Par
A bond that is trading at par is selling for the same amount as its face value, or par value.
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Par value
The nominal dollar amount assigned to a bond by its issuer. Par value represents the amount of principal you are owed at a bond's maturity. The bond's actual market value may be higher or lower. When a bond's market price fluctuates, it has an impact on its yield. If the price drops below the bond's par value, its yield goes up. If the price rises above par value, the yield goes down. Also called face value. See "When Yield Goes Up, Price Goes Down."
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Pass-through securities
A security that comprises a pool of debt instruments. The income from the debt is passed through an intermediary — usually a government agency or investment bank — to the investors.
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Payment date
The date that a stock's dividend or a bond's interest payment is scheduled to be paid.
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Payout ratio
The percentage of a company's earnings paid to shareholders as dividends. It is calculated by dividing the quarterly dividend by the quarterly earnings-per-share and multiplying by 100. Typically, growth companies retain earnings to spur further growth, while old-line companies, banks and utilities tend to have higher payout ratios. See Payout ratio.
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Penny stocks
Many penny stocks do indeed have a share price of less than $1, but this informal designation now often includes stocks that are priced at $5 and below. While many legitimate companies have share prices that low, the term "penny stocks" usually refers to speculative companies with little or no real business that are heavily promoted by unscrupulous, hard-selling brokerage firms.
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Pension
Income received upon retirement. There are two basic types of pension benefit: a defined-benefit plan and a defined-contribution plan. A defined-benefit plan is a traditional pension plan usually paid for by your employer. Upon retirement, you receive a fixed monthly check based on your age, salary and length of service. A defined-contribution plan puts the onus on you to contribute a percentage of your current income to the plan, whereupon your employer will often match part of your contribution — the combined sum to be received upon your retirement. The typical defined-contribution plan is a 401(k) or 403(b) plan.
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Pension maximization
A controversial strategy, often espoused by life insurance agents, of using insurance to augment a company benefit plan. Under this arrangement, a retiree takes pension payments for his or her own life only and buys life insurance to provide for a surviving spouse. Also known as pension max.
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Percent in top five holdings
Proportion of total assets in a mutual fund's largest five positions. Funds that have too much money invested in their top five holdings may not be properly diversified.
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Personal financial specialist
Financial planning designation given to qualifying accountants by the American Institute of Certified Public Accountants, based in New York.
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Pink sheets
The printed quotations of the bid and ask prices of over-the-counter stocks, published by National Quotation Bureau.
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Points
An amount paid to a mortgage lender, at the time of closing, above and beyond the regular interest payments. Each point equals 1% of the mortgage face amount. When you are buying a home, points are tax-deductible in full for the year you pay them, provided that they aren't out of line for your area and that they represent prepaid interest, which they usually do. If you pay points when you refinance, however, you must amortize the tax deduction over the life of your loan.
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Poison pill
A takeover defense tactic designed to make a hostile takeover prohibitively expensive. For instance, a firm may issue a new series of preferred stock that gives shareholders the right to redeem shares at a premium price after a takeover. Or a poison pill can allow all existing shareholders of the target company except the acquirers to buy additional shares at a bargain price. Such measures raise the cost of acquisition and cause dilution, hopefully deterring a takeover bid.
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Ponzi scheme
A fraudulent scheme. It is a specific form of pyramiding in which money paid by later investors or contributors is used to pay inflated returns to earlier investors — until the funds dry up because no more contributors can be found
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Portfolio
A collection of securities held by an investor. Portfolios tend to consist of a variety of securities in order to minimize investment risk.
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Portfolio insurance
A method of hedging, or protecting, the value of a stock portfolio by selling stock-index futures contracts when the stock market declines. The practice was a major contributor to the October 1987 stock market crash.
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Portfolio manager
The manager of a mutual fund or an investment trust.
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Precious metals
Commodities such as gold, silver and platinum that are used as investment instruments. Investors can buy physical metal in bullion or jewelry or can purchase precious metals futures and options contracts or mining stocks. A precious metals investment is often considered a hedge against inflation.
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Preferred stock
A stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock enjoys prior claim to company assets over common stock in the case of a bankruptcy. But the stock does not usually carry voting rights.
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Premium
When a closed-end fund's market price is more than its underlying net asset value (NAV), it is said to be trading at a premium. So if a fund trading at a 10% premium owns a portfolio of stocks collectively worth $10 a share, the market price for the fund is actually $11 a share. Unlike open-end funds, closed-ends trades like stocks on an exchange, so a fund's price is determined by investor demand for its shares. An excess of demand can cause the fund's market price to be more than its underlying portfolio value — the source of the premium. See "Closed Or Open End?"
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Premium bond
A premium bond sells at a current market price that is more than its face value. Bonds sell at a premium when the coupon on the bond is higher than prevailing rates. For example, you might have to pay $1,090 for a bond with a 6% coupon if new issues yielding 5.5% are available for $1,000.
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Prepayment
Early payment of mortgage loans by homeowners. For investors in mortgage-backed bonds, prepayments pose a serious threat. Refinancing triggered by falling interest rates causes increased prepayments, which can cause bonds that are mortgage-backed to be called early. For the homeowner, however, prepayment provides an opportunity to save on mortgage loans. See "Should I Prepay?"
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Price-to-book ratio (P/B)
A company's stock price divided by its per-share book value. Examining the P/B of an industrial company with a lot of hard assets is a good way of telling if it's undervalued or overvalued. See "Price/book value."
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Price-to-cash flow (P/C)
A ratio that shows how much investors are paying for a company's cash flow. There are various calculations because there are various definitions of cash flow (see "Digging Into the Numbers".) But the one used most often divides a company's price-per-share by its Ebitda per share. Ebitda stands for earnings before interest expense, taxes, depreciation and amoritization. Many stock analysts think cash flow paints a better picture of a company's true growth potential than net earnings do because company accountants can use crafty write-offs to alter earnings numbers. Cash flow is harder to manipulate.
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Price-to-earnings-growth ratio (PEG)
The PEG ratio (price-to-earnings-growth) is calculated by dividing a stock's forward P/E by its projected three- to five-year annual earnings-per-share growth rate. It is used to find companies that are trading at a discount to their projected growth. A PEG ratio of less than one is considered a sign that a stock is a good value. Generally speaking, the higher the PEG, the pricier the stock. See " Price/earnings."
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Price-to-earnings ratio (P/E)
A ratio to evaluate a stock's worth. It is calculated by dividing the stock's price by an earnings-per-share figure. If calculated with the past year's earnings, it is called the trailing P/E. If calculated with an analyst's forecast for next year's earnings, it is called a forward P/E. The biggest weakness with either type of P/E is that companies sometimes "manage" their earnings with accounting wizardry to make them look better than they really are. That's why some analysts prefer to focus on the price-to-cash flow measure instead. See Price/earnings.
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Price-to-sales ratio (P/S)
The ratio of a stock's latest closing price divided by revenue per share. (Sales are the same thing as revenues.) Revenue per share is determined by dividing revenue for the past 12 months by the number of shares outstanding. This ratio is particularly useful for companies that have little or no earnings. See "Price/sales."
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Pricing
The job of the underwriter to determine the price it will pay the company for a security. It is usually done the day before the sale of the security.
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Prime rate
The interest rate banks charge their most creditworthy commercial customers. Banks use the prime as a base to set rates for credit cards, home-equity loans and other loans, including loans to small and medium-size businesses. The rate is determined by general trends in interest rates. As rates decline, the prime rate will also move lower. However, it doesn't typically move on a day-by-day basis. Prime rate changes are usually led by major money center banks. Normally, the prime rate will move in steps and then remain constant until a major rate change has been made. This usually happens when the Federal Reserve makes major changes in monetary policy.
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Principal
The face value or par value of a bond. It represents the amount of money you are owed when a bond reaches its maturity. So if you buy a 10-year Treasury note with a 5% coupon rate and a $1,000 face value, $1,000 is the principal owed to you in 10 years. See "What Exactly Is A Bond?"
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Private mortgage insurance
PMI is generally required by lenders if the down payment on a home is less than 20% of the home's purchase price.
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Private placement
The sale of stocks or other investments directly to an investor. The securities in a private placement don't have to be registered with the Securities and Exchange Commission.
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Probate
The procedure in each state required to validate a will.
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Producer price index
An index that measures inflation in wholesale goods. The producer price index, or PPI, tracks the prices of food, metals, lumber oil and gas, as well as many other commodities, but does not measure the price of services. It is reported monthly by the Bureau of Labor Statistics. Economists look at trends in the PPI as an accurate precursor to changes in the consumer price index (CPI) because upward or downward pressure on wholesale prices is usually passed through to the consumer over time. Bond prices are perhaps the most responsive to PPI data. This is because inflation undercuts the value of the future interest and principal payments that bonds yield. With the consumer price index coming only days after this release, the stock market's reaction is usually delayed until the CPI either confirms or refutes what the PPI trend is indicating.
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Profit
The earnings a company realizes after all costs, expenses and taxes have been paid. It is calculated by subtracting business, depreciation, interest and tax costs from revenues. Profit is the supreme measure of value as far as the market is concerned. Profit is also called earnings or net income. See "What Is A Stock Anyway?"
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Profit margin
A measure of a company's profitability, cost structure and efficiency, calculated by dividing earnings or cash flow by revenue. There are four basic types of profit margin: gross, operating, pre-tax and net. Net margin is the one investors pay the most attention to. It shows a company's profitability after all costs, expenses and taxes have been paid. The net margin is calculated by dividing earnings by revenue and then multiplying by 100. Margins are particularly helpful since they can be used both to compare profitability among many companies and to look for financial trouble at a single outfit. See "Margins."
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Profit-sharing plan
A retirement plan funded by employer contributions that are based on a share of the company's profits. Employees are frequently responsible for managing the money themselves, selecting from such investments as mutual funds, company stock and guaranteed investment contracts. Investment gains are not taxed until the money is drawn.
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Profit-taking
Selling securities after a recent, often rapid price increase. This is often the action of short-term traders cashing in on gains from the rise. Profit-taking pushes down prices, but only temporarily; the term implies an upward market trend.
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Pro-forma results
A projection of a financial statement that shows how the actual statement would look under certain conditions. For example, pro forma results are used to show the earnings that newly merged companies would have achieved had they been combined throughout the entire period.
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Program trading
Stock trades involving the purchase or sale of a basket including 15 or more stocks with a total market value of $1 million or more. Most program trades are executed on the New York Stock Exchange, using computerized trading systems. Index arbitrage is the most prominently reported type of program trading.
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Prospectus
A formal, written offer to sell securities that sets forth the plan for a proposed or existing business. The prospectus must be filed with the Securities and Exchange Commission and given to prospective buyers. A prospectus includes information on a company's finances, risks, products, services and management. Prospectuses are also used by mutual funds to describe the fund objectives, risks, fees and other essential information.
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Proxy
A proxy is the authorization or power of attorney, signed by a stockholder assigning the right to vote their shares to another party. A company's management mails proxy statements to registered stockholders prior to the annual shareholder meetings. The statement contains a brief explanation of proposed management-sponsored voting items, along with the opportunity to vote for or against each individual issue or transfer the right to vote to company management or another party.
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Proxy fight
A contest for control of a company in which one or more companies, groups or individuals seek proxies from a company's shareholders to back a takeover attempt. The acquirer tries to persuade the shareholders of the target company that the present management of the firm should be ousted in favor of a slate of directors favorable to the acquirer. If the shareholders, through their proxy votes, agree, the acquiring company can gain control without paying a premium price for the firm.
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Proxy statement
Information that the Securities and Exchange Commission (SEC) requires must be provided to shareholders before they vote by proxy on company matters. The statement contains proposed members of the board of directors, inside directors' salaries and any resolutions of minority stockholders or management.
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Public company
A company that sells shares of its stock to the public. Public companies are regulated by the Securities and Exchange Commission (SEC). Also called a publicly held company.
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Put/call volume ratio
The volume of trading in puts (options to sell) divided by the total calls (options to buy) for a security or an index.
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Put option
An agreement that gives an investor the right, but not the obligation, to sell a stock, bond, commodity or other instrument at a specified price within a specific time period. See Call option.
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Pyramiding
A scheme that can take many forms, some of them legal. One example is using unrealized profits from a securities position as collateral to obtain new positions on margin.
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