A Piece of the Action

I thought I knew what "shibboleth" meant, but I looked it up and found out I was wrong. I was right about it being Jewish, though. I still think I know what "petard" means, but I think you're spelling it wrong. I think it's something like "pickard" or "picard", but I couldn't find it under those or any other spellings that I could think of. Be that as it may, I still think it's a type of spear or pike. In the old days, soldiers would sometimes stick the head of a defeated enemy on their spear point and carry it around like a trophy. To be hoisted on your own petard, is when your enemy defeats you and displays your head on your own spear, I suppose to keep from getting his spear dirty. As a  modern figure of speech, it means you screwed yourself while trying to screw somebody else. Funny, though, the Blogger spell checker says that your spelling is correct and mine is incorrect. Let me know what you find out.

All those speculative financial products, like futures contracts and hedge funds, come under the broad general category of "derivatives". That's basically a vehicle for repackaging risk into smaller units and selling them off one piece at a time. Say this farmer wants to plant a thousand acres of wheat this year, but he needs some help with the planting costs and he is nervous about putting all those eggs in one basket. So he sells this futures contract to somebody who wants a piece of the action but doesn't want to buy the whole farm. What the farmer is doing is sharing his risk, along with the profits he hopes to make if everything goes well. With the stock market, you might want to buy a bunch of this company's stock but, like the farmer, all that risk makes you nervous. So you buy some of the stock and also buy an option to buy more of it, on some future date, at today's prices. If the stock goes up you will be buying the second portion at bargain rates. If the stock goes down, you can let the option expire and you're only out the nominal fee that you paid for it. You will have lost money on the first portion, but not as much as you would have lost if you had bought all that stock at once. The guy who sold you the option was betting that the stock wouldn't go up, but he didn't risk as much as if he had sold you all his stock in the first place.

The reason the high rollers fool around with all those derivatives is so that they can keep all their money in the game, while mitigating the risk that playing the game entails. Derivatives are usually pretty liquid, which means you can always find a buyer if you want to dump it and put your money into something else. You may lose money in the process, but hopefully not a much as you would have by holding onto the derivative long term. One reason a guy might want to sell a product at a loss is that he thinks he sees something better and wants to put his money into that. Another reason might be that he thinks the price will go down even further and he wants to cut his loses and get out while the gettin's good. For every person who wants to sell, there is somebody else who wants to buy, if the price is right. If the buyer and seller agree on the price, they make the trade.  If they can't agree on the price, they continue to look around for a better deal. That's why it's a full time job, not recommended for the likes of you and me.

If I was a younger man, I might be interested in getting into that line of work. One reason I never did was that you had to live in the city and wear a suit and tie to do that stuff in those days. Nowadays, you can do it all on your computer from the comfort of your own home, but you still have all that stress. Who needs that at my age?