| Glossary of Financial Terms and Abbreviations |
| Personal Finance > Financial Glossary |
Occupational Pension Scheme: Contribute to your firm's pension scheme and get a maximum of 40/60ths of your final salary. Few, very few, get this much, though. Your occupational pension may well not be enough for your retirement. See Final Salary Scheme and Money Purchase Scheme.
OEIC: See Open Ended Investment Company.
Online Investing: The same as offline investing, except using the extraordinary resources of the Internet to help you out. Simply reading this sentence puts you far ahead of the pack in the process of becoming an online investor.
Open Ended Investment Company: These are replacing unit trusts and indeed many unit trusts are already converting to them. Ostensibly, they will be simpler for investors to understand and the charges will be lower as there will not be a bid-offer spread between the buying and selling prices. In practice this is replaced by a "Dilution levy". Plus ça change....
Operating Profit: Operating Profit is gross profit less all other expenses except for interest and tax. Consequently, it is also known as profit before interest and tax. In Wisespeak it is also known as EBIT, or Earnings Before Interest and Tax.
Options: Contracts that give a person the right to buy or sell an underlying share or commodity at a set price within a set amount of time. The majority of options expire worthless. See Derivatives.
Orphan assets: Assets that are no longer required by life assurers to satisfy their future liabilities to policyholders and shareholders. Some life companies which have been going for many years have accumulated surplus funds, the precise ownership of which may be obscure and can be a matter of contention. Others may suffer the reverse problem, in which case they go bust.
Paid-Up Value: If you stop paying into your AVC, FSAVC or Personal Pension Plan, but leave the money where it is, this is the amount of money that will be left to grow in the investment fund. In the first years of the plan, this is generally much less than the amount you have put in, as a result of charges. See Transfer Value.
Penny Share: A share of very low market capitalisation (often a few million pounds) trading in multiples of just a few pence. Penny shares tend to be very volatile, subject to extreme price fluctuations on the flimsiest of rumours, and are far riskier than larger shares. See Liquidity.
Pension Mis-Selling: See Mis-Selling.
Personal Equity Plan (PEP): Started in 1987. Up to April 1999 you were able to put up to £9,000 per year into equity-based investments in one of these and allow it to grow tax free. They have been replaced by ISAs, but existing PEPs can continue to grow in their tax-free state.
Personal Pension Plan (PPP): A private pension which attracts tax relief. Understand the nature of high front-end loading charges, underperformance and the need to buy an annuity before you buy one of these.
Personal Investment Authority (PIA): The people who regulate Independent Financial Advisers and indeed anyone marketing retail investment products to the general public. You can contact them on 0207 538 8860. The PIA Ombudsman, who deals with complaints around pension mis-selling, can be contacted on 0207 216 0016.
Portfolio: A collection of securities that provides a balance across several sections of the market. This provides maximum exposure to high returns while minimising risk.
Portfolio Management: Give all your money over to the stockbroker and say: "Here, go make me some money." It's one step up even from an advisory service. See Advisory Stockbroker.
Preference Shares: Shares issued by companies that have additional rights, normally in terms of dividends.
Price/Earnings Ratio (P/E): A measure of a share's price in relation to its last twelve months' earnings per share. Often, the higher the sustainable growth rate of a company, the higher its price-to-earnings ratio.
Price Earnings Growth factor (PEG):
The PEG of a company is calculated by dividing its prospective P/E ratio by the estimated future growth rate in earnings per share of the company. So to calculate a PEG, you first need to calculate its P/E ratio.
A company with a share price of 100p and earnings per share of 5p has a P/E ratio of 100/5 = 20.
By itself the P/E ratio is a useful ratio because it shows how many times the current earnings the shares cost - in a sense, how many years you would have to wait to get your money back if the company paid out all its earnings to shareholders. But the limitation of the P/E ratio is that it looks at historical information and does not relate the price of the shares to its future performance. The PEG ratio builds in that extra layer of sophistication.
Using the example of the same company, imagine that the consensus brokers' forecast for its future earnings growth rate is 15%.
For this company, the PEG would be 20 divided by 15 = 1.33.
According to Jim Slater, the investor who popularised the use of PEG's as a stock share selection tool, a share with a PEG of 1 or lower is attractive. Note that the estimated future earnings are a critical part of the PEG calculation, and that if the forecasts made by brokers are wide of the mark, the PEG ratio will be unreliable. Because of this danger, most advocated of PEG's recommend using consensus forecasts, rather than the forecasts of any single broker/analyst.
Profit and Loss Statement: The most important of the three key financial statements contained within the annual report to equity investors. It explains how the balance sheet has changed over the year and gives a figure for the profits reported. It does not necessarily reflect the cash has company has made or lost during the year. Also known as Profit and Loss account, P&L.
Profit Before Interest and Tax (PBIT): As for operating profit, but adding in any income from associates and deducting charges for head office, exploration, research and development. This number is divided by Capital Employed to calculate Return on Capital Employed.
Prospectus: A prospectus must be issued by any company before it issues shares to the public. This gives some background to the company and details about its business and financial state.
ProShare: A pressure group representing the interests of the private investor. They publish a magazine called, The Investor, and also have a useful information pack on how to set up an Investment Club. Contact them on 0207 600 0984.
Provisions: A charge made against the assets of a company for some cost which will be incurred in the future, but has yet to be paid out. This could be taxes for next year, or the future cost of cleaning up old industrial sites.
Public Limited Company (plc): As opposed to private, a company is public after it issues partial ownership of itself, in the form of shares, to the public. Only plcs can be listed on the London Stock Exchange or the Alternative Investment Market.
Quarterly reporting: In the USA, every three months a company is required to file a report providing investors with juicy details on how the company is doing. In the UK, equivalent reports are seen only every six months. See 10-Q.
