Glossary of Investment Terms (P - R)

This glossary offers a handy reference for some of the more common investment and financial terms.  The information presented here covers topics that are subject to change due to legal and regulatory actions.  Readers should consult with their legal, tax or financial advisors before entering into any agreement or effecting any transactions involving terms or concepts about whose meaning they may be unsure.

P

Paper profit (loss).  An unrealized profit or loss on a security still held. Paper profits and losses become realized only when the security is sold.

Par. In the case of a common share, par means a dollar amount assigned to the share by the company's charter. Par value may also be used to compute the dollar amount of common shares on the balance sheet. Par value has little relationship to the market value of common stock. Many companies issue no-par stock but give a stated per share value on the balance sheet. In the case of preferred stocks it signifies the dollar value upon which dividends are figured. With bonds, par value is the face amount, usually $1,000.

Participating preferred. A preferred stock that is entitled to its stated dividend and to additional dividends on a specified basis when dividends are paid on the common stock.

Payout ratio.  The percentage of a corporation's earnings that are paid to shareholders as dividends. For example, a corporation that pays a $0.12 dividend out of every $1.00 of earnings has a payout ratio of 12%.

P/E ratio (price/earnings ratio).  The P/E ratio represents the relationship between a company's stock price and its earnings.  The P/E ratio equals the price per share of stock divided by earnings per share for a 12-month period. For example, a stock selling for $50 a share and earning $5 a share is said to be selling at a price-to-earnings ratio of 10.

Penny stocks. Low-priced issues, often highly speculative, generally selling at less than $1 a share. Frequently used as a term of disparagement, although some penny stocks have developed into investment-quality issues.

Pink sheets.  A National Quotations Bureau daily publication that lists market maker's bid and asked prices from the prior day for over-the-counter securities. Equity securities are printed on long pink paper, hence the name. Debt securities are printed on long yellow sheets giving rise to the name “yellow sheets.”

Point. With respect to shares of stock, a point means $1. If ABC shares rise 3 points, each share has risen $3. With respect to bonds a point means $10, since bonds are quoted as a percentage of $1,000. A bond that rises 3 points gains 3% in $1,000, or $30 in value. With respect to market indices, the word point means merely that and no more. A point in an index such as the S&P 500 is not equivalent to $1.

Portfolio. Holdings of securities by an individual or institution. A portfolio may contain bonds, preferred stocks, common stocks and other securities.

Power of attorney (POA).  Written document that permits a third party to conduct certain actions on behalf of the person signing the document.  Depending on the specifications within the document, a power of attorney may be full or limited. A limited Power of attorney is commonly used to allow an investment advisor to effect trading in a client’s account held at a third-party custodian.

Preemptive right.   Right given to shareholders that allows them to purchase shares of a new issue before it is offered to non-shareholders. This allows shareholders to retain the same percentage of ownership in a corporation.

Preferred stock.  A preferred stock is a type of capital stock that pays dividends at a rate set at the time of issuance. Dividend payments to preferred holders must be made before common stock dividends can be paid. Preferred stock usually has (i) no voting rights and (ii) preference over common stock as to the assets of the company in the event of a liquidation of the company.

Premium. The amount by which a bond or preferred stock sells above its par value. May refer also to the redemption price of a bond or preferred stock if it is higher than face value.

Premium bond.  A bond that is selling above its face value or redemption price.

Premium income.  Money received by option writers (sellers) from option buyers in payment for specific rights.  A put writer is betting that the security price will not fall, and a call writer is betting that it will not rise during the option period.

Pretax earnings or profit. The amount of profit a corporation earns before paying its taxes. It is calculated by subtracting all costs and expenses other than taxes from total revenues.

Price change.  The difference in a security's price at the close of a trading session as compared to its previous session's closing price.

Price-to-earnings ratio. The P/E ratio represents the relationship between a company's stock price and its earnings.  The P/E ratio equals the price per share of stock divided by earnings per share for a 12-month period. For example, a stock selling for $50 a share and earning $5 a share is said to be selling at a price-to-earnings ratio of 10.

Prime paper.  The highest rated commercial paper as rated by agencies such as Moody's Investors Services. Moody's has three ratings for prime paper: P1 (highest quality), P2 (higher quality), and P3 (high quality).

Prime rate.  Interest rate charged by banks to their most creditworthy and largest corporate customers. The prime rate is used as a base rate for other types of loans such as personal, commercial and financing. These types of loans are normally of an interest rate a few points above the prime rate. Additionally, as the customer's creditworthiness declines, the interest rate will increase.

Principal. 1). The person for whom a broker executes an order, or a dealer buying or selling for their own account. 2). The face amount of a note or bond.

Principal stockholder.  A shareholder who owns a 10% or more voting stock in a registered company.

Private market value.  The aggregate value of a corporation if it is broken into individual operations and each has its own stock price--also called "breakup value" or "takeover value". Analysts look for corporations with high PMV relative to its current market value to identify potential takeover targets and bargains. It differs from the corporation's liquidating value because it does not include going-concern value.

Private purpose bond. A municipal bond whose interest may (or may not) be federally tax-exempt--also called "private activity bonds". It is dependent on the percentage of the bond's benefits that goes to private activities. A private purpose bond for a sports arena would not be tax-exempt, while one for an airport would. A sports arena generally does not help the general public whereas an airport can help the entire community.

Profit-taking. Selling stock that has appreciated in value since its purchase. The term is often used to explain a downturn in the market following a period of rising prices.

Prospectus. The official selling document that must be given to purchasers of new securities registered with the Securities and Exchange Commission. It contains the highlights of the much longer Registration Statement filed with the Commission.

Proxy. Written authorization given by a shareholder to someone else to represent him/her and vote his/her shares.

Proxy statement. Information given to stockholders in conjunction with the solicitation of proxies.

Prudent Man Rule. An investment standard. In some states, the law requires that a fiduciary such as a trustee may invest the fund's money only in a list of securities designated by the state (the so-called legal list). In other states, the trustee may invest in a security if it is one that would be bought by a prudent person of discretion and intelligence, who is seeking a reasonable income and preservation of capital.

Q

Q-TIP Trust (Qualified Terminable Interest Property Trust).  A type of trust that is frequently used to provide for the welfare of a spouse. It keeps assets out of the estate of another (such as a future marriage partner) if the grantor dies first. It allows assets to be transferred between spouses. The grantor of a Q-TIP trust directs the income generated from the assets to their spouse for life, but has the power to distribute the assets upon the death of the spouse. The trust qualifies the grantor for unlimited marital deductions if the spouse dies first.

Qualified pension plan or trust.  A retirement plan (or annuity) set up by an employer for an employee into which the employee and/or the employer may make tax deductible contributions. The plan's investment earnings are tax-deferred. The employees pay taxes only when they draw money from the plan. If the money is withdrawn before the legal age, penalties may also be incurred. IRAs and most corporate pension plans are deemed to be qualified.

Quiet period.  Time period that the issuer of a security in registration is subject to Securities and Exchange Commission (SEC) regulations regarding advertising or dissemination of information related to the offering.

Quote. The highest bid to buy and the lowest offer to sell a security in a given market at a given time. If a stock is quoted at "45¼ to 45½," this means that $45.25 is the highest price any buyer wanted to pay at the time the quote was given on the floor of the exchange and that $45.50 was the lowest price that any seller would take at the same time.

R

REIT (Real Estate Investment Trust ). An organization similar to an investment company in some respects but whose holdings are concentrated in real estate investments. REITs generally have high yields since they are required to distribute as much as 90% of their income each year.

Real rate of return.  An investment's return after adjustment for inflation.

Record date. The date on which all those registered as a shareholder of a company are entitled to certain shareholder rights such as receipt of a declared dividend, the right to vote on a specific matter, etc.

Redemption price. The price at which a bond may be redeemed before maturity at the option of the issuing company. Redemption value also applies to the price the company must pay to call in certain types of preferred stock.

Red herring. A registration statement filed with but not yet approved by the Securities and Exchange Commission (SEC).

Refinancing. Same as refunding. New securities are sold by a company and the money is used to retire existing securities. The object may be to save interest costs, extend the maturity of the loan, or both.

Registered bond. A bond that is registered on the books of the issuing company in the name of the owner. It can be transferred only when endorsed by the registered owner.

Registered competitive market maker. Members of the New York Stock Exchange who trade on the floor for their own or their firm's account and who have an obligation, when called upon by an exchange official, to narrow a quote or improve the depth of an existing quote by their own bid or offer.

Registered representative. The person who serves the investor customers of a broker/dealer. In a New York Stock Exchange-member organization, a registered representative must meet the requirements of the exchange as to background and knowledge of the securities business.

Registrar. Usually a trust company or bank charged with the responsibility of keeping record of the owners of a corporation's securities and preventing the issuance of more than the authorized amount of securities.

Registration. Before an initial public offering may be made of new securities by a company, the securities must be registered under the Securities Act of 1933. A registration statement is filed with the SEC by the issuer. It must disclose pertinent information relating to the company's operations, securities, management and the purpose of the public offering. Before a security may be listed on a national securities exchange, it must be registered under the Securities Exchange Act of 1934. The application for registration must be filed with the exchange and the SEC by the company issuing the securities.

Regular way delivery. Unless otherwise specified, securities sold on the New York Stock Exchange are to be delivered to the buying broker by the selling broker and payment made to the selling broker by the buying broker on the third business day after the transaction. Regular way delivery for bonds is the following business day.

Regulation T. The federal regulation governing the amount of credit (margin loan) that may be advanced by brokers and dealers to customers for the purchase of securities.

Regulation U. The federal regulation governing the amount of credit that may be advanced by banks to customers for the purchase of listed stocks.

Reorganization.  1). Financial restructuring of a corporation in bankruptcy.  2). A department within a brokerage firm that handles client's securities that are merging, being taken over, etc. The department is usually just called "Reorg."

Restricted stock.  Stock that is not registered under the Securities Exchange Act of 1933. Restricted stock is either purchased through a company's stock option plan, or a private placement. The investor is required to sign a letter agreeing that the purchase is for investment and not short term profit, and must hold the stock for two years before it can be sold. Sale of restricted stock is governed by SEC Rule 144.

Retail investor.  An investor who buys and sells securities for their own behalf and not for an institution. Retail investors typically trade in much smaller quantities than institutional investors.

Return on equity (ROE).  An amount expressed as a percentage that is calculated by dividing a company’s net earnings by the average stockholders' equity.  ROE is used as a measure of how effectively invested funds are being utilized during a specific period. Trends can be found if current and prior periods are compared.  Comparison to industry composites shows whether or not the company is keeping up with its competitors.

Reversal.  A term from technical analysis indicating a significant change in direction of a stock or a market.

Reverse split.  Procedure whereby a corporation reduces the number of outstanding shares. Reverse splits are used by corporations whose shares are selling at very low market prices to increase the attractiveness of their shares to investors.  The total market value of the shares remains the same after the reverse split, but each share is worth more.  In a 1 for 10 split, an investor owning 1000 old shares valued at $4 each delivers them to the issuer and receives 100 new shares that are valued at $40 each. The investor’s shares are worth the same amount as before the split.

Revocable trust.  A trust in which any of its provisions can be changed, or the trust itself can be canceled at any time by the grantor. The grantor receives income from the assets. This contrasts with an irrevocable trust in which the trust cannot be amended or canceled and the assets are not subject to estate taxes.

Rights. When a company wants to raise funds by issuing additional securities, it may give its stockholders the opportunity to buy the new securities ahead of others in proportion to the number of shares each owns. The piece of paper evidencing this privilege is called a right. Because the additional stock is usually offered to stockholders below the current market price, rights ordinarily have a market value of their own and are actively traded. In most cases they must be exercised within a relatively short period. Failure to exercise or sell rights may result in monetary loss to the holder.

Round lot. A unit of trading or a multiple thereof. On the NYSE, the unit of trading is generally 100 shares in stocks, and $1,000 or $5,000 par value in the case of bonds. In some inactive stocks, the unit of trading is 10 shares.

Rule 144.  A rule that stipulates the conditions in which an unregistered security may be sold by a broker. Specific documentation must be completed by the owner and presented to a broker before a sell order can be placed. Moreover, a letter security may not be sold for at least two years from the date of purchase. Thereafter, during any three month period, the following amounts may be sold: (i) if the corporation's securities are unlisted, 1% of the outstanding shares; (ii) if the corporation's securities are listed, the greater of 1% of the amount outstanding or the average trading volume within the past four weeks.

Russell 2000. The Russell 2000 Index is an index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index.