9 Financial Terms You Should Understand Before Watching ‘Madoff’

The miniseries “Madoff” will make waves tonight, when the peek behind the biggest-ever Ponzi scheme in history premieres on ABC.

But what the hell is a Ponzi scheme anyway? And what do all of those other confusing financial phrases Richard Dreyfuss (playing Bernie Madoff) keeps mumbling even mean? Lucky reader: TheWrap‘s got your back.

Below are nine (hopefully) over-simplified definitions of some complex terms that will arise over the show’s run.

Hedge fund
A hedge fund invests pooled money in hopes of providing high returns to those in the group. They’re basically unregulated mutual funds for rich people. The term “hedge” originated from the idea that the funds “hedged” one’s bets by investing for both the short and longterm. They’ve since evolved a bit.

Market maker
Bernard L. Madoff Investment Securities LLC was a Wall Street “market maker” before the boss was considered a huge fraud. A market maker is a designated company or individual that is always prepared to buy or sell a security at a publicly displayed price. This way, the markets stay liquid since someone always has their wallet out.

Treasuries
Treasuries are tradable debt obligations issued by the government. You’ve probably heard of T-Bills, but treasuries can also be notes or bonds — it kind of all depends on how long you’re willing to have money tied up.

The cool thing about treasuries is that there’s essentially no risk, because the government isn’t going anywhere, regardless of how this primary season goes. Before you pull all your money out of the stock market, however, be prepared for very low returns in exchange for that confidence level.

SEC
The SEC stands for the Securities and Exchange Commission, which is the government organization that should have figured Madoff out a long time before it did. This is the scary agency that enforces securities laws and proposes the rules — kind of like the IRS for stock markets.

A Republican named Dr. Michael Piwowar is the current Commissioner. Don’t make him angry; you wouldn’t like him when he’s angry.

Ponzi scheme
A Ponzi scheme is a type of fraud in which the creator of a fund — like Madoff — promises investors especially high returns. The sales pitch is usually claims that the trader has some brilliant proprietary system and they’re so much smarter than everyone else, blah, blah, blah.

However, in reality, rather than actually paying dividends earned from real investments, the creator simply pays out money from the next investor’s money. Madoff never invested people’s money in his “special” fund — he put it in his own Chase bank account, which is exactly what he used to pay people. The con is named after Charles Ponzi, who sounds like a real asshole.

NASDAQ
The NASDAQ — the National Association of Securities Dealers Automated Quotations — is the second largest stock exchange in the world, behind only the New York Stock Exchange. Madoff helped pioneer the electronic market by implementing computers into the game before many others. He was eventually named chairman of NASDAQ, a high honor for the crook.

The “Nasdaq” can also refer to a portion of the market called the Nasdaq Composite Index. So, if someone says “the Nasdaq is up” or down, they’re talking about that barometer, not the acronym.

Penny stocks
Got a penny? You’ve got a stock! Well, maybe you’ll need up to 499 of those pennies. This one is pretty easy: Penny stocks are common shares of dirt cheap companies, valued at less than five bucks per share. This tempting option is super-volatile, so while they’re financially easy to get into, be ready to lose your pennies due to the high risk.

Penny stocks aren’t trading on a national exchange — they’re considered over-the-counter securities. Think Tylenol versus Percocet. Penny stocks often trade on …

…Pink sheets
Pink sheets are a listing of companies that are too small for the bigger stock exchanges like NASDAQ and the New York Stock Exchange to bother with. There are no requirements for a company to get listed, other than submitting a form. Companies listed on the pink sheets also do not have to file any paperwork with the SEC, making it difficult to get a real sense of how they are performing financially. These listings are perfect for shady types. (See: “The Wolf of Wall Street.”)

Feeder funds
Picture the reverse of baby birds eating out of mama’s mouth, but try not to throw up.

Feeder funds are smaller funds that feed into a larger, master fund. The master fund then controls all of the investment capital, like a boss. Profits made by the master are then split among the various feeder funds, based on how much they invested. The feeder fund is the cousin of a fund of funds, which is a lesson for Season 2 — and a lot of the word “fund” for one sentence.

“Madoff” also stars Erin Cummings, Tom Lipinski, Frank Whaley and Blythe Danner as Ruth Madoff. It was written and created by Ben Robbins, and directed by Raymond De Felitta.

“Madoff” premieres tonight on ABC at 8/7c.

Joe Otterson contributed to this post.