New investors often find financial terminology quite daunting. The problem is exacerbated by some brokers and financial planners who, deliberately in our view, make simple concepts appear confusing, thus making their fees and commissions seem more justified.
Shoptalk (see page 12) is our way of inoculating you against the virus of over-complication. Think of what follows as a series of Shoptalks—a guide to some of the most pervasive and important pieces of financial jargon.
Price-to-earnings ratio (PER)
This is the ratio of a stock's price to its earnings (or profits) per share. The earnings are usually based on the last full financial year, although we sometimes include a 'prospective PER' which is the current share price divided by the amount we expect the company to make in its next full financial year. It's the most common valuation yardstick and, other things being equal, the lower, the better. See Investor's College in issues 124/Apr 03 to 127/May 03 for a more detailed explanation.
Stock
This is a generic term covering shares and units in trusts. Think of the difference between the terms as you would the distinction between a car and a Holden Commodore. All Holden Commodores are cars, but not all cars are Holden Commodores. Similarly, every share can be classified as a stock but not every stock is a share (it could be a unit in a property trust, for example). The term 'stock' also covers 'stapled security' structures such as Macquarie Infrastructure Group, Stockland (see page 11), GasNet and Westfield Group. These entities are combinations of trusts and companies (see our review of Centro Properties in issue 127/May 03 for a more detailed explanation).
Visit The Intelligent Investor for the rest of this article on investing jargon and to find out more on blue chip shares.