Dictionary of Financial Terms

Dictionary of Financial Terms

How to Invest: Investing Basics

Words have power. No more so than in the world of finance. You are what you say and what you understand. The better you grasp the meaning of financial terms, the better you can communicate and the more transparent becomes the vast, exciting and potentially profitable world of money.

By the same token, words can obfuscate. They can fool smart people. Once formidable financial houses --- Lehman Brothers, Bear Stearns, Washington Mutual among them -- collapsed because investors misunderstood (or chose to ignore) the explosive risk hidden within packages of securities given such benign labels as Credit Default Swaps (CDSs) and Collateralized Debt Obligations (CDOs).

This dictionary is not meant to be comprehensive. It is meant to be useful and accessible. It's based on common usage as practiced by financial professionals and was compiled over more than a decade by editors of The Street. It was designed to help you strip away the layers of patina applied by the industry so you can see the real picture beneath. That word restoration can be fun.

For example, did you ever wonder why oil was measured in barrels instead of gallons or tons? Turns out the first oil wells were drilled in Pennsylvania in the late 1850s, and the most readily available containers happened to be empty whisky barrels, which the thirsty roughnecks obligingly kept in plentiful supply.

And what about a MOB spread? It's not what the hapless hoods did on Saint Valentine's Day in Southside Chicago in 1929. Rather it's the difference in price between municipal bond futures and Treasury bond futures. MOB means nothing more than "municipal over bond."

And what about hedge funds? To be sure, there are as many definitions as there are funds. I should know. I ran a hedge fund for many years and know the complexities of the business. But my definition is quite simple:

"It is a fund that can go long or short stocks, hence the hedge connotation. But it's different from a regular fund in the way its managers are compensated. Regular money managers get a percentage of the assets. Hedge fund managers get a percentage of the assets and take 20% of the gains, both realized and unrealized."

So, while I know a thing or two about stocks and markets, I learned a ton from reading this little book. You can too.

So use it. Enjoy it. Keep it handy as protection.

Next time some tall-talking financial artist bombards you with words and terms he thinks you don't understand, tell him to raise his hands and spread his MOB.

You know better.

--Jim Cramer, founder of TheStreet and host of Mad Money on CNBC.

Definitions of Financial Terms