Guide to Analysing Companies

Opportunity cost
There are two definitions, both employed by investors when as-
sessing the relative risks and rewards of a proposition.
1 What investors will lose by not putting their money into the
assets with the highest yield available. For example, an in-
vestor might buy a share yielding only 2% because it promises
to show a greater capital gain even though a safer invest-
ment might yield 5%. The 3% difference between the two is the
opportunity cost.
2 The maximum amount of profit that could have been made
if factors of production had been put to other uses. This assumes
that the two courses of action carried roughly the same risk.
Option
The right to buy a specific number of securities at a specific
price within a specified period of time (usually three, six or nine
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months). Such a right can be bought or sold, but it expires if it is
not exercised within the specified period. The purchaser of the
option then loses his or her money. 
A call option gives the purchaser the right to buy, say,
100 shares of an underlying security at a fixed price before a
specified date in the future. For this right, the buyer of the call
option pays the seller, called the writer, a fee, called a
premium, which is forfeited if the buyer fails to exercise the
right within the agreed period. The purchaser of a call option
therefore bets that the price of the underlying security will rise
within the specified period.
In contrast, a put option gives the buyer the right to sell,
say, 100 shares of an underlying security within a specified
period. Buyers of put options therefore expect the price of the
underlying security to fall within the period. An investor who
thinks the price of ABC company will fall may buy, say, a six-
month put option for 100 shares at $100 each. The premium
might be $5. If the price of the shares falls to $80, the owner of
the put option can exercise the option to sell the shares for $100
each. He or she will first buy the shares in the market for $80
each and then sell them on to the writer of the option, ac-
cording to the terms of the deal, for $100 apiece. The owner of
the put option thus makes a profit of $15 ($20 less the $5 cost of
the original premium).
In practice, most call and put options expire before they are
exercised. Investors make (or lose) their money by speculating
on the rises and falls in the premiums paid for options traded on
recognised exchanges throughout the world. 
Ordinary share
The basic type of share in a company, called common stock in
the United States. Unless specified otherwise, such shares carry
the right to vote (for instance, on the appointment of directors or
auditors) and entitle the holder to a dividend as and when one
is declared by the board of directors and approved by a major-
ity of the shareholders. Ordinary shares are the riskiest of all
forms of capital because they have no prior claims to any of