Par. The face value of a stock or bond. Also called par value.
Penny stock. Generally thought of as a recently issued stock selling for less than $5 a share and traded over the counter. Penny stocks are usually issued by small, relatively unknown companies and lightly traded, making them more prone to price ma nipulation than larger, better-established issues. They are, in short, a gamble.
Preferred stock. A class of stock that pays a specified dividend set when it is issued. Preferreds generally pay less income than bonds of the same company and don't have the price appreciation potential of common stock. They appeal mainly to corpo rations, which get a tax break on their dividend income.
Price-earnings ratio. Usually called the P/E, it is the price of a stock divided by either its latest annual earnings per share (a "trailing" P/E) or its predicted earnings (an "anticipated" P/E). Either way, the P/E is considered an important indi cator of investor sentiment about a stock because it indicates how much investors are willing to pay for a dollar of earnings.
Price-sales ratio. The PSR is the stock's price divided by its company's latest annual sales per share. It is favored by some investors as a measure of a stock's relative value. The lower the PSR, according to this school of thought, the better the value.
Program trading. A complex computerized system designed to take advantage of temporary differences between the actual value of the stocks composing a popular index and the value represented by futures contracts on those stocks. To simplify, if the stocks' prices are higher than the futures contracts reflect, computer programs issue orders to sell stocks and buy futures contracts. If the stocks are lower than the futures contracts reflect, program traders buy stocks and sell the futures. The result is virtually risk-free profits for the program traders and more volatility for the market because of the vast numbers of shares needed to make the system work.
Prospectus. The document that describes a securities offering or the operations of a mutual fund, a limited partnership or other investment. The prospectus divulges financial data about the company, background of its officers and other information needed by investors to make an informed decision.
Proxy. The formal authorization by a stockholder that permits someone else (usually company management) to vote in his or her place at shareholder meetings or on matters put to the shareholders for a vote at other times.
Real estate investment trust. A closed-end investment company that buys real estate properties or mortgages and passes virtually all the profits on to its shareholders.
Registered representative. The formal name for a stockbroker, so called because he or she must be registered with the National Association of Securities Dealers as qualified to handle securities trades.
Return on equity. An important measure of investment results that is obtained by dividing the total value of shareholders' equity--that is, the market value of common and preferred stock--into the company's net income after taxes.
Return on investment. Often abbreviated ROI, this is a company's net profit after taxes divided by its total assets, which include common stock, preferred stock and bonds.
Rollover. A tax-free transfer of funds from one tax-deferred retirement savings plan to another. If you take possession of the funds, the money must be deposited in the new account within 60 days. You can also use a rollover to transfer funds from a company plan--when you receive a lump-sum distribution, for example--to an IRA. The tax bill is delayed until you withdraw funds from the IRA.
Roth IRA. New in 1998, this is also known as a "back-loaded" IRA. Contributions are not deductible, but withdrawals can be completely tax-free in retirement. Roth IRAs share several similarities with regular IRAs. But you can withdraw contributions at any time without tax or penalty (but withdrawals of earnings will be subject to penalties until age 59 1/2), and you do not have to take mandatory withdrawals at age 70 1/2. The unused balance on the account can also be passed tax-free to your heirs. For more information see IRS Publication 553, Highlights of 1997 Tax Changes.
Round lot. A hundred shares of stock, the preferred number for buying and selling and the most economical unit when commissions are calculated.