Investment Glossary

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Panic buying

a flurry of security purchases accompanied by high volume and sharp price increases. During a period of panic buying the buyers do not have time to evaluate fundamental or technical factors because their primary goal is to acquire securities before the prices rise even more.

Panic selling

a flurry of selling in a particular security or in securities as a whole. Panic selling is accompanied by particularly heavy volume and sharp price declines as owners scramble to sell before prices drop even more. Panic selling is generally set off by an unexpected event viewed by traders as particularly negative. For example, uncertainty surrounding the outbreak of serious hostilities and a cut-off of oil supplies in the Middle East might be sufficient to cause panic selling.

Par bond

a bond that sells at a price equal to its par value.

Par value

1 - the stated value of a security printed on its certificate. A bond's par value is the dollar amount on which interest is calculated and the amount paid to holders at maturity. Par value of preference shares is used in a similar way in calculating the annual dividend. - Also called face value; par. 2 - the minimum contribution made by investors to purchase a shares at the time of issue. Par value is of no real consequence to investors; in fact, many new share issues have no stated par value.

Passive investment management

a method of managing an investment portfolio that seeks to select properly diversified securities which will remain relatively unchanged over long periods of time. Passive investment management involves minimal trading, based on the belief that it is impossible to beat the averages on a risk-adjusted basis consistently. - See also Active Investment Management.

Passive portfolio

a portfolio of securities that is altered only when another variable, such as market index, is altered.

Penny share

a low-priced, speculative share. The maximum price at which a security may sell and still be classified as a penny share is subject to individual interpretation. Many penny shares are traded in the over-the-counter market and on smaller exchanges.

Performance fee

a fee paid to an investment manager based on the performance of a client's portfolio, determined by a specified standard. For example, an investment manager might be paid a regular fixed fee plus an incentive fee based on the change in value of the client's portfolio.

Portfolio

a group of investments. The more diversified the investments in a portfolio, the more likely the investor is to earn the same return as the market. - See also Diversification; Modern Portfolio Theory; Asset Allocation.

Portfolio beta

the volatility of returns relative to the market as a whole. A high portfolio or security beta indicates securities that tend to be more volatile in their price movements than the market taken as a whole. For example a beta of 1.2 indicates volatility 20% higher than the market.

Portfolio manager

a person who is paid a fee to make and implement investment decisions for others. The term is normally used in reference to the managers of large institutions such as bank trust departments, super funds, insurance companies, unit trusts ond other managed investment funds.

Preference Shares

Preference shares give investors a fixed dividend from the company's earnings and entitle them to be paid before common shareholders.

Premium bond

a bond selling at a price above its par value. The size of a bond's premium normally can be expected to decline as the bond approaches maturity, at which time it will be paid off at par. (face value)

Present value (PV)

the current value of future cash payments when the payments are discounted by a rate that is a function of the interest rate. For example, the present value of $1,000 to be received in 2 years is $812 when the $1,000 is discounted at an annual rate of 11%. Conversely, $812 invested at an annual return of 11% would produce a sum of $1,000 in 2 years. - See also Future value; Net Present Value.

Price

the dollar amount at which a security trades.

Price-earnings ratio (P/E)

a common share analysis statistic in which the current price of a share is divided by the current (or sometimes the projected) earnings per share of the issuing firm. As a rule, a relatively high price-earnings ratio is an indication that investors feel the firm's earnings are likely to grow. Price-earnings ratios vary significantly among companies, among industries, and over time. One of the important influences on this ratio is long-term interest rates. In general, relatively high rates result in low price-earnings ratios; low interest rates result in high price-earnings ratios. - Also called earnings multiple; market multiple; multiple; P/E ratio.

Primary market

the market in which new, as opposed to existing, securities are sold. Investors who purchase shares in a new security issue are purchasing them in the primary market. Investors who buy shares and bonds in the primary market are not normally required to pay brokerage commissions because fees for selling the issue are built into its price and are absorbed by the issuer. - Also called new issue market. - See also Secondary market.

Prime rate

a short-term interest rate quoted by a commercial bank as an indication of the rate being charged on loans to its best commercial customers. Even though banks frequently charge more and sometimes less than the quoted prime rate, it is a benchmark against which other rates are measured and often keyed.

Principal

1 - the face amount (value) of a bond. Once a bond has been issued, it may sell at more or less than its principal amount, depending on changes in interest rates and the riskiness of the security. At maturity, however, the bond will be redeemed for its principal amount. 2 - funds put up by an investor. 3 - the person who owns or takes delivery of an asset in a trade. For example, an investor is the principal for whom a broker executes a trade.

Principal shareholder

a shareholder who owns a large number of voting shares in a firm. A person owning 10% or more of a listed firm's voting shares is considered a principal shareholder.

Privately-held company

a firm whose shares are held within a relatively small circle of owners and are not traded publicly.

Probate

proof that a will is valid and that its terms are being carried out. Probate is accomplished by an executor/executrix.

Producer price index

a comprehensive index of price changes at the wholesale level. Since wholesale price changes eventually will find their way into consumer prices, the producer price index is closely watched as an early indicator of future retail price changes.

Productivity

the efficiency with which output is produced by a given set of inputs. Productivity is generally measured by the ratio of output to input. An increase in the ratio indicates an increase in productivity. Conversely, a decrease in the output/input ratio indicates a decline in productivity.

Progressive tax

a tax with a rate that increases as the amount to be taxed increases. For example, a taxing authority might levy a tax of 10% on the first $10,000 of income and increase the rate by 5% per each $10,000 increment up to a maximum of 50% on all income over $80,000. The opposite is a flat tax.

Prospectus

a formal written document relating to a new securities offering that delineates the proposed business plan or the data relevant to an existing business plan - information needed by investors to make educated decisions whether or not to purchase the security. The prospectus includes financial data, a précis of the firm's business history, a list of its officers, a description of its operations and mention of any pending litigation. The issue of securities including managed investment funds in NZ requires a prospectus and an investment statement to be issued. It is mandatory for the prospective investors to receive the investment statement prior to making an investment, The prospectus must be made available upon request.

Prudent person rule

a regulation requiring trustees to make financial decisions in the manner of a prudent person, eg with intelligence and discretion. The prudent person rule requires care in the selection of investments but does not limit investment alternatives.

Publicly held

1 - pertaining to or being securities that are freely transferable among investors. 2 - of, relating to, or being a publicly traded company.

Publicly traded company

a company whose shares are held by the public and are available for purchase by investors. The shares of publicly traded firms are bought and sold on the organised exchanges (are listed) or in the over-the-counter market.

Purchasing power

1 - consumer ability to purchase goods and services. Increased purchasing power represents proportionately larger increases in income than increases in the cost of goods and services. 2 - the ability to purchase goods and services with a fixed amount of money. With this narrower definition, purchasing power is inversely related to the consumer price index. Increased purchasing power is a signal that future increases in economic activity are likely.

Put Option

See Option

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