MUTUAL FUND/INVESTMENT/MARKET TERMINOLOGY-O,P&Q

O

Opportunity cost

When you make an investment decision, there is often a next best alternative that you decided not to take, such as buying one stock and passing up the opportunity to buy a different one. The difference between the value of the decision you did make and the value of the alternative is the opportunity cost.

P

Phishing

Phishing is one way that identity thieves use the Internet to retrieve your personal information, such as passwords and account numbers. The thieves’ techniques include sending hoax emails claiming to originate from legitimate businesses and establishing phony websites designed to capture your personal information. By responding you give identity thieves an opportunity to steal your confidential information. Phishing is difficult to detect because the fraudulent emails and websites are often indistinguishable from legitimate ones and the perpetrators change identities regularly.

Portfolio turnover

"The frequency at which assets (stocks in case of equity mutual funds, or MFs) within funds are bought and sold is called portfolio turnover ratio. A high portfolio turnover ratio signifies a larger number of buy and sell transactions, which in turn means more transaction costs. For products such as MFs, such transaction costs can eat into net returns. Domestic equity MFs are required to report their portfolio turnover ratio once every six months with their half-yearly results. You can also log on to online MF tracking sites to follow and compare turnover ratios.

To calculate this, you take either the total amount of stocks bought or the total amount of stocks sold, whichever is lower, for 12 months and divide it by the average corpus of the fund less expenses. For example, in one year if the fund has bought assets/stocks worth Rs 700 crore and has sold assets/stocks worth Rs 600 crore and at the end of the year the fund has an average corpus less expenses of Rs 2,000 crore, the portfolio turnover ratio is 30% (600x100/2,000). So on an average, 30% of the portfolio is churned in a year. Inverse of the ratio shows the average holding period for a stock; in this case, it is 3.33 years."

Prepayment penalty

Most lenders allow you to prepay the outstanding balance of a loan at any time without a fee, but some lenders charge a prepayment penalty, often say about 2% of the amount you borrowed. If your loan agreement doesn’t have a prepayment clause, which excludes a fee for early termination, the penalty may apply.

Price-to-earnings ratio (P/E)

"The price-to-earnings ratio (P/E) is the relationship between a company's earnings and its share price, and is calculated by dividing the current price per share by the earnings per share. A stock's P/E, also known as its multiple, gives you a sense of what you are paying for a stock in relation to its earning power. For example, a stock with a P/E of 30 is trading at a price 30 times higher than its earnings, while one with a P/E of 15 is trading at 15 times its earnings.

A low P/E can be the sign of an undervalued company whose price hasn't caught up with its earnings potential. Or, conversely, a clue that the market considers the company a poor investment risk. Stocks with higher P/Es are typical of companies that are expected to grow rapidly in value. They're often more volatile than stocks with lower P/Es because it can be more difficult for the company's earnings to satisfy investor expectations.The P/E can be calculated two ways. A trailing P/E, the figure reported in newspaper stock tables, uses earnings for the last four quarters. A forward P/E generally uses earnings projection for the coming quarters."

Private equity

Private equity is an umbrella term for large amounts of money raised directly from accredited individuals and institutions and pooled in a fund that invests in a range of business ventures. The attraction is the potential for substantial long-term gains. The fund is generally set up as a limited partnership, with a private equity firm as the general partner and the investors as limited partners. Private equity firms typically charge substantial fees for participating in the partnership and tend to specialize in a particular type of investment. For example, venture capital firms may purchase private companies, fuel their growth, and either sell them to other private investors or take them public. Corporate buyout firms buy troubled public firms, take them private, restructure them, and either sell them privately or take them public again.

Put option

"Buying a put option gives you the right to sell the specific financial instrument underlying the option at a specific price, called the exercise or strike price, to the writer, or seller, of the option before the option expires. You pay the seller a premium for the option, and if you exercise your right to sell, the seller must buy. Selling a put option means you collect a premium at the time of sale.

Not surprisingly, buyers and sellers have different goals. Buyers hope that the price of the underlying instrument drops so they can sell at the exercise price, which is higher than the market price. This way, they could offset the price of the premium, and hopefully make a profit as well. Sellers, on the other hand, hope that the price stays the same or increases, so they can keep the premium they've collected and not have to lay out money to buy."

Q

Qualitative analysis

When a securities analyst evaluates intangible factors, such as the integrity and experience of a company's management, the positioning of its products and services, or the appeal of its marketing campaign, that seem likely to influence future performance, the approach is described as qualitative analysis.While this type of evaluation is more subjective than quantitative analysis - which looks at statistical data - advocates of this approach believe that success or failure in the corporate world is often driven as much by qualitative factors as by financial data.

Quantitative analysis

When a securities analyst focuses on a corporation's financial data in order to project potential future performance, the process is called quantitative analysis. This methodology involves looking at profit-and-loss statements, sales and earnings histories, and the statistical state of the economy rather than at more subjective factors such as management experience, employee attitudes, and brand recognition. While some people feel that quantitative analysis by itself gives an incomplete picture of a company's prospects, advocates tend to believe that numbers tell the whole story.