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Investment glossary
Category: Economy and Finance > investment
Date & country: 13/10/2007, UK
Words: 272


Price Earnings Ratio
price-earnings ratio = current market price / earnings per share This is perhaps the most commonly used ratio to compare company's within the same sector as it is quoted daily in the financial press not only for individual stocks but also for sectors and indices. It shows whether stocks are expensive or cheap relative to each other and how many years of current earnings investors are prepared to pay for. Also how optimistic the market is about future trading prospects. A relatively high price-earnings ratio will indicate a stock is expensive in relation to its peers. This might be justified because the company is seen as a leader within its sector and has above average prospects. If based on projected price-earnings, the ratio will contain an element of sentiment by the analyst. Therefore there might be bargains to be had by looking at companies with a low ratio, if you believe they are out of favour with the market rather than having fundamental problems.

Price Range
The difference between the highest and lowest price of a financial instrument.

Primary Market
The primary market is the method by which securities are issued, bringing the issuer and investor together.

Property Bond
An investment bond that invests in property.

Put Option
The right, but not the obligation, to sell shares at a future date at a price fixed now.

Putable Bond
A standard bond whereby the owner has the right to sell it back to the issuer at face value at pre-determined dates during the life of the bond.

Pyramid
To increase the size of a speculative position based on current successes in the belief that the profitable trend will continue.

Quality
The creditworthiness of a security.

Quality Spread
The difference in yield between securities that do not have the same credit rating. Both will also have the same maturity date.

Quartile
When investment funds are ranked on the basis of performance, their positioning is summarised on the basis of which quartile the results fall into, with the first quartile being the best.

Quick Ratio
quick ratio = current assets - stock / current liabilities Investments are sometimes added to current assets if they are readily realisable. The quick ratio excludes stock from current assets, as the stock may be slow moving and not readily realisable. As a result the quick ratio assesses very short-term liquidity

Quoted Company
A quoted company is a company listed on a recognised stock exchange.

Raider
A person or organisation that makes hostile takeover bids for companies that have undervalued assets.

Random Walk Theory
The theory that share prices follow a random path and historical performance has no effect on future performance and prices. If the random walk theory is believed then technical analysis or charting is not a sound proposition as trends cannot be predicted.

Ratio Analysis
Ratio analysis is an invaluable tool used to decipher and compare companies, either by using figures in the financial statements or investor data relating to stock market performance. Ratios are most commonly used by analysts and investors to help determine whether a stock should be bought, held or sold, and if it represents good value in relation to it's competitors. Lenders on the other hand will use ratios to help decide if the company can pay back the debt it is requesting, paying attention to the cash flows of the business. profitability ratios return on capital employed gross profit margin net profit margin liquidity ratios current ratio quick ratio efficiency ratios debtor days creditor days gearing ratios gearing interest cover investor ratios earnings per share price earnings ratio dividend yield dividend cover

Recovery Stock
A stock that has previously fallen in value but is now expected to increase in value due to expected improved performance.

Redemption
When the capital invested in a bond or preference share for example, is returned to the investor at maturity.

Regulatory News Service
The regulatory news service is provided by the london stock exchange. All information relating to the FTSE and AIM listed companies that could have an impact on share prices are made public via the RNS so all subscribers receive the information at the same time.

Reinvestment
The rate at which an investor can reinvest the income earned into the existing investment.

Relative Strength
The strength of a share price when considered against the market as a whole.

Resistance
The price level where in the past a security has tended to stop rising and then subsequently falls.

return on capital employed
ROCE = profit before interest and tax / share capital + reserves + debentures The ROCE ratio shows the overall efficiency of the company in employing the resources available. Capital employed is the amount of capital or funds used by the business. The components of capital employed differ depending on which definition you refer to. Some will only include shareholders funds, whilst others will include long-term borrowings and possibly overdrafts, as they represent funds within the business used to generate profit. When calculating return on capital employed, return is calculated as profit before interest and tax. Return on capital employed can be broken down further. Profit Margin assesses the quality of profits and asset turnover shows how intensely the company is using the assets. ROCE = profit margin x asset turnover Where: profit margin = profit before interest and tax / turnover and asset turnover = turnover / capital employed

Reversal Pattern
A reversal pattern is a share price pattern which can be seen as the end of one trend and the start of another, opposite trend.

Reverse Yield Gap
Where the yield on securities is greater than the dividend yield on equities.

Rights Issue
A rights issue provides an opportunity for companies to raise additional finance, either to fund growth or restructure it's finances, the former normally being seen as a positive step. Rights issues are so called because they give existing shareholders the right to buy shares. This offer will include an incentive in the form of a lower price compared to the current share price. As a result, the post-issue price will be lower than the pre-issue price due to the increased number of shares in issue. The issue will allow the shareholder to buy shares in proportion to their existing holding. For example a 1:5 issue entitles the shareholder to buy one new share for every five currently held. If the shareholder does not wish to take up the rights, they can be sold.

Scrip Dividend
The payment of a dividend by way of issuing shares to the shareholder rather than making a cash payment.

Secondary Market
Where buyers and sellers trade their financial assets. This is done in a regulated environment with clear rules, ensuring clear and fair trading prices. Market makers ensure the market operates effectively by enabling traders to find an opposite party to transact the deal with.

Serial Bond
A bond issue that comprises several tranches, each with different coupons and maturity dates.

Seven Day Money
Money deposited in the money market for a period of seven days, thus earning a higher rate of interest than overnight deposits.

Share
A share in the ownership of company. A legal right to participate in a companies profitability and to vote on matters relating that company.

Share Premium
The share premium is the difference between the issue price and the nominal or par value of the share.

Shogun Bond
A bond sold on the Japanese market by a foreign institution and denominated in a foreign currency

Short Bill
A bill of exchange that is payable either on demand or within a period of ten days.

Short Selling
Selling shares to make a profit when the share price is declining.

Small Cap
Small cap refers to the lowest tier of quoted shares by market capitalisation. Large cap refers to the largest companies and mid cap to the mid tier. As market values are constantly changing there are no specific limits to define the size of companies that fall into the small cap range.

Spot Price
The spot price is the price for a share or index that is used for immediate settlement rather than at some point in the future.

Stag
An investor who buys shares in new issues in the hope the price will rise when trading commences thus earning an immediate profit.

Stop Loss
A stop loss is an instruction to a broker to close a trade if the prices moves past a pre-determined level in an adverse way.

Stop Order
An order placed with a stockbroker to buy or sell if the shre price reaches a specific level.

Support
The price level where a share tends to stop falling and rebounds to higher levels.

Swap
A swap is an agreement in which two parties agree to exchange a pre-determined series of payments over a fixed period of time.

Takeover
A takeover is where one company buys another company. This could either be on a friendly or hostile basis.

Tangible Assets
Tangible assets are physical assets that are used by a business to generate revenue and profit. Examples of tangible assets are plant, machinery, cars and land and buildings.

Terminal Bonus
A terminal bonus is a bonus added to the sum assured of a with-profits endowment policy and payable on maturity or death if earlier. The bonus is based on the investment return of the underlying investments, the term of the policy and the amount invested.

Tiger Economy
Tiger economy is a name given to growing economies in the far-east region.

Total Expense Ratio
Total expenses, excluding interest, as a percentage of the average net assets.

Tracker Fund
An investment fund, such as a unit trust, whose portfolio is based on the shares of a particular index. The funds performance will then track the performance of the index.

Trade
A purchase or sale of an investment.

Traded Options
Options on the FTSE 100 and the 100 or so largest companies, by market capitalisation. These options are bought and sold on the traded options market, where as option prices for smaller company shares may only be available on request.

Trending
Trending is a term used in charting. It is a price which is moving up or down and includes temporary reversals of the main trend.

Trendless
Trendless is the opposite of trending. Short term movements in the share price do not deliver it into new territory.

Turn
The difference between the buy and sell price of a security. Is the margin made.

Undistributed Profits
Profits earned by an organisation that are retained for future investment within the company as oposed to being distributed to shareholders by way of a dividend.

Unit Trust
A unit trust is a collective investment whereby investors' monies are pooled so the trust can purchase a broad range of investments based on its aims and objectives. Investment into the trust can usually be made with a lunp sum or on a regular basis. Unit Trusts are open ended. This means there are not a limited number of units in issue, if demand increases then so does the number of units.

Valuation
The value of an investment at a point in time. Investment funds typically send statements twice a year showing the value of any investments or withdrawals during the period, including dividends paid or reinvested.

Value Investing
Value investing techniques look at the fundamentals of a company, notably net asset value, to determine which companies are 'cheap' in relation to their share price.

Venture Capital Trust
A venture capital trust is similar to an investment trust in that it invests the money it receives in other businesses. In this instance, the businesses it invests in are new or unquoted companies that are looking for development capital. As such venture capital trusts are relatively high-risk investments. For investors willing to take on this risk there are income and capital gains tax benefits.

Vesting
Benefits arising from a share option plan or pension scheme must be made available to the employee within a certain period of time. The vesting period is the period before the shares are owned by the employee.

Volatility
Volatility relates to the movement in share prices. If the share has relatively large swings in price, or moves on a frequent basis it will be classed as a highy volatile share.

Volume
Volume is the number of shares traded in a given period. Volume indicates the liquidity of the stock. The greater the liquidity and volume, the easier it will be to buy and sell the shares. Lists showing shares traded by volume also tend to include information on the closing share price and the day's change in price.

Warrants
Warrants give the owner the right, but not the obligation, to buy shares in the issuing company at a future date for a predetermined price. The price of a warrant is linked to the underlying share, and will rise and fall in line with the share price, although due to the level of gearing, with greater volatility. Warrants do not have any voting or dividend rights. If the share price is above the exercise price, the warrant will be exercised i.e. the shares will be purchased and a profit made. If the share price is below the exercise price or you are ‘out of the money', the warrant is worthless.

White Knight
A white knight is a company that makes a welcome bid for another company that is the subject of a hostile takeover bid. The white knight will either make a better offer, or in the eyes of the takeover target offer a greater benefit for shareholders.

Wholesale Market
The money market between banks.

Windfall Shares
Windfall shares are free shares issued to qualifying members of building societies or mutual life assurance companies. The member usually has the choice of whether to take the shares or a cash lump sum.

Yankee Bonds
Bonds denominated in dollars, issued in the United States by foreign banks and companies.

Yield
A shares yield is calculated as the annual dividend divided by the purchase price.

Yield Curve
The yield curve shows the relationship between a bonds yield and maturity date.

Yield Gap
The yield gap is the difference between the annual yield on long dated gilt edged securities and the annual yield on equities. Both yields are on an average basis.

Yield to Maturity
The yield that would be achieved on a bond if it was held until maturity.

Yield to Worst
The yield-to-worst is the lowest yield a bond could generate e.g. yield-to-call or yield-to-maturity. This is the most appropriate yield to use when comparing bonds.

Zero Coupon Bond
A zero coupon bond doesn't pay a coupon. Instead it is issued at a discount to maturity value and so will generate a capital gain rather than an income return.

zero dividend preference share
A zero dividend preference share will not pay interest throughout its life but will award a maturity payment.