industry, and helps make insiders feel they are part of a tightly knit community. It also helps the group pursue its goals. It does that by shaping concepts so that they facilitate lines of thought and discussions that match the industry’s view of the world.

This natural human tendency has probably been going on ever since language began.

You may recall George Orwell’s classic Cold War novel, 1984. In the book, the totalitarian government that rules the English-speaking world has decided to replace English with an invented language called Newspeak. This new language uses lots of English words, but it defines concepts in such a way that forbidden ideas are clumsy, if not impossible, to express.

For instance, Newspeak has no word for “free” in the political sense, although there are ways to say, for instance, that a mattress is free of fleas.

How stock broker jargon can distort your investment decisions

You may have noticed that your stock broker sometimes uses unfamiliar words and phrases to describe investment concepts. Some of this broker jargon is simply shorthand that brokers use amongst themselves, to refer to familiar situations without having to explain the underlying concept. However, the concepts that these “broker-ese” words and phrases represent are also naturally conducive to furthering the goals of the brokerage business.

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If you find yourself thinking in broker-ese, you’ll naturally make assumptions that are in tune with the goals of your stock broker, and may be out of tune with yours.

Here’s an example: From time to time your broker may advise you to sell a particular stock you own because it represents “dead money.” This doesn’t mean there’s anything wrong with the stock or the company. Instead, your broker simply thinks the stock may only go sideways for a period of months or longer, producing no capital gains for you. So he naturally feels you should sell it and buy something with better short-term capital-gains potential.

To do so, of course, you have to pay one commission to sell and another to buy. You may also face some costs from the bid-ask spread. If you make money on the sale and the stock is outside your RRSP or other registered account, you’ll also have to pay capital-gains taxes. And that leave you with less capital to reinvest.

Taking all that into account, putting up with a little “dead money” in your portfolio doesn’t seem to be quite such a bad idea.

Besides, many stocks qualify as “dead money” much of the time. That’s because they go sideways over long periods; their biggest gains occur in unpredictable spurts. Risk is relatively low in a high-quality stock that is going through a “dead-money” phase, by the way. But profits can be spectacular when it comes back to life.

Building a portfolio for the long term—not avoiding “dead money” stocks—is key to investment success

Rather than trying to stay out of so-called “dead-money” stocks, it’s better to focus on building a portfolio that can produce a growing stream of dividends for you, plus long-term gains.

That’s your goal as an investor. It differs and often clashes with the goal of the brokerage business, which is to sell you investments.

COMMENTS PLEASE—Share your investment knowledge and opinions with fellow members

Is there a particular piece of stock broker jargon you find particularly annoying and misleading? Do you believe a broker’s unclear or even misleading use of language has ever cost you money? Let us know what you think.


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