Guide to Analysing Companies

particularly if (as often happens) the partly paid shares are
trading below the level at which they were first issued.
Pathfinder
A prospectus with a rough outline of a company’s history
and its prospects. A pathfinder is distributed to potential in-
vestors in advance of a full prospectus, mainly in the hope of
arousing interest. Pathfinders are often used when privatising
nationalised industries which have been extensively restruc-
tured or which need to educate investors about their prospects.
In the United States, preliminary prospectuses are frequently
issued in advance of a new issue of shares to stimulate inter-
est among investors. Such documents lack the final issue price
and other details that may change in the run-up to the offer.
Because the front page is usually printed in red ink to distin-
guish the document from the final version, it is popularly
known as a red herring.
Paying agent
A financial institution appointed by a borrower to be respons-
ible for paying the interest and principal on the borrowing
instrument (a bond or a syndicated loan) as and when it
is due.
P
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Penny stock
A share whose price is less than $1 or £1, depending on the
market in which it is issued. Such shares are usually traded
over the counter or on small stock exchanges (such as
Denver or Salt Lake City in the United States) which deal in
speculative stocks. As a result, they are notoriously volatile,
sometimes rising or falling by as much as 20% or more in a day.
Unsurprisingly, penny stocks often carry warnings which the
shares of established companies traded on recognised ex-
changes seldom require. One reason for their volatility is
that a smaller proportion of the company’s share capital is
available in the market, thus making the price more susceptible
to swings in sentiment. For example, a majority of General Elec-
tric’s shares are publicly traded, whereas as little as 25% of the
share capital of a newly floated company may be in public
hands. This makes the market in the shares less liquid and there-
fore more volatile because a relatively small group of investors
may influence the price.
Pension
A periodical payment made by a former employer (a company,
government or similar body) in recognition of past services
and/or payments. There are two main types of pensions, based
on the different ways of paying for them.
1 The pay-as-you-go pension, in which the pensions of one gen-
eration are paid for out of the earnings of the next one. This
becomes expensive when, as is happening in many developed
countries, the proportion of old people rises.
2 The funded pension, in which savings are accumulated over
time for the specific purpose of providing pensions for the
people whose savings were accumulated (see next entry). This
is the model towards which most governments in the devel-
oped world are heading, some more quickly than others.