StockWave Financial Glossary P

Glossary P

The financial world is full of jargon - i.e. strange words no-one understands. Here we try to explain some of the many technical terms.

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P

Pairs Trading

A technique from futures trading; you make a trade involving two stocks, and your profit depends on the relative movements of these stocks - what the market does overall, and the absolute stock movements do not matter; you profit if you get the relative movement of the stocks correct.

Partial Fill

Limit order that is only partially filled.

Pattern

The opposite idea from randomness. Objects which are highly patterned will have a short, compact, underlying law or rule which generates them. By analysing the pattern we can find the underlying rule and in course accurately predict the future values.

It is the avowed claim of any number of trading systems to have identified patterns in stock price data which lead to reliable buy or sell signals. Human beings are pretty good at pattern recognition especially linear progressions and simple periodicities, but that is about it, and in no way covers the totality of what can be considered patterned.

Also referred to as 'time correlations' in relation to share prices.

Paying for Advice

You would naturally expect that good advice has to be paid for. Unfortunately, paid-for advice is often little better than free advice.

Payoff

The bottom line, the end result.

When you are being sold some financial product, amidst the glossy brochures and the jargon, the slick sales patter, you may hear a small voice crying out from inside yourself - 'what do I stand to make on this, and what risks do I take'?, alas for you, a good salesman will silence this voice or subdue it with vague statements - you may hear talk of 'substantial returns' or 'small possibility of risk', but you never get it laid out clearly for you. Having been bored into submission, you may end signing up for something you do not understand, and have no inkling of the risks involved with it.

StockWave is different. For every trade that you consider making you will be shown graphs of possible payoffs, likely payoffs and summary measures which tell you - the average profit, the chance of making a profit, the maximum likely loss, and the maximum profit. These four numbers are all you need to know to make an informed investment or trading decision - even and especially for the more complicated types of things, like derivatives.

PEP

Personal Equity Plan is a tax shelter; father of the ISA.

Pensions

Savings made by working people for when they retire.

Pensions are administered by Fund Managers, and so the future well-being of most ordinary citizens is dependent on the random meanderings of the stock market, and the collective 'genius' of the blue-blood stock-picking fraternity.

In case you have been on another planet for the past two years, UK pensions are in severe trouble.

Percentage

A fraction, expressed relative to a base of 100. So, e.g. 78% = 78/100 = 0.78.

Since a percentage is a fraction it is thus a relative amount; whenever we hear a percentage, we must know what the reference amount is. This is a situation where we must take care; for almost all financial transactions we deal in absolute amounts (- e.g. a tin of peas is 20p, not 0.001% of your salary), but occasionally we may find ourselves quoted a percentage - this is unusual, and we must beware, for charging in percentages is usually done to make something large, seem very small. For example, management charges for your investment fund may be 2%. 2% sounds like a small amount, but could, in fact, be very large indeed, especially over the lifetime of the contract.

Another arena where percentages are used to mislead is in pay, where for example, the board member may take 10% as the 'going rate' whereas the worker may only get 2%. This is unfair certainly, but the difference is only a few percent, so it doesn't really matter that much does it? Well, it does ...

A Sizeable Chunk of an Enormous Amount = a lot of money, whereas
Sod-all percent of Bugger-all = absolutely nothing worth a damn

When it comes to money, talk in terms of absolutes - pounds and pennies, cents and dollars ... that way we all know where we stand.

Physics and Financial Markets

Simulations of markets have been done which accurately reproduce the correct general qualitative behaviour.

Politics

A variety of irrelevant belief systems.

Say after me -

My money is my politics
My money is my belief
My money is my loyalty

Repeat inwardly whenever you see a politician on TV; repeat 10 times quickly whenever they use the words 'integrity' or 'values' ...

Pork Barrel, aka Feeding Trough

A political situation where allegiances are decided not on ideological issues, or matters of principle, but on a share-out of government booty, i.e. tax dollars/euros/pounds; this can sometimes make for apparently 'strange' cross-party alliances and inter-party antagonisms.

Portfolio Theory

By investing ones money in a collection of stocks, and by cleverly choosing these stocks with the correct relative properties, it is possible to both increase the overall return and reduce the overall risk.

When discussing portfolio theory, you will hear experts talk of the 'correlation' - this is the way in which a variation in one thing, relates to a variation in another. By studying these correlations a portfolio manager will attempt to choose stocks in such a way so that, even if one stock performs very badly, the loss will be offset by the gains in the other stocks.

PPP/PFI

Public private partnership/Private finance initiative.

The UK name for the practice of giving companies large amounts of taxpayers cash for public works, the crucial difference being that the final product will not be owned by the public - ownership is retained by the company, while the public is locked-in to an expensive multi-decade rental scheme. This is a good way of privatizing profits, while socializing the risks involved.

The attraction of these schemes to politicians is that they do not create any upfront borrowings (- even though this would be a lot cheaper in the long run), and so the incumbents can make themselves look to be models of financial probity. The public will be paying-through-the-nose for decades to come, while the politicians could be out of a job in a couple of years, so what do they care?

Prediction

The future value of some quantity.

Not possible to calculate for share prices, unfortunately.

Price-to-Book Ratio

Stock price divided by company book value.

Price-to-Earnings Ratio (P/E ratio)

Stock price divided by company's annual earnings per share.

An enormous amount of investing folklore exists on the P/E Ratio, and indeed it is a useful tool. Alas, like many useful tools, it becomes overused - when all you have is a hammer, all problems are nails - so beware. On its own, the P/E Ratio means ... absolutely nothing. Nothing at all. You have to look at the bigger picture. Having offered these warnings, let us consider the conventional wisdom about the P/E Ratio.

The P/E Ratio is a measure of how highly a share is valued. It's a useful measure of comparison. Many, if not most, of the world's most successful investors adhere to an important rule-of-thumb relating to PE Ratios and its importance regarding when to buy or sell a company - these investors will only purchase a company when its PE Ratio is either equal to, or preferably, lower then the company's earnings per share growth rate. This is based on the understanding that a faster growing company is worth more then a slower growing one.

In a nutshell, a very high P/E is bad. During the tech boom, enormous P/E ratios were common.

Price to Earnings Growth Ratio

A stock's P/E ratio divided by its projected earnings growth rate. PEG is a widely used indicator of a stock's potential value - it is favoured by many over the price/earnings ratio because it also accounts for growth. Keep in mind that the numbers used are projected and so can be less accurate. Also, there are many variations using earnings from different time periods (i.e. 1 year vs. 5 year). Be sure to know the exact definition your source is using.

PEG ratios are considered less useful in assessing cyclical stocks and those in industries such as banking, oil or property, where assets are a more important indicator of value.

Price-to-Sales Ratio

Stock price divided by its annual sales.

Privileged Briefing

A thing of the past (?), thankfully. In the bad old days, company directors would take favoured analysts out on the golf course and pass on tasty tidbits, who would then pass them on to their favoured, i.e. biggest, clients. If you were not a well-connected insider, you had a much harder time. These days companies are supposed to release all information to everyone at the same time, so no one is disadvantaged. The biggest nightmare of all to the men who run the markets is that one day people will simply stop trading stocks - then everyone is out of a (cushy) job. If the game is seen as unfair then that is a very good reason to stop playing.

A related entity is the soft commission.

Privatisation

Stealing; the theft of the commons.

Probability

The chance that an event will occur.

Probabilistic Prediction

Something which can be calculated for financial markets. On this basis, a viable trading strategy can be developed. Get a handle on the probabilities of market moves and you can be on the right side more often than not - this is all the information you need.

Profits Warning

News released by a company to the markets when it knows that it will significantly fail to realise the expected earnings forecasts. Almost always leads to a large downward correction - it is not unheard-of for a company to lose 40% or more of its share value in a single day - the situation being that the market will always read this as being very serious indeed as issuing such a warning is about the last thing a company would want to do; ' ...if they've been forced into doing this, then things must be really bad!'

Programme Accounting

A very cunning and slippery accountancy practice used by almost all large US companies. Makes accounts almost impossible to audit; with sufficient skills any desired numbers whatsoever can be concocted; in a nutshell it means being able to book all future profits upfront, while deferring costs.

Property

Property prices seem to be a national obsession in the UK, their relentless march upward a source of joy to some, despair to others, and utter bafflement to the rest of us. Getting in on property 5 years ago in the right area would have made you a mint by now, but at that time everyone was obsessed with tech stocks; since the stock market has been so poor for the last few years, property has looked better and better.

History tells us that valuations cannot make large increases forever, there has to be a correction at some point; the thing feared most of all is of course, a crash. The government and the money men are naturally concerned with what the consequences of this would be; it would not be pretty and would reverberate throughout the entire economy. Despite much talk of such a correction, or indeed, a crash, it stubbornly refuses to happen. So what is going on?

It all begins with the stock market (- of course!), London, and the wealthy City slickers; in the good times, the City boys got large bonuses, which they decided to spend (- note how they do not reinvest in the stock market themselves!) - some young Gordon-Gekko type wants a plush penthouse by the waterfront and finds himself in a bidding war with another City boy; the price gets whacked up substantially, one of them gets the pad, the other loses. Such scenes are repeated all over the posh parts of London. All the losers from this first round then decide to go for slightly less luxurious accommodation, and find themselves in bidding wars with, say, well-heeled professionals - lawyers and the like; this time the City-boy first-round losers win, and the yuppies lose. Such scenes are repeated all over London. Now the yuppies go looking for alternative property ... and so on. And on, and on. The pattern is repeated and radiates outwards like the wave from a pebble dropped in a pond; the wave is transmitted wherever there is good transport infrastructure - a motorway or an underground line, and soon prices are going up everywhere. Previously unfashionable areas adjacent to fashionable areas themselves become fashionable; the consequences are felt everywhere, but as always most harshly at the bottom - pretty ordinary people in ordinary sorts of jobs, in ordinary areas, find that they now cannot afford to buy a house.

Meanwhile, the stock market is in a slump, everyone is getting out of it, and looking for a new place to put their cash, some place which is showing a positive return; soon the stock market refugees are getting into property as an investment, fuelling further prices rises. Stock markets fall even further, interest rates are cut to prop up the stock market, which makes mortgages even cheaper, further driving up property demand. Note that there is no stable endpoint to this cycle, it will drive itself out of control quite naturally; interest rate increases could put a brake on it, but that would drive the stock market even lower; this is the economic equivalent of 'between a rock and a hard place'.

My point to all this is that I cannot tell you when the property bubble will burst, or how - a loud pop, or a slow fizzle. But, if you are interested in property, keep your eyes on what is happening at the top end of the market; when top quality luxury London apartments start failing to get their asking prices, it may be that the market has turned, and when it does, it shall again radiate outwards.

It must be said, bubbles, generally speaking, go 'pop' - they do not 'gently deflate'.

Prophets of Doom

Financial punditry is populated by two main types; cheerleaders (- by far the most common), for whom spectacular returns are only just round the corner - 'the next Bull Market has already started - get on board for the big victory' - that sort of thing, and the prophets-of-doom, for whom civilisation teeters on the brink of collapse, according to whom we should all move into gold and retreat to our nuclear shelters in Montana, along with 3 years supply of tinned food, air and water purifiers, and if you are American, lots and lots of guns (- shitloads of them!) ... the cheerleader types have already been amply criticised elsewhere, so lets turn our derision to the modern day Jeremiahs.

But there is a bit of a problem here, in ridiculing the prophets of doom; the thing is, in a very general and wide ranging sense - they are quite right.

An elementary knowledge of astronomy or geology (- a few hours lazy-eyed in front of the BBC/Discovery Channel) tells us that the universe is a really violent place, and what we inhabit is a paper-thin, eggshell bio-paradise of great fragility. There are many ways the human race could be wiped out -

Asteroid or Comet strike - we've all seen the movie, but alas the brave astronauts and the nuclear landmines won't do us much good. That is just Hollywood (- Morgan Freeman for President, now that's an idea!)
Gamma Ray Burster - a star gone haywire has turned itself into a lethal lighthouse death ray which is capable of exterminating all life in an entire galaxy.
Solar Flare - the Sun gets 'sick' and belches out a torrent of deadly radiation. Nice light show though - we'd be getting the Northern Lights everywhere.
Extreme Vulcanism - super volcanoes the size of entire countries open up. There is one under Yellowstone Park I believe; currently it is grumbling away to itself, but supposedly the 2000ft bulge under the lake is nothing to worry about.
New Ice Age - just about due, right now.
Mega Tsunami - apparently one of the Canary Islands is ready to collapse into the Atlantic; check out the 500ft tidal wave. Or maybe not - why not run for your life instead.
Climate Change - could have its plus points, if you live in a cold part of the world - just don't buy any beach-front property. As for residents of Holland, Bangladesh and Tuvalu - you might start thinking about emigrating. Be prepared for your food to be a lot more expensive than it is now.
Nuclear War - hate to admit it, but the old-style Cold War deterrence did work; but what we will have soon are lots of much smaller countries with nukes who have nothing to lose by using them (- dying in nuclear fire or conventional weapon fire, it is all the same).
Evolution of super-predator or super bug or super virus - a reprise of the plagues of the Middle Ages.
Exhaustion of Food Supply - Malthus rides again; perhaps eventually he will be right some time and the usual technological fixes will be unavailable. The current favourite mechanism for this to happen is topsoil erosion.
Exhaustion of Oil - this will happen, but it won't kill us (- not all of us anyway); but we will have to revert to a more primitive technological level. This 'reversion period' will involve a lot of pain for a lot of people though.
General worldwide Market Crash - all the markets are very interlinked. LTCM nearly did the job when Yeltsin defaulted on an IMF loan.
Some fiendish combination of some or all of the above; modern society is very interconnected, and its participating forms are very specialised - this potentially makes them brittle. If you look at the way society is run there is a definite obsession with maximum efficiency, but where are the backups, the redundant systems?
God has simply had enough of our bullshit - sends the 4 Horsemen of the Apocalypse or Kali with a million Demons or the Beast with 9 Heads and the Dragon with seven Horns; if you are religious you're supposed to believe this aren't you? And anyway, the righteous amongst us are quite looking forward to the Rapture.

In dealing with investment strategy we have talked of probability and risk management; we could similarly try to apply these ideas to the various apocalyptic scenarios but we hit a brick wall mostly - there is not enough data to quantify these risks, and if they did happen there is sod-all we can do about them anyway. It could happen tomorrow, in a million years or never - we just don't have the numbers. So don't lose any sleep over it!

Pseudo-Science

Science makes the modern world possible; by letting us see things as they truly are, we develop control over them; the technological spin-offs of this deep understanding are legion ... TV, computers, air and space travel, medicine. We have a lot to be thankful for, and yet science has a lot of enemies; usually the main enemy is taken to be Religion, but Religion lost this battle a long time ago, and for the most part gracefully excuses itself.

Other enemies of science include political dogma, (some strands of) postmodernism, roughneck anti-intellectualism and pseudo-science; of all these it is perhaps pseudo-science which is the most difficult to deal with.

What is pseudo-science?

Pseudo-science is the creation of the scientifically ignorant, or poorly educated layman, when let loose with scientific and other elements. The results are usually ridiculous, and alas, clutter up a multitude of newsgroups and Web sites; the problem is though, and it is a serious one; the ordinary public cannot tell the difference between science and pseudo-science. The scientific education of the general public is very poor, and so they do not have the tools to assess the strength of a scientific argument; all they can do is to assess the elements involved - if these sound impressive, then they'll believe it.

Pseudo-science seems plausible to the layman; and when people start to believe in these things, their resulting actions will have a real effect on the world.

What do I mean by the "quality of argument"?

Suppose I made the non-controversial assertions that I had in my house; a dog, a violin, and a piece of sheet music by Beethoven. Nothing wrong there, you might say, but suppose I then said that my dog could play Beethoven on the violin! This is clearly bullshit, we hardly need to even think it through; a dog's paw cannot grasp the bow properly, nor can a dog read sheet music, and while it is possible to somehow clasp the bow in its paw and let it strike the violin strings, the noises which arise will not be musical ones. Note that in my final statement there is contained an enormous conceptual leap - this is the signature of pseudo-science.

The classic pseudo-scientific manifesto will be posted to somewhere like alt.science and start out with some groovy, cutting-edge area of respectable science like say, superstring theory, or genetics; there will be repeated book definitions, followed by some dubious inferences based thereon, neither wholly right or wrong. The time has come to make the first conceptual leap, add in, say, the psycho-analytical theories of Jung or some obscure Hindu mysticism; now you are on a roll, accelerate your arguments, leaping in ever larger steps; now add the conspiracy element - link it all to Freemasonry and the oil corporations, and again accelerate, drawing-in ever more wild and widespread phenomena; the mother-lode you are trying to hit is the "It All Fits" moment for your reader - blinded by your argument, dazzled by your rhetoric, at some point he should capitulate totally - "I see it all now, my doubts have been lifted ... " (If you are smart, this is the time to ask the reader for his credit card details ...) Finally, you should explain that you cannot present proof of your theory to the scientific community as you are being persecuted by some secret government agency.

Now, wild flights of fancy are allowed in science; scientific creativity is based mostly on analogy after all, but the deal is this - you can imagine anything at all you like, but there is a price to pay - a very tight feedback loop called experimental testing. If your theory doesn't work, no matter how elegant, no matter how beautiful, no matter how long you spent on it, you have to give it up. That is the way of science. What this means is that to be considered scientific, a theory has to be falsifiable, and be capable of producing a novel prediction; belief systems which simply exhibit internal self-consistency are not enough.

Here is a project for a reader - write a program to generate random pseudo-science, or even better, a chat-bot that can give a pseudo-scientific answer to any question (- think of this as a negative Turing Test!) To recap, here are your elements -

Respectable science - Quantum Theory, General Relativity, Superstring Theory, M-Theory, Fuzzy Logic, Neural Nets, Cellular Automata, AI, Genetic Algorithms, Genetics, Molecular Biology ...
Socio-political ideas - Hobbes, Malthus, Psycho-analysis, Postmodernism, Jung, Freud, Reich ...
A subject of topical interest - Stock Market, Global Warming, International Politics, Aids, Crop Circles, Cloning ...
Mysticism - Zen, Hinduism, Buddhism, Zoroastrianism, Stigmata, Magick, Aleister Crowley, Padre Pio, Voodoo ...
Quackery - Cold Fusion, Vacuum Energy, Ether Theory, Refutations of Relativity ...
Kookie - Homeopathy, Crystal Energy, Aromatherapy, Astrology, I Ching ...
Conspiracy - UFOs, Freemasonry, Illuminati, Roswell, Black Helicopters, JFK, Bilderberg, Trilateral Commission, ...

Pick and mix to your taste!

Science is, unfortunately, hard; it takes time to do things right; as a project it is unfinished and some would say, unfinishable. Professional scientists thus have better things to do than to waste time arguing with idiots, but sometimes science does catch up with one of the big pseudo-science topics. Remember the Bermuda Triangle? - there were hundreds of books written on this in the 1970s; to recap, many ships had disappeared over the years in a relatively small area of ocean. Even though this area was a confluence of major shipping lanes, the numbers did seem to be excessive. Something was going on - it didn't take too long for the theories to appear, many concerning UFOs (- obviously!), and legends of the fabled lost continent of Atlantis.

You don't hear much about the Triangle now though; a few years ago it was discovered that there are pockets of carbon dioxide trapped under the ocean here - minor earthquakes can release this gas. The physical effect of the gas in the water is a large reduction in buoyancy - a ship engulfed in such an eruption will sink like a stone. Problem solved, and rather boring in the end really. But solved, and with no need for UFOs, Atlantis or anything else. Alas, the problem with the pseudo-science crowd is that they simply move on to something else! Arguing with them is thus seen as a waste of time by the real scientists, who will just tend to ignore them; unfortunately, this simply further encourages these various kooks and cranks, since if the establishment is thus conspiring against them, their ideas must be correct!? (The truth is out there ...)

Finally, as regards the Stock Market, there are many, many theories which 'explain' its behaviour, almost all of them, thoroughly and absolutely, pseudo-science.

Pundit

A dangerous fool, unaware of the depths of his ignorance, relentlessly overplaying some small trivial snippet of knowledge he has discovered; desperate for the attention of others, in order that they follow him. The sincere philanthropists are as dangerous as the cynics.

The financial world is full of such experts; avoid them.

Put

Option contract that gives the holder the right to sell the underlying security at a specific price for a specific period of time. Puts can be bought or sold.

Puts to Acquire Stock

A technique used to acquire stock at a price you want to pay, and receiving a premium for doing so.