In the financial markets, a haircut represents the risk that an asset will lose value on a sale or in the event of an immediate cash settlement. The higher the haircut, the higher the risk and volatility of a security. The haircut is a percentage value that refers to the difference between the market value of a certain asset and the value recognised as collateral to obtain a loan. For example, if an investor owns £20,000 of shares at market prices, they can use this value as collateral to take out a loan. Should the value of the shares fall, the bank applies a haircut to protect itself, namely it grants a loan for a lower value, e.g. for £10,000. This difference is the haircut, with which the bank defends itself to ensure that the collateral can cover the loan.
A hammer candlestick is a specific pattern on a candlestick chart, which technical analysts use to track a security’s price movements. A hammer candlestick is a bullish pattern signalling that the price of a security is rebounding.
It occurs when the price of a security first declines after opening, then reverses and closes near the opening price. The pattern is made up of just one candle that resembles a hammer, with a short body atop a long wick.
Hang Seng Index (HSI)
The Hang Seng Index (abbreviated as HSI) is a measurement of a selection of stocks that represent about 60% of the capital listed on the Hong Kong Stock Exchange. It is weighted by market capitalisation and covers the 50 largest companies in Hong Kong. Founded in 1969, it is now used to take the pulse of Hong Kong’s economy and is the most widely referenced index for that market.
A harmonic scanner is a software tool that checks price charts for harmonic patterns, which are changes in price direction that follow the Fibonacci sequence. The Fibonacci sequence is a series of ratios that commonly occur in nature, and they are applied to securities markets to predict the extent to which the price of a security will correct itself after making an upward or downward move. The most frequent patterns are given names, like the Gartley, the crab, or the bat. A harmonic scanner allows a trader to quickly analyse many currency pairs, securities, or commodity prices to identify harmonic patterns and make trading decisions based on them.
A hedge is an investment made against the prevailing price direction of an asset in order to protect against the risk of a price reversal. It is meant to offset potential losses. Hedging reduces risk but also lowers potential gains, so it comes at a price.
Hedging is often achieved through derivative instruments, such as forwards, options, or contracts for difference. These instruments allow an investor to wager against a favourable price trend in the underlying asset without holding or taking delivery of the asset itself. Diversification is another hedging strategy. Investing in gold is a common move made to hedge against inflation.
A hedge fund is an actively managed investment fund that is restricted to individuals with a high net worth or income. Hedge funds are named for the short-selling techniques that the first hedge funds used, but their activity now has little to do with hedging risk, and they are actually considered risky and controversial investments. Hedge funds often make extensive use of leverage trading and invest in lesser-known and higher risk instruments like derivatives and options.
Forex hedging is any strategy used to protect against losses in currency trading activities.
One strategy is a simple, or perfect, hedge, which is when a trader opens buy and sell trades for a pair at the same time to taking advantage of market imbalances to make money at no risk. This strategy is not allowed by US brokers. A more common strategy is an imperfect hedge, where a trader uses a derivative called a forex option to minimise their risk. With a forex option, the trader has a right but not obligation to buy a currency pair at a certain price at a given time in the future, so if the pair falls below that price (called the strike price), they can exercise the option and recoup at least part of their losses. A final strategy involves holding multiple currency pairs as a way of hedging against adverse movements in any given pair.
High-Frequency Trading (HFT)
High-Frequency Trading (HFT) is a type of automated trading that uses an algorithm in order to execute a very high volume of trades in a limited period of time. Generally its profitability depends on speed, so computing power, connectivity, and sophisticated coding are key to this type of trading.
Proponents of HFT hold that it adds much-needed liquidity to the market and reduces the bid-ask spread. However, critics claim that its liquidity comes and goes so fast it cannot be used by traders and that HFT traders rig the system by using their extremely fast speeds to cut in on trades in the time it takes other traders that have expressed an intention to buy to actually place their trade.
The term high-yield bond refers to a high-risk corporate bond, i.e., a bond with a rating below BBB-. Commonly, these bonds are also called junk bonds, as they have a very low rating and offer a high yield to cover the high risk of defaulting. They are bonds with a high possibility of ending in default and not repaying the investor.
Like all bonds, high-yield bonds are debt securities, instruments issued by companies to acquire funds from the market to invest in their company. When the contract matures, the company must repay the value of the bond plus the interest rate, but the poor rating exposes the investor to considerable risk. In general, small investors should avoid high-yield bonds due to the high risk of default.
A histogram resembles a bar graph and visually represents data by grouping it into “bins” or “buckets” along a single x-axis continuum. For example, a histogram of employee salaries in the UK might have a £15,000 to £30,000 bracket, a £30,000 to £45,000 bracket, and so on in £15,000 increments. The height of the bar shows the number of data points that fall into each range. In a histogram, the order of the bars cannot be rearranged since they lie on a continuum, while an ordinary bar graph can be reordered because it charts non-consecutive categories.
Histograms are used by investors and traders as a technical analysis tool to visualise momentum changes. The most common indicator involving histograms is the Moving Average Convergence Divergence (MACD) histogram.
A holding company is an entity that holds a controlling stake in other companies, but without itself making any products, providing any services, or carrying out any business operations.
However, the companies they control (their subsidiaries) are often operating companies that manufacture goods or render services. Holding companies oversee how subsidiaries are run and make decisions about their leadership, but they are not involved in subsidiaries’ day-to-day operations.
Holding companies are often formed as a way to limit liability since each individual company rather than the parent company is liable for its own debts. They are also used to control companies without having to fully own them, thus making a more efficient use of capital.
For instance, a holding company could control a subsidiary’s revenue stream by only owning 51% of its capital stock, whereas if the same operation was an internal unit of the business, it would have to contribute all capital. Holding company structures can also be used to get lower interest rates since a larger, more established entity is able to negotiate more favourable terms than a higher-risk subsidiary.
Hyperinflation refers to a rapid, unchecked rise in the price of basic goods and services. The consensus among economists is that inflation becomes hyperinflation when price indexes increase by over 50% per month.
One of hyperinflation’s most detrimental consequences is that it erodes the real value of the currency (its purchasing power), causing people to put their money into durable goods with intrinsic value, which drives up the price of goods even further. Most of the time, hyperinflation occurs because a government injects more money into the domestic economy than is warranted by that economy’s performance, usually to cover budget deficits.