Off-balance-sheet finance Assets are acquired in such a way that liabilities do not appear on the balance sheet (e.g. renting an asset that will not appear as a liability in the accounts).
Off-market transfer The transfer of ownership of shares and other securities without the use of a broker or the stock market. A stock transfer form can be used.
Offer document (1) A formal document sent by a company attempting to buy the shares of a target firm to all the shareholders of the target, setting out the offer. (2) The legal document for an offer for sale in a new issue (IPO).
Offer for sale A method of selling shares in a new issue. The company sponsor offers shares to the public by inviting subscriptions from investors. In an offer for sale by fixed price, the sponsor fixes the price prior to the offer. In an offer for sale by tender, investors state the price they are willing to pay. A strike price is established by the sponsors after receiving all the bids. All investors pay the strike price.
Offer for subscription A method of selling shares in a new issue. The issue is aborted if the offer does not raise sufficient interest from investors.
Offer price (1) The price at which a market maker in shares will sell a share, or a dealer in other markets will sell a security or asset. (2) The price of a new issue of securities e.g. a new issue of shares.
Official List (OL) The daily list of securities admitted for trading on the UK’s regulated markets by the UK Listing Authority. Most are on the London Stock Exchange’s Main Market. It does not include securities traded on the Alternative Investment Market (AIM) or most of those on NEX Exchange.
Offshore investment Outside investors’ home country jurisdiction and financial regulation, usually in tax havens, such as the Cayman Islands.
Offshore roll-up funds Savers can deposit money in these outside their country of residence to reduce tax paid on interest or dividends. The interest/dividends are kept within the fund until the saver partially or wholly encashes it. This may be done when the investor enters a phase of life as a low-rate tax payer.
Oligopoly A small number of producers in an industry.
OMX Scandinavian and Baltic group of stock exchanges, now merged with the United States’ Nasdaq.
Ongoing charge Collective (pooled) investment funds, e.g. unit trusts need to pay for the management of the fund and numerous other annual costs. The annual ongoing charge, expressed as a percentage of funds under management, is usually 0.2 to 0.5 percentage points greater than the annual management charge and covers, for example, administration,
custody, legal and audit, as well as the management charges for selecting shares and running the fund.
Onshore fund A fund authorised and regulated by the regulator in the investor’s home country.
Open-ended fund The size of the fund and the number of units depends on the amount investors wish to put into the fund, e.g. a unit trust. The manager adds to or liquidates part of the assets of the fund depending on the level of purchases or sales of the units in the fund.
Open-ended investment companies (OEICs) Share-issuing collective investment vehicles with one price for investors. OEICs are able to issue more shares if demand increases from investors, unlike investment trusts. OEICs invest the finance raised in securities, primarily shares.
Open interest The sum of outstanding long and short positions in a given futures or option contract. Transactions have not been offset or closed out, thus there is still exposure to movements in the underlying.
Open offer New shares created by a company are offered to a wide range of external investors (not the generality of current shareholders). However, under clawback provisions, existing shareholders can buy the shares at the offer price if they wish.
Open outcry Where trading is through oral calling of buy and sell offers and hand signals by market members.
Operating and financial review (OFR) Also known as business review. It is required by all UK companies other than the small ones, the business review in the annual report provides an analysis of the development and performance of the business(es) during the year and an assessment of the position of the firm at the year-end in terms of strategy, risk, efficiency and progress.
Operating gearing The extent to which the firm’s total costs are fixed. This influences the break-even point and the sensitivity of profits to changes in sales level.
Operating lease The lease period is significantly less than the expected useful life of the asset and the agreed lease payments do not amount to more than 90 per cent of the present value of the asset.
Operating margin Operating profit as a percentage of sales.
Operating profit (operating income) The income remaining after paying all costs other than interest and tax.
Operating profit margin (operating margin, trading margin) Operating profit as a percentage of sales.
Operational efficiency of a market Relates to how the market minimises the cost to buyers and sellers of transactions in securities on the exchange.
Opportunity cost The value forgone by opting for one course of action; the next best use of, say, financial resources.
Option A contract giving one party the right, but not the obligation, to buy or sell a financial instrument, commodity or some other underlying asset at a given price, at or before a specified date.
Option premium The amount paid by an option purchaser (holder) to obtain the rights under an option contract.
Order book for retail bond (ORB) The London Stock Exchange’s venue for the trading of a dozens of corporate bonds and gilts in transaction sizes suitable for retail investors.
Order book system Buy and sell orders for securities are entered on a central computer system, and investors are automatically matched according to the price and volume they entered. SETS is an example.
Order-driven trading system (matched bargain or order book system) Buy and sell orders for securities are entered on a central computer system, and investors are automatically matched according to the price and volume they entered. SETS is an example.
Ordinary resources Those that give the firm competitive parity. They provide a threshold competence.
Ordinary shares The equity capital of the firm. The holders of ordinary shares are the owners and are therefore entitled to all distributed profits after the lenders and preference shares have had their claims met. They are also entitled to control the direction of the company through the power of their votes – usually one vote per share.
Organic growth Growth from within the firm rather than through mergers.
Orphan assets (inherited estates) Reserves that an insurance company has held back from with-profits policyholders to act as a buffer should the market decline. Critics claim that the insurance companies have been too cautious and should give the majority of these assets back to policyholders.
Out-of-the-money option An option without intrinsic value. For a call option the current price of the underlying is less than the exercise price. For a put option the current price of the underlying is more than the exercise price.
Over-allotment issue An option that permits an issuing house, when assisting a corporation in a new issue, to sell more shares than originally planned. They may do this if demand is particularly strong.
Over-capacity An industry or company has significantly more capacity to supply product than is being demanded.
Over-subscription In a new issue (IPO) of securities investors offer to buy more securities (e.g. shares) than are made available.
Over-the-counter (OTC) trade Securities trading carried on outside regulated exchanges. These bilateral trades allow tailor-made transactions.
Overdraft A permit to overdraw on an account (e.g. a bank account) up to a stated limit; to take more out of a bank account than it contains.
Overhang Blocks of securities or commodities that are known to be available for sale. This can lead to a situation where a share price (or other security or commodity price) is depressed because of an anticipated sale of a large quantity of shares (or other security or commodity).
Overhead The business expenses not chargeable to a particular part of the work or product; a cost that is not directly associated with producing the merchandise.
Overtrading When a business has insufficient finance to sustain its level of trading. Too much cash is tied up on stocks (inventory) and debtors (receivables), and too little is available to pay creditors and meet day-to-day expenses. A business is said to be overtrading when it tries to engage in more business than the investment in working capital will allow. This can happen even in profitable circumstances.
Overweighting When a fund invests in an individual asset, industrial sector or country more than in proportion to the asset’s, sector’s or country’s weighting in the relevant benchmark index.
Owner earnings Earnings plus depreciation, depletion, amortisation and certain other non-cash charges less the amount of expenditure for plant and machinery and working capital, etc. that a business requires to fully maintain its long-term competitive position, its unit volume and its investment in value-generating opportunities.
Pac-Man defence or strategy In a hostile merger situation the target makes a counter-bid for the bidder.
Paid-up capital The amount of the authorised share capital that has been paid for or subscribed for by shareholders.
Panel Short for City Panel on Takeovers and Mergers. The organisation that provides and enforces the rules governing behaviour in companies engaged in merger activity in the UK. The rules apply to unquoted and quoted public limited companies (plcs). Often shortened to ‘The Takeover'.
Paper A term for some securities, e.g. certificates of deposit, commercial paper.
Paper bid In a merger, the acquirer offers shares in itself to buy shares in the target.
Par value (nominal, principal, stated book or face value) A stated and fixed nominal value of a share or bond. Not related to market value, which fluctuates.
Parent company (holding company) The one that partially or wholly owns other companies.
Participating preference share A participating preference share receives a share in residual profits. If you want to know more see Preference shares.
Partnership An unincorporated business formed by the association of two or more persons who share the risk and profits.
Passive fund An investment fund which is intended to replicate the return of a market index. Also called an index fund or tracker fund.
Path-dependent resources Firm resources that have been created because of the route that the firm took to get to where it is today.
Pathfinder prospectus In a new issue of shares a detailed report on the company is prepared and made available to potential investors a few days before the issue price is announced.
Payables (accounts payable) Credit received from suppliers.
Payback The period of time it takes to recover the initial cash put into a project.
Payout ratio The percentage of after-tax profit paid to shareholders in dividends.
Peer to peer lending Raising finance directly from small savers via the internet, e.g. small businesses raising money from individuals, or small businesses selling unpaid invoices to provide working capital. Increasingly, financial institutions lend via peer to peer websites.
PEG ratio, Price–earnings ratio to growth ratio. The PER is divided by the expected percentage growth in earnings per share. It is used to highlight those companies on a low share price relative to their growth prospects. Problem: estimating future growth.
PEITs (Private equity investment trusts) Investment vehicles allowing investors to buy into an established private equity fund, investing in unquoted companies, run by an experienced management team. The investor buys PEIT shares which are traded on the London Stock Exchange.
Penny shares Shares priced at only a few pence. Some investors like these, despite the risk of liquidation, because of their large potential if management turns the company around.
Pension funds/scheme These manage money on behalf of members to provide a pension upon the members’ retirement. Most funds invest heavily in shares and bonds.
Pension holiday When a pension fund does not need additional contributions for a time, it may grant the contributors (e.g. companies and/or members) a break from making payments.
PER (Price–earnings ratio ) Share price divided by earnings per share. Historical (or trailing) PER is share price divided by most recently reported annual earnings per share. Forward (prospective) PER is share price divided by anticipated annual earnings per share.
Perfect competition (perfect market) Entry to the industry is free and the existing firms have no bargaining power over suppliers or customers. Rivalry between existing firms is fierce because products are identical. The following assumptions hold: There are a large number of buyers. There are a large number of sellers. The quantity of goods bought by any individual transaction is so small relative to the total quantity traded that individual trades leave the market price unaffected. The units of goods sold by different sellers are the same – the product is homogeneous. There is perfect information – all buyers and all sellers have complete information on the prices being asked and offered in other parts of the market. There is perfect freedom of exit from the market.
Perfect hedge Eliminates risk because the movements in the value of the hedge instrument are exactly contrary to the change in value of the underlying.
Perfect negative correlation When two variables (e.g. returns on two shares) always move in exactly opposite directions by the same proportional amount.
Perfect positive correlation When two variables (e.g. returns on two shares) always move in the same direction by the same proportional amount.
Performance attribution Identifying the factors that led to a fund’s performance (e.g. share selection, asset allocation).
Performance fee A fee paid to some fund managers (especially hedge fund managers, but also some investment trust and other collective fund managers) which depends on the returns achieved.
Perks In addition to paying dividends to investors, some companies provide perks such as a reduced rate in hotels or on ferries owned by the company.
Permanent capital Capital, such as through the purchase of shares in a company that cannot be withdrawn., at least, not for years or without complex legal procedure.
Permanent interest-bearing shares (PIBS) Loan stock issued by building societies. The ‘shares’ pay interest and are irredeemable.
Perpetuity A regular sum of money received at intervals for ever.
Personal guarantee An individual associated with a company, e.g. a director, personally guarantees that debt will be repaid.
Personal membership of CREST Investors hold shares in their own accounts with CREST rather than in a broker’s nominee company or in certificated form.
Personal/private pension A pension scheme set up for an individual by that individual but through a financial institution. Contributions to the fund are subject to tax relief in the UK.
Physical delivery/settlement Settlement of a futures contract by delivery of the underlying rather than cash settlement determined by price movement during the holding of an open position.
Physical ETFs (physical replication) An exchange traded fund that buys the underlying security such as a collection of shares, rather than uses derivatives to replicate the price movements.
Piece A standard unit of trading as set by convention or by the exchange regulating that trading (e.g. only multiples of 1,000 bonds are traded, each 1,000 being a ‘lot’).
Pilot Fishing During a placing of shares in say an initial public offering the sponsor gauges investor interest at an early stage in the issue process. It is pre-marketing to test investor receptivity and gain feedback, e.g. on whether the timing is right. Potential investors are given information on the company raising money before a more finalized draft of the prospectus is created and circulated ahead of book-building. Sponsors can learn which clients are fairly enthusiastic and can think about a suitable price based on feedback.
Placing, place or placement A method of selling shares and other financial securities in the primary market. Securities are offered to the sponsors’ or brokers’ private clients and/or a narrow group of institutions.
Plain vanilla A bond that lacks any special features such as a call or put provision.
Platform (investment platform, fund platform) Online organisations that allow investors to invest in a range of unit trusts, investment trusts, shares, bonds ETFs, OEICs, etc. Investors can select one, two or a dozen funds from different management companies together with other investments. They usually charge either a flat fee or a percentage of funds held on the platform.
plc (Public limited company) A company which may have an unlimited number of shareholders and offer its shares to the wider public (unlike a limited company). Must have a minimum share value of £50,000. Some plcs are listed on the London Stock Exchange.
Poison pills Actions taken, or which will be taken, which make a firm unpalatable to a hostile acquirer.
Political risk Changes in government or government policies impacting on returns and volatility of returns.
Pooled funds Organisations (e.g. unit trusts) that gather together numerous small quantities of money from investors and then invest in a wide range of financial securities.
Portfolio A collection of investments.
Portfolio theory Formal mathematical model for calculating risk–returns trade-offs as securities are combined in a portfolio.
Pound cost averaging An investing system that, through the commitment of a regular sum of money to a company’s shares or the market as a whole leads to the purchasing of a greater number of shares when the market is low and less when it is high. For example, investor A commits to investing £10,000 each year over 10 years. The market sells for £1 in one-half of the years and £2 in the other five years (for a typical share, let’s say). Thus, in bad years 10,000 shares are bought, in good years 5,000. The average price paid is £1.33 which is below the average market price of £1.50.
PRA (Prudential Regulatory Authority) A subsidiary of the Bank of England supervising and regulating financial institutions, banks, insurers, brokers, etc. for micro-prudential risk – seeking to enhance the safety and soundness of individual financial institutions, as opposed to the macroprudential view which focuses on welfare of the financial system as a whole.
Precipice bonds Bonds sold by insurance companies to investors offering high income based on stock market returns. The initial capital is guaranteed up to a point, but if the stock market declines by more than a set percentage (say, 20 per cent) investors lose capital. This loss can be highly geared (e.g. for every 1 per cent drop in the FTSE 100 index the capital value falls by 2 per cent).
Pre-emption rights The strong rights of shareholders of UK companies to subscribe for further issues of shares. See Rights issue.
Preference shares These normally entitle the holder to a fixed rate of dividend, but this is not guaranteed. Holders of preference shares precede the holders of ordinary shares, but follow bondholders and other lenders in payment of dividends and return of principal. A participating preference share receives a share in residual profits. A cumulative preference share carries forward the right to preferential dividends. A redeemable preference share is a preference share with a finite life. A convertible preference share/stock may be converted into another type of security (e.g. an ordinary share).
Preferred ordinary shares Rank higher than deferred ordinary shares for an agreed rate of dividend or share of profits. Not the same as preference shares.
Preliminary annual results (preliminary profit announcement, prelims) After the year-end and before the full reports and accounts are published, a statement on the profit for the year and other information is provided by companies quoted on the London Stock Exchange.
Premium (investment trusts) The amount by which the share price exceeds the net asset value per share.
Premium (on an option) The amount paid to an option writer to obtain the right to buy or sell the underlying.
Premium Listing The London Stock Exchange’s normal quality level for companies on the Main Market. The Premium segment is only open to equity shares issued by trading companies and closed and open-ended investment entities. Issuers with a Premium Listing are required to meet the UK’s super-equivalent rules which are higher than the EU minimum requirements. Premium Listed companies comply with the UK’s highest standards of regulation and corporate governance, as a consequence they may enjoy a lower cost of capital through greater transparency and through building investor confidence, standards of regulation and corporate governance.
Present value The current worth of future cash flows when discounted to time zero.
Pre-tax margin Profit after all expenses, including interest, but excluding tax on that profit, expressed as a percentage of sales.
Pre-tax profit Profit on ordinary activities before deducting taxation.
Pre-tax profit margin (pre-tax margin) Profit after all expenses, including interest, but excluding tax on that profit, expressed as a percentage of sales.
Price discovery (price formation) The process of forming prices through the interaction of numerous buy and sell orders in an exchange.
Price–earnings ratio (PER, price–earnings multiple, PE multiple, PE ratio, P/E ratio) Share price divided by earnings per share. Historical (or trailing) PER is share price divided by most recently reported annual earnings per share. Forward (prospective) PER is share price divided by anticipated annual earnings per share.
Price–earnings ratio game (bootstrapping) Companies increase earnings per share by acquiring other companies with lower price–earnings ratios than themselves. Share price can rise despite the absence of economic value gain.
Price formation Profit after all expenses, including interest, but excluding tax on that profit, expressed as a percentage of sales.
Price improvement service Brokers are frequently able to obtain for clients (retail investors) better buy and sell prices than those shown on the stock exchanges’ screens from market makers or other traders. This could occur because of a change in market price or your broker is particularly diligent in getting a good deal.
Price limit The maximum price an investor is willing to pay to buy, or the minimum a seller is willing to accept.
Price-sensitive information That which may influence the share price or trading in the shares.
Price-to-book ratio (market-to-book ratio) The price of a share as a multiple of per share book (balance sheet) value.
Price-weighted index An index of a collection of financial (e.g. shares) or other assets (e.g. houses) which measures through time the average price of the constituents.
Pricing power An ability to raise prices even when product demand is flat without the danger of losing significant volume or market share.
Primary dealer A firm approved by a government to deal in its debt securities. In the UK they are known as Gilt-edged market makers (GEMMs).
Primary investors The household sector contains the savers in society who are the main providers of funds used for investment in the business sector.
Primary listing A company that makes the London Stock Exchanges its primary listing (the main stock exchange for trades in its shares) agrees to abide by its high standards of regulation and disclosure – greater than that under the EU directives. This may lower the rate of return it has to offer on capital raised. It may have secondary listings on other stock markets.
Primary market A market in which securities are initially issued to investors rather than a secondary market in which investors buy and sell to each other.
Prime grade Debt with a sufficiently high credit rating (BBB– or Baa or above) to be regarded as safe enough for institutional investors who are restricted to buying safe debt only.
Principal (a) The capital amount of a debt, excluding any interest. (b) A person acting on their own account accepting risk in financial transactions, rather than someone acting as an agent for another. (c) The amount invested.
Principal–agent problem In which an agent (e.g. a manager) does not act in the best interests of the principal (e.g. the shareholder).
Private client brokers Stockbrokers acting for investors in the buying and selling of financial instruments and providing other investment-related services for investors.
Private equity Share capital invested in companies not quoted on an exchange.
Private equity investment trusts (PEITs) Investment vehicles allowing investors to buy into an established private equity fund, investing in unquoted companies, run by an experienced management team. The investor buys PEIT shares which are traded on the London Stock Exchange.
Private investors (private clients) Investors buying and selling small quantities of shares on their own account rather than institutions buying and selling for funds or on their own account.
Private limited company (Ltd) A company which is unable to offer its shares to the wider public.
Privatisation The sale to private investors of government-owned equity (shares) in nationalised industries or other commercial enterprises.
Profit and loss account (Income statement) Records whether a company’s sales revenue was greater than its costs.
Profit margin Profits as a percentage of sales.
Pro-forma earnings (a) Projected or forecast earnings. (b) These may be prepared by the directors so as to exclude those items that they regard as unusual or nonrecurring for a recent past period. These are not audited and may be unreliable.
Project finance Finance assembled for a specific project. The loan and equity returns are tied to the cash flows and fortunes of the project rather than being dependent on the parent company/companies.
Promising company Company with a mediocre/ordinary earnings record which the investor expects to do better than the average in the future.
Promissory note A debtor promises to pay at a fixed date or a date to be determined by circumstances. A note is created stating this obligation.
Proprietary transactions (proprietary trading) A financial institution trades on the financial markets with a view to generating profits for itself using its own capital or borrowings (e.g. speculate in foreign exchange).
ProShare An independent not-for-profit company set up to help private investors, promote knowledge about investment and assist investment clubs.
Prospective PER Is the share price divided by anticipated annual earnings per share. If you want to know more see Price–earnings ratio.
Prospectus A document containing information about a company (or unit trust or OEIC), to assist with a new issue (initial public offering) by supplying detail about the company and how it operates.
Provision (1) An allowance for a liability that you are unable to be precise about concerning either the amount or when it will be paid (anticipated loss or expenditure). (2) A clause or stipulation in a legal agreement giving one party a right.
Provisional Allotment Letters (PALs) In a rights issue shareholders receive PALs which are temporary documents of title showing each shareholder the number of shares they can apply for. To accept the shareholder fills in and returns the PAL with a cheque or banker’s draft.
Proxy votes Shareholders unable to attend a shareholders’ meeting may authorise another person (e.g. a director or the chairman) to vote on their behalf, either as instructed or as that person sees fit.
Prudential Regulatory Authority (PRA) A subsidiary of the Bank of England supervising and regulating financial institutions, banks, insurers, brokers, etc. for micro-prudential risk – seeking to enhance the safety and soundness of individual financial institutions, as opposed to the macroprudential view which focuses on welfare of the financial system as a whole.
Public limited company (plc) A company which may have an unlimited number of shareholders and offer its shares to the wider public (unlike a limited company). Must have a minimum share value of £50,000. Some plcs are listed on the London Stock Exchange.
Public-to-private (PTP) The management of a company currently quoted on a stock exchange return it to unquoted status. The finance to buy the shares often comes from private equity firms.
Put option This gives the purchaser the right, but not the obligation, to sell a financial instrument, commodity or some other underlying asset at a given price, at or before a specified date.
Off-market transfer The transfer of ownership of shares and other securities without the use of a broker or the stock market. A stock transfer form can be used.
Offer document (1) A formal document sent by a company attempting to buy the shares of a target firm to all the shareholders of the target, setting out the offer. (2) The legal document for an offer for sale in a new issue (IPO).
Offer for sale A method of selling shares in a new issue. The company sponsor offers shares to the public by inviting subscriptions from investors. In an offer for sale by fixed price, the sponsor fixes the price prior to the offer. In an offer for sale by tender, investors state the price they are willing to pay. A strike price is established by the sponsors after receiving all the bids. All investors pay the strike price.
Offer for subscription A method of selling shares in a new issue. The issue is aborted if the offer does not raise sufficient interest from investors.
Offer price (1) The price at which a market maker in shares will sell a share, or a dealer in other markets will sell a security or asset. (2) The price of a new issue of securities e.g. a new issue of shares.
Official List (OL) The daily list of securities admitted for trading on the UK’s regulated markets by the UK Listing Authority. Most are on the London Stock Exchange’s Main Market. It does not include securities traded on the Alternative Investment Market (AIM) or most of those on NEX Exchange.
Offshore investment Outside investors’ home country jurisdiction and financial regulation, usually in tax havens, such as the Cayman Islands.
Offshore roll-up funds Savers can deposit money in these outside their country of residence to reduce tax paid on interest or dividends. The interest/dividends are kept within the fund until the saver partially or wholly encashes it. This may be done when the investor enters a phase of life as a low-rate tax payer.
Oligopoly A small number of producers in an industry.
OMX Scandinavian and Baltic group of stock exchanges, now merged with the United States’ Nasdaq.
Ongoing charge Collective (pooled) investment funds, e.g. unit trusts need to pay for the management of the fund and numerous other annual costs. The annual ongoing charge, expressed as a percentage of funds under management, is usually 0.2 to 0.5 percentage points greater than the annual management charge and covers, for example, administration,
custody, legal and audit, as well as the management charges for selecting shares and running the fund.
Onshore fund A fund authorised and regulated by the regulator in the investor’s home country.
Open-ended fund The size of the fund and the number of units depends on the amount investors wish to put into the fund, e.g. a unit trust. The manager adds to or liquidates part of the assets of the fund depending on the level of purchases or sales of the units in the fund.
Open-ended investment companies (OEICs) Share-issuing collective investment vehicles with one price for investors. OEICs are able to issue more shares if demand increases from investors, unlike investment trusts. OEICs invest the finance raised in securities, primarily shares.
Open interest The sum of outstanding long and short positions in a given futures or option contract. Transactions have not been offset or closed out, thus there is still exposure to movements in the underlying.
Open offer New shares created by a company are offered to a wide range of external investors (not the generality of current shareholders). However, under clawback provisions, existing shareholders can buy the shares at the offer price if they wish.
Open outcry Where trading is through oral calling of buy and sell offers and hand signals by market members.
Operating and financial review (OFR) Also known as business review. It is required by all UK companies other than the small ones, the business review in the annual report provides an analysis of the development and performance of the business(es) during the year and an assessment of the position of the firm at the year-end in terms of strategy, risk, efficiency and progress.
Operating gearing The extent to which the firm’s total costs are fixed. This influences the break-even point and the sensitivity of profits to changes in sales level.
Operating lease The lease period is significantly less than the expected useful life of the asset and the agreed lease payments do not amount to more than 90 per cent of the present value of the asset.
Operating margin Operating profit as a percentage of sales.
Operating profit (operating income) The income remaining after paying all costs other than interest and tax.
Operating profit margin (operating margin, trading margin) Operating profit as a percentage of sales.
Operational efficiency of a market Relates to how the market minimises the cost to buyers and sellers of transactions in securities on the exchange.
Opportunity cost The value forgone by opting for one course of action; the next best use of, say, financial resources.
Option A contract giving one party the right, but not the obligation, to buy or sell a financial instrument, commodity or some other underlying asset at a given price, at or before a specified date.
Option premium The amount paid by an option purchaser (holder) to obtain the rights under an option contract.
Order book for retail bond (ORB) The London Stock Exchange’s venue for the trading of a dozens of corporate bonds and gilts in transaction sizes suitable for retail investors.
Order book system Buy and sell orders for securities are entered on a central computer system, and investors are automatically matched according to the price and volume they entered. SETS is an example.
Order-driven trading system (matched bargain or order book system) Buy and sell orders for securities are entered on a central computer system, and investors are automatically matched according to the price and volume they entered. SETS is an example.
Ordinary resources Those that give the firm competitive parity. They provide a threshold competence.
Ordinary shares The equity capital of the firm. The holders of ordinary shares are the owners and are therefore entitled to all distributed profits after the lenders and preference shares have had their claims met. They are also entitled to control the direction of the company through the power of their votes – usually one vote per share.
Organic growth Growth from within the firm rather than through mergers.
Orphan assets (inherited estates) Reserves that an insurance company has held back from with-profits policyholders to act as a buffer should the market decline. Critics claim that the insurance companies have been too cautious and should give the majority of these assets back to policyholders.
Out-of-the-money option An option without intrinsic value. For a call option the current price of the underlying is less than the exercise price. For a put option the current price of the underlying is more than the exercise price.
Over-allotment issue An option that permits an issuing house, when assisting a corporation in a new issue, to sell more shares than originally planned. They may do this if demand is particularly strong.
Over-capacity An industry or company has significantly more capacity to supply product than is being demanded.
Over-subscription In a new issue (IPO) of securities investors offer to buy more securities (e.g. shares) than are made available.
Over-the-counter (OTC) trade Securities trading carried on outside regulated exchanges. These bilateral trades allow tailor-made transactions.
Overdraft A permit to overdraw on an account (e.g. a bank account) up to a stated limit; to take more out of a bank account than it contains.
Overhang Blocks of securities or commodities that are known to be available for sale. This can lead to a situation where a share price (or other security or commodity price) is depressed because of an anticipated sale of a large quantity of shares (or other security or commodity).
Overhead The business expenses not chargeable to a particular part of the work or product; a cost that is not directly associated with producing the merchandise.
Overtrading When a business has insufficient finance to sustain its level of trading. Too much cash is tied up on stocks (inventory) and debtors (receivables), and too little is available to pay creditors and meet day-to-day expenses. A business is said to be overtrading when it tries to engage in more business than the investment in working capital will allow. This can happen even in profitable circumstances.
Overweighting When a fund invests in an individual asset, industrial sector or country more than in proportion to the asset’s, sector’s or country’s weighting in the relevant benchmark index.
Owner earnings Earnings plus depreciation, depletion, amortisation and certain other non-cash charges less the amount of expenditure for plant and machinery and working capital, etc. that a business requires to fully maintain its long-term competitive position, its unit volume and its investment in value-generating opportunities.
Pac-Man defence or strategy In a hostile merger situation the target makes a counter-bid for the bidder.
Paid-up capital The amount of the authorised share capital that has been paid for or subscribed for by shareholders.
Panel Short for City Panel on Takeovers and Mergers. The organisation that provides and enforces the rules governing behaviour in companies engaged in merger activity in the UK. The rules apply to unquoted and quoted public limited companies (plcs). Often shortened to ‘The Takeover'.
Paper A term for some securities, e.g. certificates of deposit, commercial paper.
Paper bid In a merger, the acquirer offers shares in itself to buy shares in the target.
Par value (nominal, principal, stated book or face value) A stated and fixed nominal value of a share or bond. Not related to market value, which fluctuates.
Parent company (holding company) The one that partially or wholly owns other companies.
Participating preference share A participating preference share receives a share in residual profits. If you want to know more see Preference shares.
Partnership An unincorporated business formed by the association of two or more persons who share the risk and profits.
Passive fund An investment fund which is intended to replicate the return of a market index. Also called an index fund or tracker fund.
Path-dependent resources Firm resources that have been created because of the route that the firm took to get to where it is today.
Pathfinder prospectus In a new issue of shares a detailed report on the company is prepared and made available to potential investors a few days before the issue price is announced.
Payables (accounts payable) Credit received from suppliers.
Payback The period of time it takes to recover the initial cash put into a project.
Payout ratio The percentage of after-tax profit paid to shareholders in dividends.
Peer to peer lending Raising finance directly from small savers via the internet, e.g. small businesses raising money from individuals, or small businesses selling unpaid invoices to provide working capital. Increasingly, financial institutions lend via peer to peer websites.
PEG ratio, Price–earnings ratio to growth ratio. The PER is divided by the expected percentage growth in earnings per share. It is used to highlight those companies on a low share price relative to their growth prospects. Problem: estimating future growth.
PEITs (Private equity investment trusts) Investment vehicles allowing investors to buy into an established private equity fund, investing in unquoted companies, run by an experienced management team. The investor buys PEIT shares which are traded on the London Stock Exchange.
Penny shares Shares priced at only a few pence. Some investors like these, despite the risk of liquidation, because of their large potential if management turns the company around.
Pension funds/scheme These manage money on behalf of members to provide a pension upon the members’ retirement. Most funds invest heavily in shares and bonds.
Pension holiday When a pension fund does not need additional contributions for a time, it may grant the contributors (e.g. companies and/or members) a break from making payments.
PER (Price–earnings ratio ) Share price divided by earnings per share. Historical (or trailing) PER is share price divided by most recently reported annual earnings per share. Forward (prospective) PER is share price divided by anticipated annual earnings per share.
Perfect competition (perfect market) Entry to the industry is free and the existing firms have no bargaining power over suppliers or customers. Rivalry between existing firms is fierce because products are identical. The following assumptions hold: There are a large number of buyers. There are a large number of sellers. The quantity of goods bought by any individual transaction is so small relative to the total quantity traded that individual trades leave the market price unaffected. The units of goods sold by different sellers are the same – the product is homogeneous. There is perfect information – all buyers and all sellers have complete information on the prices being asked and offered in other parts of the market. There is perfect freedom of exit from the market.
Perfect hedge Eliminates risk because the movements in the value of the hedge instrument are exactly contrary to the change in value of the underlying.
Perfect negative correlation When two variables (e.g. returns on two shares) always move in exactly opposite directions by the same proportional amount.
Perfect positive correlation When two variables (e.g. returns on two shares) always move in the same direction by the same proportional amount.
Performance attribution Identifying the factors that led to a fund’s performance (e.g. share selection, asset allocation).
Performance fee A fee paid to some fund managers (especially hedge fund managers, but also some investment trust and other collective fund managers) which depends on the returns achieved.
Perks In addition to paying dividends to investors, some companies provide perks such as a reduced rate in hotels or on ferries owned by the company.
Permanent capital Capital, such as through the purchase of shares in a company that cannot be withdrawn., at least, not for years or without complex legal procedure.
Permanent interest-bearing shares (PIBS) Loan stock issued by building societies. The ‘shares’ pay interest and are irredeemable.
Perpetuity A regular sum of money received at intervals for ever.
Personal guarantee An individual associated with a company, e.g. a director, personally guarantees that debt will be repaid.
Personal membership of CREST Investors hold shares in their own accounts with CREST rather than in a broker’s nominee company or in certificated form.
Personal/private pension A pension scheme set up for an individual by that individual but through a financial institution. Contributions to the fund are subject to tax relief in the UK.
Physical delivery/settlement Settlement of a futures contract by delivery of the underlying rather than cash settlement determined by price movement during the holding of an open position.
Physical ETFs (physical replication) An exchange traded fund that buys the underlying security such as a collection of shares, rather than uses derivatives to replicate the price movements.
Piece A standard unit of trading as set by convention or by the exchange regulating that trading (e.g. only multiples of 1,000 bonds are traded, each 1,000 being a ‘lot’).
Pilot Fishing During a placing of shares in say an initial public offering the sponsor gauges investor interest at an early stage in the issue process. It is pre-marketing to test investor receptivity and gain feedback, e.g. on whether the timing is right. Potential investors are given information on the company raising money before a more finalized draft of the prospectus is created and circulated ahead of book-building. Sponsors can learn which clients are fairly enthusiastic and can think about a suitable price based on feedback.
Placing, place or placement A method of selling shares and other financial securities in the primary market. Securities are offered to the sponsors’ or brokers’ private clients and/or a narrow group of institutions.
Plain vanilla A bond that lacks any special features such as a call or put provision.
Platform (investment platform, fund platform) Online organisations that allow investors to invest in a range of unit trusts, investment trusts, shares, bonds ETFs, OEICs, etc. Investors can select one, two or a dozen funds from different management companies together with other investments. They usually charge either a flat fee or a percentage of funds held on the platform.
plc (Public limited company) A company which may have an unlimited number of shareholders and offer its shares to the wider public (unlike a limited company). Must have a minimum share value of £50,000. Some plcs are listed on the London Stock Exchange.
Poison pills Actions taken, or which will be taken, which make a firm unpalatable to a hostile acquirer.
Political risk Changes in government or government policies impacting on returns and volatility of returns.
Pooled funds Organisations (e.g. unit trusts) that gather together numerous small quantities of money from investors and then invest in a wide range of financial securities.
Portfolio A collection of investments.
Portfolio theory Formal mathematical model for calculating risk–returns trade-offs as securities are combined in a portfolio.
Pound cost averaging An investing system that, through the commitment of a regular sum of money to a company’s shares or the market as a whole leads to the purchasing of a greater number of shares when the market is low and less when it is high. For example, investor A commits to investing £10,000 each year over 10 years. The market sells for £1 in one-half of the years and £2 in the other five years (for a typical share, let’s say). Thus, in bad years 10,000 shares are bought, in good years 5,000. The average price paid is £1.33 which is below the average market price of £1.50.
PRA (Prudential Regulatory Authority) A subsidiary of the Bank of England supervising and regulating financial institutions, banks, insurers, brokers, etc. for micro-prudential risk – seeking to enhance the safety and soundness of individual financial institutions, as opposed to the macroprudential view which focuses on welfare of the financial system as a whole.
Precipice bonds Bonds sold by insurance companies to investors offering high income based on stock market returns. The initial capital is guaranteed up to a point, but if the stock market declines by more than a set percentage (say, 20 per cent) investors lose capital. This loss can be highly geared (e.g. for every 1 per cent drop in the FTSE 100 index the capital value falls by 2 per cent).
Pre-emption rights The strong rights of shareholders of UK companies to subscribe for further issues of shares. See Rights issue.
Preference shares These normally entitle the holder to a fixed rate of dividend, but this is not guaranteed. Holders of preference shares precede the holders of ordinary shares, but follow bondholders and other lenders in payment of dividends and return of principal. A participating preference share receives a share in residual profits. A cumulative preference share carries forward the right to preferential dividends. A redeemable preference share is a preference share with a finite life. A convertible preference share/stock may be converted into another type of security (e.g. an ordinary share).
Preferred ordinary shares Rank higher than deferred ordinary shares for an agreed rate of dividend or share of profits. Not the same as preference shares.
Preliminary annual results (preliminary profit announcement, prelims) After the year-end and before the full reports and accounts are published, a statement on the profit for the year and other information is provided by companies quoted on the London Stock Exchange.
Premium (investment trusts) The amount by which the share price exceeds the net asset value per share.
Premium (on an option) The amount paid to an option writer to obtain the right to buy or sell the underlying.
Premium Listing The London Stock Exchange’s normal quality level for companies on the Main Market. The Premium segment is only open to equity shares issued by trading companies and closed and open-ended investment entities. Issuers with a Premium Listing are required to meet the UK’s super-equivalent rules which are higher than the EU minimum requirements. Premium Listed companies comply with the UK’s highest standards of regulation and corporate governance, as a consequence they may enjoy a lower cost of capital through greater transparency and through building investor confidence, standards of regulation and corporate governance.
Present value The current worth of future cash flows when discounted to time zero.
Pre-tax margin Profit after all expenses, including interest, but excluding tax on that profit, expressed as a percentage of sales.
Pre-tax profit Profit on ordinary activities before deducting taxation.
Pre-tax profit margin (pre-tax margin) Profit after all expenses, including interest, but excluding tax on that profit, expressed as a percentage of sales.
Price discovery (price formation) The process of forming prices through the interaction of numerous buy and sell orders in an exchange.
Price–earnings ratio (PER, price–earnings multiple, PE multiple, PE ratio, P/E ratio) Share price divided by earnings per share. Historical (or trailing) PER is share price divided by most recently reported annual earnings per share. Forward (prospective) PER is share price divided by anticipated annual earnings per share.
Price–earnings ratio game (bootstrapping) Companies increase earnings per share by acquiring other companies with lower price–earnings ratios than themselves. Share price can rise despite the absence of economic value gain.
Price formation Profit after all expenses, including interest, but excluding tax on that profit, expressed as a percentage of sales.
Price improvement service Brokers are frequently able to obtain for clients (retail investors) better buy and sell prices than those shown on the stock exchanges’ screens from market makers or other traders. This could occur because of a change in market price or your broker is particularly diligent in getting a good deal.
Price limit The maximum price an investor is willing to pay to buy, or the minimum a seller is willing to accept.
Price-sensitive information That which may influence the share price or trading in the shares.
Price-to-book ratio (market-to-book ratio) The price of a share as a multiple of per share book (balance sheet) value.
Price-weighted index An index of a collection of financial (e.g. shares) or other assets (e.g. houses) which measures through time the average price of the constituents.
Pricing power An ability to raise prices even when product demand is flat without the danger of losing significant volume or market share.
Primary dealer A firm approved by a government to deal in its debt securities. In the UK they are known as Gilt-edged market makers (GEMMs).
Primary investors The household sector contains the savers in society who are the main providers of funds used for investment in the business sector.
Primary listing A company that makes the London Stock Exchanges its primary listing (the main stock exchange for trades in its shares) agrees to abide by its high standards of regulation and disclosure – greater than that under the EU directives. This may lower the rate of return it has to offer on capital raised. It may have secondary listings on other stock markets.
Primary market A market in which securities are initially issued to investors rather than a secondary market in which investors buy and sell to each other.
Prime grade Debt with a sufficiently high credit rating (BBB– or Baa or above) to be regarded as safe enough for institutional investors who are restricted to buying safe debt only.
Principal (a) The capital amount of a debt, excluding any interest. (b) A person acting on their own account accepting risk in financial transactions, rather than someone acting as an agent for another. (c) The amount invested.
Principal–agent problem In which an agent (e.g. a manager) does not act in the best interests of the principal (e.g. the shareholder).
Private client brokers Stockbrokers acting for investors in the buying and selling of financial instruments and providing other investment-related services for investors.
Private equity Share capital invested in companies not quoted on an exchange.
Private equity investment trusts (PEITs) Investment vehicles allowing investors to buy into an established private equity fund, investing in unquoted companies, run by an experienced management team. The investor buys PEIT shares which are traded on the London Stock Exchange.
Private investors (private clients) Investors buying and selling small quantities of shares on their own account rather than institutions buying and selling for funds or on their own account.
Private limited company (Ltd) A company which is unable to offer its shares to the wider public.
Privatisation The sale to private investors of government-owned equity (shares) in nationalised industries or other commercial enterprises.
Profit and loss account (Income statement) Records whether a company’s sales revenue was greater than its costs.
Profit margin Profits as a percentage of sales.
Pro-forma earnings (a) Projected or forecast earnings. (b) These may be prepared by the directors so as to exclude those items that they regard as unusual or nonrecurring for a recent past period. These are not audited and may be unreliable.
Project finance Finance assembled for a specific project. The loan and equity returns are tied to the cash flows and fortunes of the project rather than being dependent on the parent company/companies.
Promising company Company with a mediocre/ordinary earnings record which the investor expects to do better than the average in the future.
Promissory note A debtor promises to pay at a fixed date or a date to be determined by circumstances. A note is created stating this obligation.
Proprietary transactions (proprietary trading) A financial institution trades on the financial markets with a view to generating profits for itself using its own capital or borrowings (e.g. speculate in foreign exchange).
ProShare An independent not-for-profit company set up to help private investors, promote knowledge about investment and assist investment clubs.
Prospective PER Is the share price divided by anticipated annual earnings per share. If you want to know more see Price–earnings ratio.
Prospectus A document containing information about a company (or unit trust or OEIC), to assist with a new issue (initial public offering) by supplying detail about the company and how it operates.
Provision (1) An allowance for a liability that you are unable to be precise about concerning either the amount or when it will be paid (anticipated loss or expenditure). (2) A clause or stipulation in a legal agreement giving one party a right.
Provisional Allotment Letters (PALs) In a rights issue shareholders receive PALs which are temporary documents of title showing each shareholder the number of shares they can apply for. To accept the shareholder fills in and returns the PAL with a cheque or banker’s draft.
Proxy votes Shareholders unable to attend a shareholders’ meeting may authorise another person (e.g. a director or the chairman) to vote on their behalf, either as instructed or as that person sees fit.
Prudential Regulatory Authority (PRA) A subsidiary of the Bank of England supervising and regulating financial institutions, banks, insurers, brokers, etc. for micro-prudential risk – seeking to enhance the safety and soundness of individual financial institutions, as opposed to the macroprudential view which focuses on welfare of the financial system as a whole.
Public limited company (plc) A company which may have an unlimited number of shareholders and offer its shares to the wider public (unlike a limited company). Must have a minimum share value of £50,000. Some plcs are listed on the London Stock Exchange.
Public-to-private (PTP) The management of a company currently quoted on a stock exchange return it to unquoted status. The finance to buy the shares often comes from private equity firms.
Put option This gives the purchaser the right, but not the obligation, to sell a financial instrument, commodity or some other underlying asset at a given price, at or before a specified date.