I wanted to (finally) give you a money dictionary that doesn’t require a dictionary to understand the word’s definition. That doesn’t exist . . . so I made my own. You know how you explain a term to a friend who doesn’t “get” it? That’s the way it’s written here. Let this glossary be your go-to guide for definitions with a practical perspective whenever you need a little cheat-sheet. Some stuff changes over the years, but these basics never go out of style.
P/E Ratio -
P/E Ratio: Stands for price-to-earnings ratio. It’s a way to measure stock value and is calculated by dividing the current stock price by earnings per share. The higher the P/E ratio, most likely the better the investment.
P&L Statement -
P&L Statement: P&L stands for “profit and loss.” We like the P but hate the L. It’s also called an “income statement.” Companies have P&Ls to show how much money they’ve made and how much money they’ve spent. Your online bank statement is like your very own P&L. Sometimes it can be very good or very bad. P.S. Sometimes people will confuse the abbreviation and say “PNL.” That doesn’t exist, so don’t be that person.
Partnership, Limited -
This is a slightly more protective option than a pure partnership. One of you is the general partner, responsible for running the business
and also handling any liabilities that might come your way; the limited partner does not have a say in running the business but does share in the company’s profits (as well as shouldering potential losses).
A government license issued by the US Patent and Trademark Office that gives an inventor or other patent holder exclusive rights to a new design or product or process for a specific length of time (twenty years in the US).
Permanent Insurance -
Permanent Insurance: This kind of life insurance has level premiums and pays a fixed amount of money to the beneficiary when the insured dies. But it also has an investment feature, which grows in value, which the policyholder (who is not necessarily the insured person, since you can buy a policy on somebody else’s life) can withdraw or borrow against. Unlike term life insurance, this kind of policy never expires. (See also: Life Insurance, Term Life Insurance)
A phone interview. That is, one in which you won’t have the advantage of using your body language to convey your ideas, so you need to make sure you’re on point and on message (and have strong cell reception!).
Sometimes the best strategy is to change direction on a dime, or pivot, to a more successful approach or idea.
Portfolio: The whole shebang of all your investments: stocks, bonds, mutual funds, CDs and all that good stuff.
Preferred Stock -
Preferred Stock: This is stock that gets more perks than common stock. Preferred stock dividends must be paid before dividends are paid to common stockholders (hence the name “preferred”). And, in the case where a company goes out of business, preferred stock- holders get their money first. (See also: Common Stock)
Premium: Refers to your monthly insurance payment, typically for health insurance. Unless you change your plan or the insurance rates go up (which unfortunately happens all the time) then it’s the same amount every month.
Pretax Earnings -
A company’s earnings after expenses have been deducted from revenue, but before taxes have been taken out. (See also: EBITDA)
Principal: The total amount borrowed on a loan, and/or the amount you still owe on that loan, separate from interest. So if you have taken out $10,000 in student loans at an interest rate of 4.66%, your principal for that loan is $10,000. A few years down the road, when you have paid off some of the loan and have $6,000 remaining, then $6,000 is your new principal.
Private Equity -
Private Equity: This is when investors (usually institutional rather than individual) put money directly into a company rather than buying shares on a public exchange.
Privately Held Business -
A company that is owned by one or more individuals rather than publicly traded on a stock exchange.
Pro Forma -
Think of it as looking toward the future. In investing, it’s a way of figuring out financial results based on current or projected earnings.
Pro Rata -
Giving something out proportionately. For example, let’s say you own 75% of your company, your friend owns 20 %, and your sister owns 5%. You guys get 100 bucks and decide to give it out “pro rata”: you would get $75, your friend would get $20, and your sister would get $5.
Profits: Repeat after me: profit = total revenue - total expenses. Once you have overcome the expenses, costs and taxes needed to sustain your business, the rest of the money coming in is profit. (See also: Revenue)
Proof of Concept -
Showing that your idea or business is viable and likely profitable over the long term, especially to investors. You want to do your homework ahead of time and go into any meeting armed and ready with proof.
Public Company -
Public Company: In short, a company that anyone can buy into. This company has already had its “coming out” party by joining the stock market via an initial public offering (IPO). The biggest advantage of “going public” is the ability to sell stock (which can make the company, its employees, and its shareholders a lot of money). But the downside is that it opens the door to increased regulations and less control for the company’s founders and majority owners.
Publicly Traded Company, aka Public Company -
A company that anyone can buy into (i.e., buy shares of on a stock exchange). This company has already had its “coming- out party” by joining the stock market via an initial public offering (IPO). The biggest advantage to going public is the ability to sell stock (which
can make the company, its employees, and its shareholders a lot of money). But the downside is that it opens the door to increased regulations and less control for the company’s founders and majority owners. (See also: IPO)
Purchase Order -
Also known as a “PO.” If you have an actual product, this is the amount of your product that gets ordered from a company who wants to
sell your stuff. While a big PO is usually a cause for celebration, start- ups often struggle trying to finance or fulfill a big order that could help them “make it big”— so don’t break out the bubbly too early. You’ve gotta fulfill the order first!
Purchasing Power -
Purchasing Power: How much stuff can you buy with $1? Purchasing power is the value of a dollar in terms of the amount of goods or services that one dollar can buy at a specific time. It’s heavily influenced by inflation, because inflation typically decreases the amount of goods or services you’d be able to purchase with that dollar. (It’s why $15 used to be able to get you a ticket to the movies, but that $10 could maybe buy you one third of one today.)