10 terms from “The Wolf of Wall Street”, which you probably didn’t figure out
Jan 27, 2014
If you have already succeeded to watch the all-new Hollywood flick by Martin Scorsese, set against the backdrop of our corporate drunk protagonist and ludicrously rich characters, you must have caught hold of ten terms used throughout the movie, some of them not so easy to grasp: IPO, Nasdaq and so on. Not only this, the way our protagonist sells the shares over the telephone could come off as surprising to some people, as well.
So that you could enjoy not only the funny scenes, but also understand and assess the subtleties of the life at a stock exchange and its terminologies, we asked Erik Nayman, Managing Partner of Capital Times and a recognized expert in the field of investment and trading securities, to provide some explanation to these terms mentioned in the film and their peculiarities.
1. What is an IPO?
Actually, IPO is an abbreviation of the term – Initial Public Offering, and as the name suggests, is the primary offering in any stock. Private firms must have an IPO in order to become a publicly traded company or a joint stock. For instance, until recently, Facebook was operating as a private company. Nevertheless, on May 18, 2012, the company offered its shares to the public and anyone that had money could buy the stocks on the IPO. Through this, the company can attract money into buying equity for further future investments. Previous investors receive an assessment on their earlier investments made when the company was still private along with the ability to sell their shares in the company.
The selling point is usually much higher than if the company was still kept in private – a direct effect of going liquid. However, a company cannot sell its shares by itself. For this, they must utilize a proper licensed Brokerage company. Ideally, by launching its IPO, a company becomes much more transparent and accountable. Although Belfort earned on bringing a company’s IPO whose share prices were set completely falsely. In fact, he sold something completely out of the air without having an existing business on the first place. Remember the part of the film, where Jordan goes around the room explaining that they were doing IPO, and then says: “Was that legal? (Pause) Of course, not!”
2. Penny Stocks – Cheap and cheerful
Penny stocks are cheap shares worth up to $20. Jordan Belfort made a fortune specifically by selling penny stocks. They’re different from other options in the sense that they could provide a significant profit to the holder, from anywhere between 20% to a 200% increase in a day itself and possibly even more. One doesn’t requires much capital to buy them. And with just a small investment and correct understanding of the options, one can cover up on their amount invested very quickly. This option is for lovers of quick buy/sell investment.
In the context of the film, penny stocks play an important role in the rise of Belfort, not only because their sale brought 50% commission per transaction, but rather because Stratton Oakmont sold shares of those ‘left-out’ companies which existed only on paper. This possibility exists because the Securities and Exchange Commission of the United States (SEC) did not pay adequate attention to these cheap stocks. How they were able to carry this out is described below.
3. Selling stocks over the phone
Trading stocks over the phone may seem redundant at first. How can I purchase securities worth a few thousand dollars over the phone when you did not even see the Seller? That’s because in the United States, there exists a very different business culture and public perception of the stock market, than that in Russia and Ukraine. In America, anyone can call and ask the broker to buy shares on their behalf. However, before that, they must still open a Broker account to trade stocks. This was particularly true in the 80s, when buying shares became fashionable and every other thought of it as a quick and easy way to become rich. Although shares are still popular, but now we have more options to invest in, for instance, credits and deposits. Amidst the hype, Belfort’s company engaged in just calling potential clients and luring them with possible profits.
To draw an analogy with the present day reality, at that time, calls with offer to purchase shares were as common to Americans, as theater tickets are sold over the phone in Ukraine – a practice, which surely must have bored you much!
4. Direct system of persuasion: The client should always tell you ‘yes’
For Jordan Belfort, there never existed the word ‘no’. He developed a specific system that forced his customers to always say ‘yes’. The Wolf of Wall Street noticed that for maximum effect, sales should be pitched using emotions. This is linked with confidence as well. Not all people manage to exhibit a relaxed sense of confidence that is so important when dealing with clients. But this art can be learned, more so if you want to increase sales and increase the number of clients.
There are two methods of persuasion: indirect and direct. In the first case, the means of persuasion could be random factors, such as, say, the credibility or communicator’s attractiveness. Of course, in a "cold" call it is quite difficult to realize someone’s credibility. For phone sales it’s much more appropriate to utilize the second method in which the conviction is based on logical, truthful, and obvious arguments.
Employees of Belfort presented themselves as one of top managers or vice-presidents of the company, and hence, naturally the other party commanded respect. Based on the situation, they picked up the necessary cues to reduce the "pain threshold" of parting with money. One said that through these their grandpa became so rich, and other asked them to judge based on their profits, since there were no losses at all. In fact, employees of Belfort told people on the other end what they wanted to hear, and this was often enough to make a deal.
5. Aggressive sales technique
The basic idea of this technique is that the seller makes the client believe that the proposed product is extremely vital to him. It is important not to seem intrusive, so as not to be driven away in disgrace with a "to hell with your stupid suggestions". You must not only be able to establish contact, but also to identify customer’s needs and ask the right questions and work with objections.
Belfort fed his employees that they are heroes, and thus motivated them. He knew that Wall Street - it's practically the Wild West, and understood how important it is that each of his men felt their importance and were prepared, if necessary "to pull the trigger."
6. Boiler Room
The film "The Wolf of Wall Street," opens your eyes not only to the backstage business secrets. It also reveals the secrets of quite risky schemes as well, such as the Boiler room. The term "boiler room" comes from an analogy with the hot boiler - since it is very hot and the other makes hot money. The essence of "boiler room" business is so that a new joint stock company could be ready for an IPO, that is, to sell shares in the open market. The organizers surround a market legend around the company to boost up the sales. After everything is carefully planned out - exactly what the company is doing and why it should succeed in the near future (for example, to obtain permission to release new cancer drugs) - professional sellers start offering the purchase of these shares to unsophisticated investors. Legend does its own job. End result being that these stocks are sold at a very high value, although actually they had no values in the first place.
Here it is appropriate to mention the so-called "rat holes" - the Belfort secret accounts in which he accumulated bought up shares of these "boiler" companies. He floated these stocks after the market price already reached its maximum, resulting in a fantastic profit to him.
7. ‘Pump and Dump’ – use and slay in the trash
Another not quite a very legitimate scheme, which was closely linked to Belfort. ‘Pump and dump’ means a sale of shares of lousy companies with inflated price. This is a classic example of Exchange fraud. The bottom line is that the insiders (usually the top managers of joint stock companies) make maximum efforts to unwind the company shares through rumors, hoping thereby to obtain a quick profit.
8. Sales Manager
This concept in the modern world has long been present. Jordan Belfort had literally an army of well-trained sales managers who did really well whatever he taught them. One of the most famous tests, which an applicant for a job must pass just to come to him - is a request to sell a pen. And if a novice was able to create a "buzz around assets" – he was immediately took on the staff.
9. NASDAQ
It is an acronym that stands for National Association for Securities Dealers Automated Quotations. It was once the largest American OTC market (over-the-counter market), specializing in shares of high-tech companies. Currently, NASDAQ is one of the three major US Stock Exchanges, along with NYSE and AMEX. The exchange owner is an American company NASDAQ OMX Group, which also owns eight European stock exchanges. To date, more than 3200 companies trade on NASDAQ. Moreover, a large number of Penny stocks are traded as well.
10. Liquidity
The higher the liquidity, the more quickly and with fewer losses one can sell the shares and exchange them for cash. Usually, stocks with higher liquidity have a ‘liquidity premium’, and they’re worth more than illiquid stocks. In addition, liquid stocks are traded among increasing number of players – i.e., "the bees fly to the honey, and honey is there where the bees are." After all, everybody is ultimately interested not in stocks, but rather, in the real money. And shares themselves are no more than an intermediate tool for making more money. Therefore, liquidity is very important for investors and they are willing to pay extra for more liquid stocks.
Belfort acted in the following way: he created two companies, between which trades were carried out in order to show a high level of liquidity. It showed a pretty good picture for investors, who saw that the shares are actively traded, prices are rising, and that the options are not only easy to buy, but its also easy to sell and get back their money.
Jordan Belfort was born in a middle class family on Long Island, but it did not prevent him to get rich quick. Even today, in spite of imprisonment and a fine of $ 110.4 million, which he has to pay the victims compensation fund, Belfort lives on a grand scale. He travels around the world, receiving $30 thousand dollars per show. In addition, he has earned several million dollars for his books and film rights. Working as a consultant in the private sector, he worked with Symantec, Deutsche Bank, Delta Air Lines, Fairfax Media, Virgin Airlines. Despite everything, he rose again and succeeded, however, closing eyes on the criminal activities of Jordan Belfort, you must understand that this crook has a lot to learn from.