Guide to Analysing Companies

Preferred stock
US terminology for preference share.
Premium
There are a number of meanings.
 A regular payment to an insurer for providing
insurance cover.
 The amount paid by a purchaser (for example, to buy an
historic car) over and above its quoted price.
 The amount by which a bond sells above its face
value. For example, a bond with a face value of
$1,000 would sell for a premium of $200 if it cost
$1,200.
 The amount by which the redemption price of a
bond exceeds the face value when the bond is called.
(See also call premium.)
 The price that a buyer must pay to a seller for an
option contract.
 The price charged by a lender of a stock or share to
an investor who has borrowed stock to make delivery on
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a short sale (that is, after selling stock in the market
which he or she does not own).
 The amount by which a company’s share price exceeds
those with which it is comparable (that is, other
companies in the same sector or industry). In such cases,
the market assumes that the first company, for whatever
reason, is likely to generate higher profits.
Prepayment
The prepayment of a debt before it becomes due. Some loan
contracts have a prepayment clause allowing them to be
prepaid at any time without penalty (often the case with a
mortgage). With other loans, prepayment may entitle the
lender to charge a fee, which is known as a prepayment
penalty.
Price/book ratio
The market price of a share divided by its book value per
share. This measure is used by analysts and investors to
judge a stock’s relative value to the market. A high price/book
ratio would suggest that the company’s earnings are likely to
grow faster than the average; these growth stocks appeal
to investors mainly looking for a capital gain. If the stock is
selling below its book value, then the company could be worth
more broken up than as a going concern. Such a prospect may
appeal to value investors, who seek out undervalued compa-
nies whose share prices fail to reflect their true worth.