P

Paid-in Capital

Paid-in Capital is the amount of capital received by a company from investors in exchange for stock, not including shares bought on the secondary market. It represents the initial funding provided by shareholders.

For example, if investors buy $1 million worth of shares during the initial offering, that amount is considered paid-in capital.

Par Value

Par Value is the nominal or face value of a bond or a share of stock as stated by the issuing company. It is usually set at a minimal amount and does not reflect the market value.

For example, a company’s stock might have a par value of $0.01 per share, even if the current market price is $50 per share.

Participating Preferred Stock

Participating Preferred Stock is a type of preferred stock that provides shareholders with dividends and also grants them the right to additional dividends if the company meets certain financial targets. They also participate in the remaining proceeds in the event of liquidation.

For example, holders of participating preferred stock might receive their fixed dividend and an additional amount based on company profits, plus a share of the liquidation proceeds if the company is sold.

Partnership Agreement

A Partnership Agreement is a legal document that defines the rights, responsibilities, and profit-sharing arrangements among partners in a business partnership. It outlines the terms of the partnership and helps prevent disputes.

For example, two entrepreneurs might sign a partnership agreement detailing how they will share profits, manage the business, and handle potential conflicts.

Payback Period

The Payback Period is the time it takes for an investment to generate an amount of income or cash equivalent to the cost of the investment. It is a measure of how quickly an investment can be recovered.

For example, if a company invests $100,000 in new equipment and expects to save $25,000 annually from its use, the payback period is four years.

Pay-to-Play Provision

A Pay-to-Play Provision is a clause in a financing agreement that requires existing investors to participate in future funding rounds to maintain their ownership and avoid dilution. If they do not participate, their shares may be converted to a less favorable type.

For example, an investor might be required to invest additional capital in subsequent rounds to retain their preferred stock status; otherwise, their shares might convert to common stock.

Penny Stock

A Penny Stock is a low-priced, small-cap stock that typically trades for less than $5 per share. Penny stocks are known for their high risk and volatility, often traded over-the-counter.

For example, an investor might buy penny stocks hoping for significant gains but must be aware of the high risk of loss associated with these stocks.

Performance-Based Incentive

A Performance-Based Incentive is a compensation strategy that rewards employees based on their achievement of specific performance targets or objectives. These incentives can include bonuses, stock options, or other rewards.

For example, a sales manager might receive a performance-based incentive in the form of a bonus if their team meets or exceeds its annual sales targets.

Performance Metrics

Performance Metrics are quantifiable measures used to evaluate the success and efficiency of an individual, team, or organization in achieving goals. These metrics help track progress and identify areas for improvement.

For example, a customer service department might use metrics such as average response time, customer satisfaction scores, and resolution rates to gauge performance.

Perpetual Bond

A Perpetual Bond, also known as a “consol bond,” is a fixed-income security with no maturity date. It pays a steady stream of interest indefinitely, and the principal is never repaid.

For example, an investor might buy a perpetual bond that pays a fixed interest rate of 5% annually, providing a continuous income stream without a repayment of the principal.

Piggyback Registration

Piggyback Registration is a right that allows shareholders to include their shares in a public offering initiated by the company or another shareholder. It helps shareholders sell their shares without incurring separate registration costs.

For example, if a company decides to go public, investors with piggyback registration rights can include their shares in the IPO, facilitating their sale.

Pivot

A Pivot is a significant change in a company’s business model or strategy to better meet market demands or overcome challenges. It often involves shifting focus to a different product, target market, or business approach.

For example, a tech startup might pivot from a consumer-facing app to a B2B software solution after discovering greater demand and profitability in the enterprise market.

Poison Pill

A Poison Pill is a defensive strategy used by a company to prevent or discourage a hostile takeover. It allows existing shareholders to purchase additional shares at a discount, diluting the potential acquirer’s stake.

For example, a company facing a hostile takeover attempt might activate a poison pill provision, making it more expensive and difficult for the acquirer to gain control.

Portfolio Company

A Portfolio Company is a business that has received investment from a private equity firm, venture capital firm, or other institutional investor. These firms manage a portfolio of such companies, seeking to enhance their value and achieve returns on investment.

For example, a venture capital firm might have several portfolio companies in various industries, each representing a different investment opportunity.

Portfolio Management

Portfolio Management involves overseeing and managing a collection of investments to achieve specific financial goals. It includes activities such as asset allocation, risk management, and performance monitoring.

For example, a financial advisor might manage a client’s investment portfolio to balance risk and return, ensuring alignment with the client’s long-term financial objectives.

Portfolio Theory

Portfolio Theory, also known as Modern Portfolio Theory (MPT), is a framework for constructing investment portfolios to maximize expected return based on a given level of market risk. It emphasizes diversification to reduce risk.

For example, an investor applying portfolio theory might diversify their investments across different asset classes to achieve an optimal risk-return balance.

Position Limit

A Position Limit is the maximum number of futures or options contracts that an investor can hold on a single underlying asset. It is set by regulatory authorities to prevent market manipulation and excessive speculation.

For example, a commodities trader might be subject to position limits to ensure they do not hold a disproportionate share of contracts in a particular commodity, like oil or gold.

Post-Money Valuation

Post-Money Valuation is the value of a company after new capital has been added from a funding round. It is calculated by adding the investment amount to the pre-money valuation.

For example, if a startup has a pre-money valuation of $5 million and raises $2 million in funding, its post-money valuation is $7 million.

Pre-Money Valuation

Pre-Money Valuation is the value of a company before it receives any new capital from a funding round. It is used to determine the ownership percentage that new investors will receive.

For example, if a company is valued at $10 million pre-money and raises $2 million in new investment, the investors would own a certain percentage of the company based on the pre-money valuation.

Preferred Return

Preferred Return, also known as a “hurdle rate,” is the minimum return that limited partners in a private equity or real estate fund are entitled to receive before the general partners can earn a share of the profits.

For example, a private equity fund might offer limited partners a preferred return of 8%, meaning the fund must achieve at least an 8% return before the general partners can receive their performance-based compensation.

Preferred Stock

Preferred Stock is a type of equity security that typically offers fixed dividends and has priority over common stock in the distribution of dividends and assets in the event of liquidation. Preferred shareholders usually do not have voting rights.

For example, an investor might purchase preferred stock in a company to receive regular dividend payments and have a higher claim on assets than common shareholders.

Preliminary Prospectus

A Preliminary Prospectus, also known as a “red herring,” is an initial version of a prospectus issued by a company planning to go public. It provides potential investors with essential information about the offering but is subject to change.

For example, a company preparing for an IPO might release a preliminary prospectus to gauge investor interest and provide details about its financials, management, and business strategy.

Price-Earnings (P/E) Ratio

The Price-Earnings (P/E) Ratio is a valuation metric that compares a company’s current share price to its earnings per share (EPS). It is used to assess whether a stock is overvalued or undervalued relative to its earnings.

For example, if a company’s stock is trading at $100 per share and its EPS is $5, its P/E ratio is 20.

Price to Book (P/B) Ratio

The Price to Book (P/B) Ratio is a financial ratio used to compare a company’s market value to its book value. It indicates whether a stock is trading at a premium or discount to its book value.

For example, if a company has a market value of $500 million and a book value of $250 million, its P/B ratio is 2.

Primary Market

The Primary Market is the market where new securities are issued and sold for the first time. Companies raise capital in the primary market through initial public offerings (IPOs) and other new stock or bond issuances.

For example, a company might issue new shares to the public through an IPO in the primary market to raise funds for expansion.

Private Equity

Private Equity refers to investment capital provided by private equity firms to companies not listed on public exchanges. It involves buying equity ownership to improve and eventually sell the company for a profit.

For example, a private equity firm might acquire a controlling interest in a struggling company, restructure its operations, and sell it at a higher value.

Private Placement

Private Placement is the sale of securities to a small number of selected investors, such as institutional investors or accredited individuals, rather than through a public offering. It is often used to raise capital quickly with fewer regulatory requirements.

For example, a startup might raise funds through a private placement by selling shares directly to venture capital firms.

Pro Forma

Pro Forma refers to financial statements or projections that present hypothetical scenarios to reflect the financial impact of specific events or transactions. It helps investors and management assess future performance.

For example, a company might prepare pro forma financial statements to show the potential impact of acquiring another business.

Pro Rata

Pro Rata is a Latin term meaning “in proportion.” It refers to the allocation or distribution of something in proportion to the ownership or participation of each party.

For example, if a company issues dividends pro rata, each shareholder receives a dividend proportional to their shareholding.

Profit Margin

Profit Margin is a measure of a company’s profitability, calculated as the ratio of net income to total revenue. It indicates how much profit a company makes for every dollar of revenue.

For example, if a company’s net income is $50,000 and its total revenue is $500,000, its profit margin is 10%.

Promissory Note

A Promissory Note is a financial instrument in which one party promises in writing to pay a specified sum of money to another party at a future date or on demand. It includes the terms of repayment, interest rate, and maturity date.

For example, an individual might sign a promissory note to borrow $10,000 from a friend, agreeing to repay it with interest over the next year.

Prospectus

A Prospectus is a formal document issued by a company when offering securities for sale. It provides detailed information about the company’s business, financial condition, and risks to potential investors.

For example, a company planning an IPO would issue a prospectus to inform investors about its operations, financial health, and the risks associated with the investment.

Provision

A Provision is an amount set aside in a company’s financial statements to cover future liabilities or losses. It is a form of accounting reserve for anticipated expenses.

For example, a company might create a provision for bad debts to account for the possibility that some customers may not pay their invoices.

Public Company

A Public Company is a corporation whose shares are traded on public stock exchanges, allowing the general public to buy and sell its stock. Public companies are subject to strict regulatory requirements and disclosure obligations.

For example, Apple Inc. is a public company with its shares traded on the NASDAQ stock exchange.

Public Offering

A Public Offering is the sale of securities to the general public, typically through an initial public offering (IPO) or a subsequent offering. It allows companies to raise capital from a broad base of investors.

For example, a company might conduct a public offering to raise funds for expansion by selling shares to the public.

Pump and Dump

Pump and Dump is a fraudulent scheme where the price of a stock is artificially inflated through false or misleading statements, only for the promoters to sell their shares at the high price before the stock collapses.

For example, unscrupulous investors might promote a penny stock with exaggerated claims, causing the price to spike before they sell their shares, leaving other investors with losses.

Purchase Order (PO)

A Purchase Order (PO) is a commercial document issued by a buyer to a seller, indicating the type, quantity, and agreed price for products or services. It serves as an official offer and, once accepted, forms a binding contract.

For example, a retailer might send a purchase order to a supplier to order inventory for the upcoming season.

Put Option

A Put Option is a financial contract that gives the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a predetermined price within a specified period. It is used to hedge against potential declines in asset prices.

For example, an investor might buy a put option on a stock they own to protect against a potential drop in the stock’s price.

Pyramid Scheme

A Pyramid Scheme is a fraudulent investment scheme where returns are paid to earlier investors using the capital from new investors, rather than from profit earned by the operation of a legitimate business. These schemes are unsustainable and illegal.

For example, a company promising high returns for recruiting new members, who then recruit others, is likely operating a pyramid scheme.