Topic: How To Invest

Stock broker jargon is a bad guide to investment decisions

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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 slant your investment decisions

You may have noticed that your stock broker sometimes uses unfamiliar words and phrases to describe investment concepts. Some of this stock 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 just 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 stock 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 stock 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 have to pay capital-gains taxes, which will 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 so bad.

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.

You can get our clear investing advice, plus buy/sell/hold advice on stock market picks you may be considering buying in our Successful Investor newsletter. Click here to learn how you can get one month free when you subscribe today.

Comments

  • Bruce F.

    The jargon which irritates me the most of all is “consolidate.”

    Patrick is not at all shy to promote his newsletters, but he is nothing compared to egomaniacs like Louis Navellier. They gush with superlatives when their recommendations have increased. But when their recommendations fail dramatically, they have “consolidated.” What a weasel word!

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