Financial Glossary – P
Pareto Principle – also known as the 80/20 rule or principle, is a theory that maintains that a minority of causes are responsible for the majority of effects. The Pareto Principle is frequently used in business to determine how to get the best return on investment; channel your resources into priority areas.
Paris Club a group of officials from major creditor nations who try to find coordinated and sustainable solutions for debtor nations that are having difficulties in paying back the money they borrowed. Sometimes the Paris Club members may offer to reschedule the terms of the loan. Since the Paris Club was formed in 1956, it has lent $583 billion, and signed more than 433 agreements to ninety debtor countries.
Partner – a member of a partnership, such as a law or accounting form, business, international arrangement between two nations, or a joint venture. A business partner is an individual or commercial entity which has some type of alliance with another individual or commercial entity.
Partnership – a relationship, generally a business one, formed by the agreement of two or more individuals or entities (corporations may be partners) to run a firm as co-owners. It is a business with two or more owners, each one having invested in the partnership and being liable to its debts and obligations. The owners of a partnership are called partners. Limited partners are usually liable just for the money they have initially invested, and do not risk losing their private savings and assets if the partnership is unable to pay its debts.
Passive Portfolio Strategy – tries to maximize diversification with little expectational input. A passive strategy often mirrors a market index.
Passporting – often referred to as passporting rights, refers to the rights that financial institutions have to do business freely throughout the European Economic Area (EEA). The EEA consists of the 28 EU nations plus Norway, Iceland and Liechtenstein. London risks losing passporting rights if no agreement can be reached when Brexit occurs. This may encourage companies to move from London to mainland Europe.
Patent – a certificate that protects an inventor from the illegal copying, sales and other uses of his or her invention without permission. It is like being given a sword and shield that you can use to protect your inventions. Patentable inventions include products, processes that give new technical solutions to problems, methods of doing things, technical improvements for existing products, or the composition of new goods.Copyright, trademarks and patents are examples of intellectual property.
Path Dependence – an idea that tries to explain that many of the things we do and the decisions we make today are the result of choices and decisions we made in the past – history really matters! Where we have been in the past and what we did then determines where we currently are and where we can go in future. Even seemingly insignificant differences in the path we have taken may have major consequences for where we are now and where we can go.
Peer-to-Peer – a system or network of computers without a central administrative server. In a peer-to-peer system, each computer is both server and client. Cryptocurrency blockchains use a peer-to-peer system. Each block holds all the transaction data of the whole blockchain.
Penny Stocks – shares that trade at extremely low prices. The US Securities and Exchange Commission (SEC) defines a penny stock as being a share valued below $5. They are cheap and can be very volatile.
Per Capita – means per head, per person, or for every man, woman and child in the population. The term is commonly used in human geography, economics and statistics, but may be used in virtually any description of a situation that includes populations. ‘Per capita’ is also used in legal English when talking about inheritance. The term has been part of the English language since the seventeenth century. In Latin, ‘capita’ means ‘head’, while ‘per’ means ‘by’ or ‘by means of’.
Percentage Point – also called a percent point or pp, is a one-hundredth (1/100). If something is one percentage point greater it does not mean it is one percent greater. Five percent (5%) is one percentage point more than four percent (4%), but 25% (twenty-five percent) more than four percent.
Percentile – also called centile or pp, is the value below which a percentage of data falls. If you are at the 75th percentile in your test score, it means that you did better than seventy-five percent of the test takers. The poorest one percent of a population is at the bottom percentile, while the wealthiest 1% is at the top percentile.
Perfect Competition – a theoretical free-market Utopia in which there are many buyers and sellers so that none of them has any significant impact on the prices of goods and services, all buyers and suppliers seek to maximize their income (profit), buyers and sellers can freely enter or leave the market, transactions do not incur costs, and all the players – both buyers and sellers – have access to information regarding the goods’ quality, availability and prices. Also known as a perfect market or pure competition. It is the opposite of an imperfect market
Personal Loan – a loan taken for personal use, rather than business use. The individual may need to borrow money to buy a car, renovate the home, cover the costs of a wedding, a vacation, etc. Personal loans are for smaller amounts than mortgages and for shorter periods.
PEST Analysis – a study that helps companies identify threats and opportunities. Specifically, threats and opportunities related to uncontrollable external factors. PEST stands for Political, Economic, Social, and Technological. These are factors that have an impact on a company’s current and future profits and overall performance.
Pet insurance – a policy a pet owner buys to either lessen or eliminate the cost of veterinary care, surgery, and medications that a pet incurs. There is also pet insurance for accidents and damage/injury to third parties.
Peter Principle – a management concept that employees in a hierarchy are promoted until they reach their ‘level of incompetence’, and are then promoted no more. The term was coined by Dr. Laurence Peter, who suggested that all over the world there are millions of managers who are in way over their heads.
Phillips Curve – a graphical representation of Professor A.W.H. Phillips’ theory that the inflation and unemployment rates have a direct inverse relationship – when one goes up the other falls. The theory was disproved, to a certain extent, by the stagflation in the 1970s experienced by the United States and most other advanced economies.
Pigou Effect – an economics concept that suggests that when there is negative inflation – a decline in prices – the economy is stimulated because consumers’ purchasing power increases. If consumer spending rises, company sales will increase, which will result in them taking on more workers. Consequently, employment rises. The Japanese deflationary recession that started in the 1990s revealed some major flaws in the arguments behind the Pigou Effect.
Pip – also known as ‘percentage in point’ or ‘price interest point’, it is simply a measure of change in the exchange rate of a currency pair.
Plaza Accord – an agreement between the United States, West Germany, Japan, the United Kingdom and France in 1987 to work together to bring down the value of the US dollar, which during the Reagan administration had appreciated considerably. The Accord was successful, and the dollar fell over the next two years. In fact, it was so successful that they needed another meeting – the Louvre Accord – to stop the dollar’s slide.
Political Capital – this is the goodwill, trust and influence that a politician builds up with the public and other lawmakers. The more political capital a politician has, the more effectively and rapidly he or she can get things done. This goodwill is like a type of political currency that lawmakers are able to use to mobilize voters or spend on policy reform.
Porter’s Five Forces Analysis – a strategy tool that helps businesses analyze and understand which factors affect the business environment. It is a simple but very power tool that can help business people determine which strategy their company should take.
Portfolio – a group of investment products held and managed by an entity such as a financial institution, an individual, a hedge fund, or a corporation. Your portfolio is your spread of investments.
Portfolio Insurance – a strategy of hedging a portfolio against market risk by short selling stock index futures. Institutional investors often use this strategy when the market is volatile.
Portfolio Manager – a person or firm who manages clients’ portfolios, or somebody who works in a financial institution and is in charge of asset and liability portfolios.
Positional Goods – goods that people buy in order to enhance their socioeconomic status. These products are purchased because the buyer wants others to think that he or she belongs to an exclusive group of people – that he or she has class, style, money, and good taste. Demand for most positional goods goes up when their prices rise. Examples include designer clothes and shoes, expensive vacations, diamond necklaces and other jewelry, Swiss watches, and luxury cars.
Positive Economics – the economic study of what is, what was, and what will happen. It focuses on facts and things that can be proven. It contrasts with normative economics, which tells us what should or ought to be – it is a value judgment.
Poverty – the condition or state of being poor; having very little or no money, goods, food, shelter, clothing or access to health care. In the advanced economies, poverty refers to people or families whose incomes fall below a specified threshold. Measuring levels of poverty is not easy. There is more to being poor than simply not having enough money. All or nearly all a poor person’s income is spent on food, they have no or very limited access to schools, they may spend much of their lives feeling hungry, they fear for tomorrow, and live one day at a time.
Predatory Pricing – a strategy taken by a product’s market leader in which prices are drastically cut in order to kill off the competition. Predatory pricing may be in response to a newcomer that has just entered the market, or a decision to destroy existing rivals. When successful, predatory pricing helps the dominant seller either re-establish or establish a monopoly. If there is a strong likelihood that the strategy will result in a monopoly or less competition, the authorities will intervene.
Preferred Stock – (also known as preferred shares) is a type of stock that has a higher claim on earnings and assets compared to common stock. Holders of preferred stocks are paid a specific dividend before common stock holders get their dividends.
Price – the amount of money we have to pay for anything that is on sale. It is how much the vendor will accept for the sale of a good or service. Prices today are expressed in currency, but used to be quoted in quantities of other products (barter). Price minus cost equals the profit the seller makes.
Price Discrimination – setting different prices for the same product for different purchasers. Bus companies and movie theaters, for example, offer discounts for children, students and seniors (aged 65+). Supermarkets may offer you a discount if you buy in bulk, or telephone companies may charge less per minute for calls after you have used up 10 minutes. Airlines charge frequent flyers less by allowing them to clock up air miles. Companies take the price discrimination approach to maximize profits.
Price-Earnings Ratio (P/E ratio) – calculates a corporation’s current share price compared to its earnings per-share. It can be an indicator of high earnings and the growth that is to come.
Price Elasticity – a measure of how the demand (or supply) for a product or service is affected by a price rise or price cut. If a good or service is very price elastic, it means that demand changes by a greater percentage than the price change. If the demand change is smaller or not at all, it is said to be price inelastic. Except for Griffen goods and Veblen goods, the relationship between price changes and demand is inverse – when prices go up demand goes down, when prices fall demand rises.
Price-to-Book Ratio – a financial multiple used to compare a share’s current market price to its book value. Investors use this metric to determine whether a stock is worth buying. Also known as market-to-book ratio and P/B ratio.
Price-to-Sales Ratio – the ratio of the market value of equity to sales. It is calculated by dividing a company’s stock price by its sales revenue per share over a 12-month period. Also known as the P/S ratio, PSR or price-sales ratio.
Primary Market – where securities (stocks and bonds) are sold for the first time. The money from the sale goes straight to the issuer. The primary market is part of the capital market. Also known as the New Issue Market.
Prime Rate – the interest rate that American banks charge their ultra-creditworthy customers, their lowest-risk customers, for loans. The Prime Rate is typically determined by the Federal Reserve System’s key rates. It is a benchmark for all commercial lending rates across the country. The Fed says the Prime Rate is also known as the Base Rate, and is a reference rate for many types of loans, including lending to small businesses, credit card loans, some private student loans, adjustable-rate mortgages (ARM), and home equity lines of credit with variable interest rates.
Prisoner’s Dilemma – a situation described in Game Theory that illustrates a problem when two accomplices are accused of the same crime and are locked in different cells. The Prisoner’s Dilemma shows why cooperation is sometimes hard to achieve in a business environment, especially in an oligopoly (too few competitors), where one rival does not know what the other one is going to do. If every player chose one particular option, they would all be better off. However, none of them will risk being the first to make that choice, because they do not know how their rivals will respond.
Private Banking – a service offered to wealthy individuals by banks. Private banking is much more personalized than general retail banking – it is focused on the needs and preferences of each customer.
Private Company – an enterprise (firm) whose shares are not offered to the general public for sale, i.e. they are not traded at a stock exchange. The term might also mean companies that do not belong to the state.
Private Equity – money invested in certain types of private companies, i.e. businesses that are not publicly listed – they are not listed on a stock exchange. Investors may want to acquire a struggling business and turn it round, or inject funds into a startup. Private equity may include mezzanine capital, distressed investments, growth capital, venture capital or leveraged buyouts.
Producer Surplus – the difference between how much a producer sold something for and how low he or she was willing to go. If something is sold for $10, and the producer would have gone as low as $6, the producer surplus is $4. In economics, it is part of the Economic Surplus, which also includes the Consumer Surplus – the difference between how much a consumer paid and how high he or she would have gone.
Product Differentiation – the process of distinguishing a good or service from others. The seller or provider aims to make its product or service more appealing to a particular target market. For example, if an automaker creates a very fast car, it is appealing to consumers who like speed.
Product Life Cycle – four stages that every product goes through during its commercial life. They are: 1. Introduction. 2. Growth. 3. Maturity. 4. Decline. There are strategies to extend the decline so that the product’s profitable life can continue for longer.
Product Recall – the action of asking or telling buyers to return a product. They have to return it because it either has a defect or may be dangerous. For example, defective car brakes pose a danger, while a ballpoint pen without enough ink has a defect.
Production Function – in economics, it relates physical output of a production process to factors of production (physical inputs) using mathematical equations. In other words, what production figures would you get with one combination of land, labor and capital, compared to a different combination (with different proportions of each one)? Companies want to produce goods using the cheapest combination of inputs.
Productivity – refers to how much is produced per unit of input. For example, how many shirts a worker produces per hour in a factory. There are several kinds of productivity depending on the input, and different was to calculate it. For instance, labor productivity can be calculated per hour, per worker, etc. When calculating the return from an investment, capital productivity would be examined.
Product Line – a series of different products which form a group. All the items in a product line must belong to the same company. A product line may focus, for example, on a market sector such as personal care.
Profit – the financial reward that business people aim to receive in compensation for the risks that they take. It refers to how much money a business is making.
Profit Margin – also known as net margin, is a measure of profitability. It is the net profit as a percentage of net revenue. In other words, it is the amount by which revenue from sales exceeds a business’ costs.
Progressive Tax – a tax system that charges a higher percentage of higher earners’ incomes than that of lower earners. It is called progressive because the tax rate ‘progresses’ upward as incomes increase. Progressive tax applies to both income tax and sales tax, as well as the income of individuals and businesses.
Project Management – involves planning, organizing and managing many things, including a team of people to make sure a project is completeted properly, on time and within budget. Put simply, it is about getting things done – knowing about what you want to accomplish, how it is going to be done, how long it will take, and what the cost will be. Project management professionals are called project managers.
Propensity – in economics, generally refers to what percentage of a person’s income is channeled in a specific direction. For example, our propensity to consume is the percentage of our income that we spend. There are two types – marginal and average propensities. The former measures what we do with any additional income, while the latter focuses on total income.
Property Rights – the legal rights that you and I, companies, organizations, charities, governments and other entities have on a thing that is owned. They are among the most basic rights in free societies, and are generally taken for granted in today’s Western democracies. Property rights include the right of the owner to use the good, earn income from it, transfer ownership to others, and enforce property rights.
Prospect Theory – a theory that suggests that people make decisions based on the potential value of gains and losses, rather than the final outcome, and that we place more weight on a loss than its equivalent gain. For example, losing $50 earns more negative points in our perception of things than the number of positive points earned by receiving $50. The theory was put forward by Daniel Kahneman and Amos Tversky in the 1970s.
Prospectus – a legal document that describes a financial security for potential investors. It contains material for potential buyers of stocks, bonds, mutual funds or other investments. It describes the company’s business, officers’ and directors’ biographies, how much they earn, financial statement, and other data potential purchasers might be interested in.
Protectionism – a government policy that tries to reduce imports and possibly also promote exports. The government may impose tariffs or quotas on imported goods and services, subsidize exports or offer domestic suppliers financial assistance.
Public Company – a company whose shares are bought and sold freely by members of the public on a stock exchange or over-the-counter. Contrasts with a private company. Also known as a public corporation, publicly held company, or a publicly-traded company.
Public Goods – goods and services that we all consume and are provided by the state (in most cases). Public goods are available for the well-being or benefit of all citizens. When an individual consumes a public good, it does not stop another individual from consuming it – it is non-rival. We cannot avoid consuming it; it is non-rejectable. If one person can consume it, it is impossible to stop another person consuming it; it is non-excludable. Examples of public goods include clean air, national defense, emergency services, the judiciary, and public parks.
Public Limited Company (PLC) – a public company under British and Irish law, in addition to some Commonwealth nations. Members of the general public can buy and sell a PLC’s shares on the open stock exchange.
Public-Private Partnership – also known as 3P, PPP or P3, is a cooperative agreement between a local or national government and a private company; usually a long-term arrangement. The two partners provide a public asset or service. PPPs have become considerably more common since the 1980s. In a public-private partnership, the private company bears significant risk and management responsibility. Remuneration (how much the private company gets paid) is linked to performance.
Public Relations – also called PR, is the discipline that focuses on a company’s or organization’s reputation – how customers and other people perceive it. Public relations is all about reputation. PR specialists attempt to create and maintain a favorable public image of a company, organization or famous person.
Public Utility – a company that supplies consumers with a utility such as water, electricity, natural gas, sewage treatment, and telephone service. The term may refer to the company or the utility itself. Public utilities are usually monitored by a national or local government regulator. They are often natural monopolies, because it would not be economically viable to have more than one supplier. Public utilities may either be state-owned or private companies.
Purchase – as a verb means to buy something, and as a noun something that is bought. Can also refer to a firm hold – ballerinas add powder to their shoes in order to get a better purchase on the floor (prevent slipping).
Purchasing Power Parity (PPP) – an economic term that calculates the relative value of different currencies. PPP allows economists and investors to determine the exchange rate between currencies for the trade to be on par with the purchasing power of the countries’ currencies.