Glossary

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The financial world has developed a special investment-oriented language to help describe the stock market, investments, securities for the stock market, stock market analysis, and its conditions. At times you may be confronted with a term which is totally alien or has a completely different meaning from what you thought. Misunderstanding these terms can sometimes lead to the wrong conclusion, and that can cost you money!

What you don't know can hurt you.

P/E (Portfolio)

The weighted average of the price/earnings (P/E) ratios of the stocks in a mutual fund's portfolio. The P/E ratio of a company is its stock price divided by a year's earnings per share, and is a closely watched measure of a firm's performance.

P/E on FY EPS Estimates

The price/earnings (P/E) ratio based on next year's earnings estimates.

P/E Ratio

Also known as the P/E multiple, this is the latest closing price divided by the latest 12 months' earnings per share. P/E is perhaps the single most widely used factor in assessing whether a stock is pricey or cheap. A company's P/E should be looked at against those of similar companies, and against that of the stock market as a whole, since different industries and even different companies are characterized by markedly different P/Es. In general, fast-growing technology companies have high P/Es, since the stock price is taking account of anticipated growth as well as current earnings. High-tech companies often trade at P/Es above 40, or about double the overall market P/E. Banks, on the other hand, typically have below-market P/E ratios. A high P/E is often a reflection of lofty expectations for a stock, since no one would invest knowing it would take 40 years just to make one's money back. The idea is that earnings will grow. A high P/E can also reflect poor recent earnings. A low P/E can imply low investor expectations, an undervalued stock, or both. Some investors like to compare P/E to the growth of earnings per share. The resulting PEG ratio (P/E divided by growth rate) gives some idea of whether investor expectations are reasonable given past performance. Value investors sometimes say that a PEG ratio of less than one means a stock is cheap.

P/E Ratio (1 month ago)

The closing price one month ago divided by the latest 12 months' EPS.

P/E Ratio (1 year ago)

The closing price one year ago divided by the latest 12 months' EPS.

P/E Ratio (6 months ago)

The closing price six months ago divided by the latest 12 months' EPS.

Par Value

Par value for bonds is simply the face value. Par value for stocks is an outdated concept, and although some common stock has a par value, nowadays many issues don't even bother.

Passive loss deductions

Passive loss deductions or passive activities deductions are deductions from trades or businesses in which the taxpayer is only "passively" involved in, such as income from portfolios and tax refunds. The "loss" deductions come into play when the amount of "passive deductions" exceed "passive activity gross income" for the taxable year.

Pay Date

The date a company will issue a previously announced dividend and mail the checks to shareholders. You must own the stock on the record date in order to get a check on the pay date. If you buy the stock the day after, you won't get a dividend check.

Payment of Cash Dividends

Includes cash payments of common and preferred dividends to the shareholders. Preferred dividends are the amounts required for the current year only and not for any amount in prior years.

Payout Ratio

The latest indicated annual dividend rate divided by the latest 12 months' EPS. Basically, this tells us how much of earnings are paid out in dividends. A company with a high payout ratio can be appealing to conservative investors who want income, but by paying out so much of earnings, the company will have little left to finance growth. A high payout ratio can be cause for concern when coupled with weak or falling earnings, since it could mean a dividend cut is in the offing, or that the company is shortchanging reinvestment to keep up its payout. For most companies, the payout ratio should not exceed two-thirds of earnings. Like most ratios, however, this one varies with industry. Real estate investment trusts pay out almost all their earnings because of a provision in the law that exempts them from taxes if they do so. Utilities also have high payout rates. By contrast, newer, faster growing companies often pay no dividends at all.

Payout Ratio

The latest indicated annual dividend rate divided by the latest 12 months' EPS. Basically, this tells us how much of earnings are paid out in dividends. A company with a high payout ratio can be appealing to conservative investors who want income, but by paying out so much of earnings, the company will have little left to finance growth. A high payout ratio can be cause for concern when coupled with weak or falling earnings, since it could mean a dividend cut is in the offing, or that the company is shortchanging reinvestment to keep up its payout. For most companies, the payout ratio should not exceed two-thirds of earnings.

Like most ratios, however, this one varies with industry. Real estate investment trusts pay out almost all their earnings because of a provision in the law that exempts them from taxes if they do so. Utilities also have high payout rates. By contrast, newer, faster growing companies often pay no dividends at all.

PEG Ratio

The price/earnings (P/E) ratio divided by expected per-share earnings growth over the coming year. A value of less than 1 implies that the stock may well be undervalued; more than 1 implies that it is overvalued. The idea behind the PEG Ratio is to relate price to growth, given that some expectations about growth -- or the lack thereof -- are built into every P/E. PEG is considered particularly helpful in valuing small and mid-cap growth stocks, which typically pay no dividend. For valuing larger stocks, Peter Lynch adds a company's dividend yield to its projected five year earnings growth rate on the theory that larger, more established firms are valued by investors for their current payout as well as the prospect of price appreciation. PEG ratios are considered less useful in assessing cyclical stocks and those in industries such as banking, oil or real estate, where assets are a more important indicator of value.

Percent Bond

The percent of the mutual fund that is composed of bonds, including every fixed-income security with a maturity of more than one year, from government notes to high-yield corporate bonds.

Percent Cash

The percent of the mutual fund that is composed of cash and cash equivalents (fixed-income securities with a maturity of one year or less). Negative percentages of cash indicate that the portfolio is leveraged, meaning it has borrowed against its own assets to buy more securities or that it has used other techniques to gain excess exposure to the market.

Percent Change

The percentage difference between the preceding day's closing price and the current price.

Percent Change in Earnings

The percent difference in Earnings Per Share (EPS) between what analysts were predicting for the company and what the company actually reported.

Percent Gain

The gain or loss on a security or portfolio, expressed as a percentage of its cost.

Percent Institutional Ownership

The proportion of outstanding shares held by mutual funds, pension funds and other big institutional investors.

Percent Net Assets

The proportion of the fund's net assets that each of its leading holdings makes up.

Percent of Portfolio

The percentage of a total portfolio's value that is accounted for by a given security.

Percent Other

The percent of the mutual fund that is composed of holdings other than stocks, bonds or cash. This can include preferred stocks (equity securities that pay dividends at a specified rate), as well as convertible bonds and convertible preferreds, which are corporate securities that are exchangeable for a set amount of another form of security (usually common shares) at a prestated price. Other also denotes all those not-so-neatly categorized securities, such as warrants and options

Percent Price Change

The percent change in the price of the stock versus the price at a given point in the past.

Percent Price Change 1 Week

The percent price change from the previous Friday's closing price to the previous day's closing price.

Percent Price Change Last 6 Months

The percent price change from the closing price on the last day of the month six months ago to the previous day's closing price.

Percent Price Change Last Month

The percent price change from the Friday closing price four weeks ago to the previous day's closing price.

Percent Price Change Last Quarter

The percent price change from the closing price on the last day of the month three months ago to the previous day's closing price.

Percent Price Change Last Year

The percent price change from the closing price on the last day of the current month one year ago to the previous day's closing price.

Percent Price Change Year to Date

The percent price change from the closing price on the last day of the previous year to the previous day's closing price.

Percent Stock

The percent of the mutual fund that is composed of common stock.

Personal Active Strategy

An approach to investing in which the individual investor handles his or her own portfolio with the assistance of investment advisors.

Points

A point is a sum equal to 1% of a loan amount. It is charged to the borrower by the lender.

Portfolio

A collection of securities held by an individual.

Portfolio Turnover

A measure of how much buying and selling the fund is doing. This figure is computed by taking the lesser of purchases or sales (excluding all securities with maturities of less than one year) and dividing by average monthly assets. A turnover ratio of 100% or more does not necessarily suggest that all securities in the portfolio have been traded. In practical terms, the resulting percentage loosely represents the percentage of the portfolio's holdings that have changed over the past year. Other things being equal, a lower turnover rate is preferable to a higher one. High portfolio turnover can mean high expenses associated with all that trading, as well as higher capital gains distributions. High turnover can also mean a high level of speculation and a short-term orientation on the part of fund management.

Power of attorney

A document authorized by a person, called the principal, that grants legal authority to another person, the agent, to act on behalf of the principal. A power of attorney could authorize the agent to purchase and sell shares on behalf of the prinicipal where all trading activity conducted by the agent will be binding on the principal.

Pre-Tax Income

Also known as EBT, for earnings before taxes, this is simply net income with income taxes added back.

Pre-Tax Margin

The latest 12 months' pre-tax income divided by the latest 12 months' sales. A good measure of profitability, although it's important to bear in mind what industry a company is in. Supermarket chains have low pre-tax margins and depend on volume, so there is no point comparing a grocery chain to an upscale specialty retailer, which will have higher margins.

Preferred Dividends

The total ruppee amount of the current dividend requirement on issued preferred stock of the parent company. Preferred dividends are the amounts required for the current year only, and not for any amount required in past years.

Preferred Shares

A special variety of stock that (usually) pays a fixed dividend, and whose holders have a claim on the company's earnings and assets that precedes the claim of those who hold common stock. Preferred shares act a little like bonds, what with their dividend, but aren't necessarily preferred by individual investors, perhaps in part due to the difficulty of pricing them.

Preferred Stock

Preferred stock is stock that acts a lot like a bond but confers an ownership stake in the company. Preferred shares typically pay a fixed dividend and give their holder a claim to earnings and assets prior to that bestowed by common stock. In general, the higher the preferred yield, the greater the risk. Also, preferred yields can be cut, whereas a company can't simply decide not to pay its bondholders (unless it relishes the notion of default). Preferred stock often comes with a conversion clause permitting it to be traded in for common shares; in such instances, look at the conversion premium, or gap between the conversion price and the market price of the common. Too large a gap means limited appreciation for the preferred, and little chance of conversion in the near future. Preferred stock tends to be bought by institutions rather than individuals. The latter can conveniently invest in such issues through a mutual fund specializing in convertible securities.

Preferred Stock Equity

Stockholders' equity attributable to the preferred stock of the parent company. Preferred stock equity equals the number of preferred shares issued (less any preferred shares in the treasury) multiplied by the involuntary liquidating value per share (usually par).

Premium

The price paid by a buyer to a seller of an option quoted on a per-share basis. The premium will usually exceed the intrinsic value of the option because of its time value.

Previous Close

The price of the security at the end of the previous day's trading session.

Price

The current market price of a security or the amount paid to buy one unit of a security.

Price Appreciation

Market value less cost. This number tells you how much your investment has appreciated in price.

Price Change

The percent price change over the specified time interval.

Price Channel

A channel (upper and lower lines) that typically shows the trailing 20-day high and 20-day low. The trading strategy based on the price channel is one of the simplest and oldest trend-following models. It requires no calculations. The rules are: Buy when the weekly closing price moves up to a new 20-period high; sell and sell short when the weekly closing price moves down to a new 20-period low. In other words, when the price moves out of its channel, trade in the direction of this new trend. When using Investor charts to study price channels, you can select whatever time period works best for your investing strategy.

Price/Asset Ratio

The closing price divided by total assets.

Price/Book Value

The latest closing price of the stock divided by the most recent quarter's book value per share. (Book value is simply assets minus liabilities.) Also known as the price/equity ratio. A favorite of strict value investors, the price/book ratio gives some idea of whether you're paying a little or a lot for what would be left of the company if it went out of business immediately. A price/book ratio of less than one causes value hunters to salivate. One reason is that basic accounting principles, geared to err on the side of conservatism, typically understate a company's book value, since assets must be accounted for at cost less depreciation. Thus, a factory could have little or no value on the balance sheet even though, if it were for sale, it might bring millions. Given all this, a very low price to book ratio makes some fundamental investors feel that an ability to generate earnings as well is almost gravy. As with most ratios, this one will vary by industry. The price/book ratio can be especially useful in any field where asset values are fairly certain.

Price/Cash Flow Ratio

The closing price divided by cash flow per share from the last 12 months. An alternative to the P/E ratio, this one removes depreciation and other non-cash charges from the equation, and can be especially useful in businesses with huge depreciation expenses. Price/cash flow is also often used to analyze companies in cyclical industries such as automobiles and steel. Like the P/E ratio, Price/Cash Flow should not be considered in a vacuum, but rather in comparison with similar companies. Another advantage of Price/Cash flow is that it makes it easier to analyze various companies across borders. Depreciation and other issues are treated in different ways under different national accounting rules, making earnings-based ratios problematic. Looking at cash flow can help eliminate such problems and make comparisons more meaningful.

Price/Sales Ratio

The latest closing price of the stock divided by the latest 12 months' sales per share. In recent years, investment theorists have paid increasing attention to sales as an indicator of a company's prospects.

Primary EPS from Continuing Operations

The latest four quarters of earnings from continuing operations divided by the number of shares outstanding.

Primary EPS from Discontinued Operations

The latest four quarters of earnings from discontinued operations divided by the number of shares outstanding. This excludes income from extraordinary gains/losses.

Primary EPS from Total Operations

The sum of the previous four quarters' primary EPS from continuing operations and the primary EPS from discontinued operations divided by the number of shares outstanding.

Prime Rate

Officially, this is the interest rate that banks charge their biggest and best customers for short-term loans. (In reality, some borrowers are charged less or more, depending on various factors.) Because some other rates in the economy are based on the prime, and because it is considered a good indicator of the direction of rates generally, the prime rate (which is set by individual banks) is closely watched.

Probate

The court process in which a deceased person's estate is administered, whether the person died with a will or not. The process includes the appointment of a representative, notice to creditors, inventorying the estate, and distributing the estate according to the deceased person's will or according to the law if there is no will.

Productivity

Technically, the rate of output per unit of input. In the economy at large, productivity generally means labor productivity, or output per hour worked. In a company, productivity can be measured by the ratio of revenue per employee, the return on assets, and at a more specific level, the number of widgets produced per hour at a given plant running with a given level of staffing, equipment, energy and other inputs.

Profit Margin

Subtract cost of goods sold from net sales, and divide the result by net sales. Basically, profit margin tells you the rate of profit generated on actual business operations, leaving aside capital investment, depreciation and other costs that don't directly and immediately relate to the cost of goods. A firm with a razor-thin profit margin generally is less attractive to investors than one with a big profit margin, but like all such measures, this one varies widely by industry. Profit margins for successful software firms and movie studios can be quite high, while profit margins for supermarket chains tend to be low.

Program Trading

Computerized trading undertaken by large institutions to exploit differences in price between expiring stock index futures and the underlying stock when both ought to be equal. The resulting arbitrage play produces essentially riskless profit. Program trading has been criticized for creating market turmoil, in effect producing risk-free profits for practitioners while increasing volatility for everyone else. But advocates of program trading say it makes a more efficient market by eliminating price differences between two items that are essentially the same.

Property, Plant, and Equipment, Gross

The original purchase price of the fixed assets of a company.

Property, Plant, and Equipment, Net

Assets of a company that are of a relatively permanent nature and are not intended for resale. The figure is stated as cost minus accumulated depreciation and amortization.

Prospectus

A document issued by a company that is about to sell stock to the public. Prepared with the help of lawyers and other high-priced advisers, the prospectus is must-reading for investors. It discloses a wealth of information about the business of a private company, much of it not previously made public. This includes financial data, background on the top executives, information on pending litigation, details of the offering itself (what proportion of ownership is being sold, what will happen to the proceeds), and risk factors to consider before investing (competition in the industry, barriers to entry, etc.).

Proxy

Authority to act for another, or the person with the power to do so. In the investment world, a proxy may be solicited from shareholders so that management can vote their shares. The word ""proxy"" is also investment shorthand for the proxy statement, a revealing document sent to shareholders annually that discloses what issues may be up for shareholder approval and how much top managers are paid.

Public Short Ratio

A technical indicator that shows the relationship between the number of public short sales and the total number of short sales. The usefulness of the public short ratio (PSR) is based on the premise that of all short sellers, the public picks the worst possible time to sell short. If this is true, then we should buy when the public is shorting (historically high PSR) and sell when the public is buying (historically low PSR).

Purchase Constraints

Describes any limits on the purchase of shares in the fund.

Purchase of Property, Plant, Equipment

Capital outlays undertaken to increase, construct, or improve capital assets.

Purchase of Short-Term Investments

Includes any items not assigned to purchases, selling of fixed assets, or investments.

Put/Call Ratio

Volume of put options divided by the volume in call options. A high ratio (put volume much higher than call volume) is considered by technical analysts a sign of bearish sentiment indicating the market is headed south.