WITH Kerry farmers' set to make millions of pounds by converting huge numbers of their shares in Kerry Co-Op into Kerry PLC, a letter from Mr B in Dublin 4 takes on even more relevance.
"I have a number of shares and read the financial papers regularly, but I would be most interested in a short column to help me understand exactly what some terms and figures mean, such as PE ratio capital ratio and Tier One ratio. Other general points that you might tackle in such a column are things like which companies are actually included in the ISEQ 100, whether all transactions covered in closing prices are listed, and how many shares constitute a small lot".
It is fair to say that the financial pages are littered with a lot of jargon, but also that it is an unfortunate necessity. To explain, every term when it is used would take up a lot of space, so here is Fally Money's abbreviated guide to the jargon of the market.
People involved in the market such as stockbrokers, analysts and fund managers will use various methods to compare stocks and shares against each other. The most commonly used methods of comparison are price/earnings ratios (Mr B's PE ratio) and dividend yield.
The price/earnings ratio is calculated by dividing a company's share price by its earnings per share. As a rule of thumb, the higher the PE ratio, the more highly regarded the share among investors. The specialists will also compare a company's PE ratio against the average for the market to see whether a company is viewed more favourably than the market in general. They will also compare a company's PE against others in the same industry to see which in any particular sector is the most highly regarded.
A company with a very low PE is not necessarily a very poor company, quite often it may be undervalued. And the opposite can also be the case. A very high PE does not always indicate a brilliantly performing company as some investors may have bid up the share price in anticipation of some event in the future that might justify that high PE.
In general, PE ratios are used when comparing industrial shares such as Smurfit, CRH or Kerry. When it comes to the banks, a more usual method of comparison is the dividend yield.
Dividend yield is arrived at by dividing the dividend by the share price and then expressing that figure as a percentage. Traditionally, banks and other financial shares have paid higher dividends than industrial companies although that gap is narrowing as industrial companies come under more pressure to share more of their wealth with their shareholders. Again, the higher the dividend yield, the more generous the company's dividend payments.
The other two terms mentioned by Mr B capital ratios and Tier One ratios are invariably used when analysing financial shares and, put simply, reflect a bank's financial strength. The higher the ratio then the stronger the bank is in financial terms all financial institutions have to conform with minimum financial requirements set by the Central Bank, but"in the case of Irish financial institutions, their capital ratios are far higher than the Central Bank's minimum requirements.
What is a small lot of shares? It depends on the share concerned. Quite often it can be difficult to deal quickly in small lots of some of the bigger financial and industrial shares where the big pensions funds and life assurance companies dominate the share register. Small lots hundreds of shares can more easily be dealt in smaller value companies and the exploration companies.
A stockbroker will usually be able to tell you what the minimum size of a deal in any particular company should be, but quite often a broker will wait until he has a large number of small lots of shares before he goes into the market looking to sell those shares.
As regards the closing Prices every day The Irish Times carries a full list of Irish share prices as of 5.30 pm the previous day the final close of the market after which no further dealing is permitted. The Irish Times also carries a detailed report on the previous day's trading in the market as well as reports on some important overseas stock markets such as London and New York.
The ISEQ index mentioned by Mr B is computed four times daily by the Irish Stock Exchange and indicates the rise or fall of the market. The figure quoted by The Irish Times is the 5.30 p.m. closing value.
The index includes all shares which have an official stock market listing or a listing on the unlisted securities market. It does not include exploration companies which do not have a full listing and are listed separately on the Exploration Securities Market.
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