The City watchdog whose job is to oversee the conduct of takeovers involving companies listed on the London Stock Exchange.

The Panel writes and enforces the City Code on Takeovers and Mergers, which sets out in meticulous detail the management and timing of takeover bids. The objective of the City Code is to ensure that high standards of integrity and fairness are maintained, and that shareholders in both bidding and target company are treated equitably.

The Panel is not concerned with the financial or commercial advantages or disadvantages of a takeover, nor is it concerned with competition issues.

The City Code does not have the force of law, but, as the Code says 'those who seek to take advantage of the facilities of the securities markets in the United Kingdom should conduct themselves in matters relating to takeovers in accordance with best business standards and so in accordance with the Code'. It goes on to say that 'Those who do not so conduct themselves may find that, by way of sanction, the facilities of those markets are withheld.'

Panel on Takeovers and Mergers
PO Box 226
The Stock Exchange Building
London
EC2P 2JX
Tel: 020 7382 9026
http://www.thetakeoverpanel.org.uk

The issued price of a security (stock, share, bond etc). Par value is the same as 'nominal value' and bears no relation to the market price.

• An ordinary share might have a par value of 100p, but its market value will be determined by supply and demand in the market place, not by its par value.
• gilts are issued with a par value of £100 and as they are traded on the market throughout their lives their value can vary above or below £100 depending on their popularity at the time. When they reach their redemption date they will be redeemed at their par value of £100.

A collective fund which does not try to beat the index, but simply aims to track it by investing in companies precisely in accordance with the constituents of an index. The managers of the fund have far lower expenses, and the charges to investors are lower than for active funds.

Active funds have a loftier ambition - they aim to outperform the market average by seeking out stocks that will provide superior total return. Their fund managers have access to extensive research and analysis to help them make the right choices, and one of the consequences of this effort is that the management charges passed on to investors in the fund tend to be higher.

Advocates of passive funds point to the fact that many actively managed funds fail to match the index, let alone beat it. Advocates of active funds argue that the more investors there are investing in index funds, the more opportunity there is for active investors to be selective and invest in outperforming shares.

Literally, any share costing less than 100p, but in a recent paper on the subject, the Financial Services Authority designated penny shares as shares which have limited liquidity - in other words, that are hard to buy and sell in quantity without moving the price. Specifically, the FSA singled out those with a spread of 10% or more between buying and selling prices.

The FSA definition highlights one of the dangers of penny shares: in order to make a profit on them, you need a significant rise in share price just to cover the wide spread. There is no evidence that penny shares as a class have any more potential to appreciate in price than higher-priced shares. The reason is simple: Price in itself is not a measure of value. It only becomes a measure of value in relation to other factors, e.g. price-to-earnings or price-to-assets.

Novice investors often make the mistake of equating low share price with value. That's a fundamental error. A share costing £10 can easily be better value than one costing 10p, if the Net Asset Value per share of the two companies is £12 and 5p respectively. What matters is the size of the 'cake' to which the shares relate, and the number of shares in issue.

A fund set up by a company, union, government entity, or other organisation to invest the pension contributions of members and employees, and pay out pensions to those people when they reach retirement age.

Pension funds accumulate huge pools of capital which they invest in the stock and bond markets. Because of the weight of money, they exert considerable influence on the markets, and their decisions on which shares to hold in which sectors have a substantial impact on prices.

Some pension funds employ their own fund managers; others delegate responsibility to external fund managers. Invariably they will try to achieve a diversified portfolio of investments, some in low risk areas, others in high risk areas. Actuaries determine how much is going to have to be paid out to pension holders in forthcoming years, and the pension fund has to try to achieve a rate of return on its capital that will meet (or better still exceed) this target.

Tax allowances are concessions by the Inland Revenue which can be used to reduce a person's Taxable Income. The main allowance for UK taxpayers is the 'personal allowance'; which is an amount of income that is tax free. In the tax year 2006-2007 the personal allowances are:

• Under 65: £5,035
• 65-74: £7,280
• 75+: £7,420

Other allowances are:

• Married Couple's Allowance: only available to couples where one person is 65 or over
• Blind Person's Allowance: £1,660

A plan where people over the age of 18 could formerly invest in the shares of UK and other EC companies via an approved plan manager or through qualifying unit trusts and investment trusts and receive both income and capital gains free of tax.

• Maximum investment amounts were £6,000 for a general PEP and £3,000 for a single company PEP per tax year
• PEPs were discontinued on 6th April 1999 and replaced by individual savings accounts (ISAs). PEPs in existence were allowed to continue to grow with similar tax privileges.

A Self Regulating Organisation (SRO) authorised by the Financial Services Authority (FSA) which regulates the majority of companies conducting investment business with private investors in the financial services market.

The PIA replaced FIMBRA and LAUTRO and some activities of IMRO and the SFA in 1994.

All regulatory functions of the PIA were taken over by the Financial Services Authority (FSA) in December 2001.

A savings scheme introduced by the government in 1985 to enable the self employed, and employees working for companies not operating a group pension scheme, to build up a pension fund for retirement.

• PPPs are money purchase schemes and effectively replace what was known as a retirement annuity contract (RAC).
• Contributions to PPPs receive full tax relief up to maximum given percentages of net earnings for a range of ages.
• Life assurance may be purchased with up to 5% of net relevant earnings which will receive full tax relief. This percentage is included within the maximum contributions allowable.
• An employer may contribute to a person's PPP but this is not obligatory.
• Personal pensions can move with individuals when they change jobs.
• A PPP may be used to contract out of S2P.

When a company has a new issue of its shares, either as part of an IPO (flotation) or after listing, it has two choices. It can have an 'offer for sale' to the public at large or it can 'place' the shares with institutions.

In the 1980s there were lots of high profile new issues involving offers for sale, and some of them were done as tender offers where investors effectively had to bid for the shares.

In recent years, offers for sale have been thin on the ground, with companies preferring to place shares with favoured institutions. This is partly because the costs of a placing are far lower than an offer for sale, and partly it is because in 1996 the Stock Exchange scrapped its rule requiring that new issues worth more than £50m should offer a proportion to the public.

A type of charting used by technical analysts which differentiates itself from other charting methods by only plotting significant price changes.

A point and figure chart has price on the Y-axis and time on the X-axis, but the time function is not regular because prices are only plotted on the chart when they represent significant movements. To plot a point and figure chart, therefore, you first need to decide what is significant - 2p, 5p of whatever amount you choose for the share concerned. Whenever a price rise of that increment occurs, you mark the chart with an X, and you continue marking it vertically as long as the changes are heading in the same direction (i.e. up). When they change direction and start heading down you start a new line on the X axis and mark the chart with a O.

The idea behind point and figure is that by ignoring trivial price fluctuations, the overall trend is made much clearer. What you see on the chart is a clear pattern of significant price movements up and down.

A principle of UK financial regulation which states that salesmen and advisers must choose between being either:

• completely independent, or
• entirely tied to the products of a single supplier

The principle exists so that consumers know the basis on which someone is trying to sell them a financial product.

A group of investments held by an institution or individual.

The process of choosing which investments go into a portfolio is known as portfolio management or 'asset allocation', and decisions are based on:

• whether the investment objective is income, growth or a balance of the two
• how much risk the investor is prepared to accept
• what the time horizons of the investor are

Based on the answers to these questions (and others) the portfolio manager decides how to allocate funds between different classes of investment (bonds, shares, property), how to diversify between sectors, countries and shares, how much cash to hold, and when to make changes in the composition of the portfolio. If you are managing your own portfolio of investments, exactly the same considerations apply.

A gift from one person to another which is not liable to inheritance tax provided the person making the gift lives for at least seven years after the transfer is made. If he/she dies before seven years elapse, tax will be payable, the amount being related to the number of years following the transfer prior to death according to the table below.

• Transfer up to 3 years before death: 100% of gift
• Transfer 3 to 4 years before death: 80% of gift
• Transfer 4 to 5 years before death: 60% of gift
• Transfer 5 to 6 years before death: 40% of gift
• Transfer 6 to 7 years before death: 20% of gift

The tax payable is normally charged to the recipient of the gift but in some circumstances it may revert to the donor's estate.

In the UK, the regular investing of fixed amounts over regular periods, typically monthly, in order to accumulate holdings in securities such as shares, unit trusts and investment trusts.

When for example a unit trust price or investment trust price has fallen then more units or shares can be purchased for that month. Similarly when the price rises then fewer units or shares can be purchased.

Over a period of a few years, the average price paid will be lower than the average share price for that period since more shares are bought at the lower price and fewer at the higher price.

Shares in a company which give their holders an entitlement to a fixed dividend but which do not usually carry voting rights. The important difference between preference and ordinary shares are:

1. The dividend on ordinary shares is uncertain and variable (high when the company does well, poor or non-existent when it does badly). Preference shareholders get a fixed dividend which, if not paid, usually accrues until it can be.
2. Each ordinary share usually carries a vote. Preference shares do not usually carry a vote unless dividends fall into arrears.
3. In the event of a winding up, preference shares are usually repayable at par value, and rank above the claims of ordinary shareholders (but behind bank and trade creditors).

Preference shares may be issued with the right of conversion into ordinary shares. These are called convertibles.

Warrants: the premium on a warrant is calculated as the price of the warrant minus the difference between the exercise price and the price of the underlying asset. So if a warrant costing 8p gives you the right to buy a share at 75p, and that share was currently trading at 70p, the premium would be 3p (8-5).

Investment trusts: the premium is the amount by which the share price of the investment trust exceeds its net asset value per share.

e.g. If the Net Asset Value is £3.00, and the share price of the trust is £3.30, the trust is trading at a 10% premium to its NAV.

In the more common situation where the share price is below the net asset value, the trust is said to be trading at a discount.

Virtually all the charts and indicators used by technical analysts are based on price data. Price data is a record of the day-to-day share price over a period. Of course share prices move during the day, so in plotting the share price on, for instance, 11th April 2002, you could actually pick from 7 prices:

• Opening price - the price of the first trade of the day
• High - the highest price at which the share traded during the day
• Low - the lowest price at which the share traded during the day
• Close - the final price at which the share traded during the day
• Bid - the price that a market maker is willing to pay for a financial instrument and the price you will receive if you are selling
• Ask - the price at which a market maker is willing to sell you a share and the price you will pay if you are buying
• Mid - the price midway between the bid and asking price of a share

Where do you get price data from? The laborious way is to plot it yourself by looking in the newspaper every day which will usually quote the mid-price, or consulting Teletext or Ceefax. An easier way is to invest in a technical analysis software package, most of which come with historic data on all the FTSE companies, plus charting features and analysis tools. Many financial websites provide price data and charts free of charge.

The PEG of a company is calculated by dividing its prospective P/E ratio by the estimated future growth rate in earnings per share of the company. So to calculate a PEG, you first need to calculate its P/E ratio.

• P/E = current share price divided by earnings per share

A company with a share price of 100p and earnings per share of 5p has a P/E ratio of 100/5 = 20.

By itself the P/E ratio is a useful ratio because it shows how many times the current earnings the shares cost - in a sense, how many years you would have to wait to get your money back if the company paid out all its earnings to shareholders. But the limitation of the P/E ratio is that it looks at historical information and does not relate the price of the shares to its future performance. The PEG ratio builds in that extra layer of sophistication.

Using the example of the same company, imagine that the consensus brokers' forecast for its future earnings growth rate is 15%.

• PEG = P/E divided by estimated future growth rate

For this company, the PEG would be 20 divided by 15 = 1.33.

According to Jim Slater, the investor who popularised the use of PEG's as a stock share selection tool, a share with a PEG of 1 or lower is attractive. Put simply, the lower the PEG, the less you are being asked to pay for estimated future earnings. Jim Slater did not recommend use of the PEG as the only criteria of share selection. There are plenty of other fundamental checks that have to be made too.

Note that the estimated future earnings are a critical part of the PEG calculation, and that if the forecasts made by brokers are wide of the mark, the PEG ratio will be unreliable. Because of this danger, most advocated of PEG's recommend using consensus forecasts, rather than the forecasts of any single broker/analyst.

P/E = current share price of a company divided by its earnings per share

• A company with a share price of 100p and earnings per share (EPS) of 5p has a P/E ratio of 100/5 = 20.

A company's P/E (also known as its multiple) shows how high its shares are priced in relation to its historical earnings. Although mathematically, it relates share price to past performance, the reality is that P/Es are more about forward expectations than the past. A high P/E indicates that the City expects the company's earnings to grow fast in the future.

P/E 're-ratings' by the City can have a dramatic effect on share price. If a company regarded as a growth stock announces sharply reduced trading figures, fund managers may revise their view of the company, and decide that it doesn't justify a growth stock P/E of 20, and can only justify a more normal P/E of, say 12. If earnings were 10p share, that re-rating would suggest a change in share price from 200p to 120p.

Equally, if a company announces some major technical breakthrough, or a major contract, the City may decide that its future earnings potential justifies a growth P/E, and re-rate it upwards from 12 to 20 (or equivalent figures). In which case the share price will leap.

There is nothing formal about this re-rating procedure. It is simply buyers in the market pushing up the price to reflect a new perception of a company. But P/Es do tend to be comparative, in that companies in the same sector with similar prospects would normally have similar P/Es. If they don't, there is invariably a reason accounting for the difference.

Information which, if made public, is likely to have a significant effect on the price of a company's securities. Such information must, in connection with a listed company, be reported to RNS, so that it can be released to the market in a fashion which is fair to all investors.

Any person who uses price sensitive information to make a profit either for themselves or a third party in the shares of a company are in breach of insider trading laws or the Market Abuse Regime.

A financial ratio calculated as: current share price divided by sales per share. Put another way, market capitalisation divided by total sales.

A low ratio of market cap to sales is seen as exciting by some investors. Why? Because a small increase in the company's profit margins will thanks to the high level of sales, leverage into large increases earnings per share.

However, just because a company has a low PSR does not necessarily make it an attractive investment. For example, the company may operate in very low margin industries such as contracting or construction which make it difficult for margins to improve.

A market in which new issues are traded. In other words, the trading of shares directly between a company and investors.

By contrast, the secondary market involves investors buying and selling with other investors, with market makers and brokers facilitating trade. The companies whose shares are being traded are not directly involved in the secondary market, unless they engage in a share buyback.

The sale of government-owned equity in nationalised industries or other commercial enterprises to private investors.

• The sale may either transfer all the equity to private ownership, or the government may retain some shares. Sometimes, governments will retain a majority shareholding (a 'golden share') in order to be able to prevent the company falling into the hands of an unwelcome bidder.
• Privatisation's heyday was the mid-1980s and early 1990s under the Conservative governments of the time. Many of the nationalised industries were privatised (BT, British Gas, British Rail, electricity and water companies) with the intention of improving efficiency, and increasing private share ownership.
• From the investor's point of view, privatised companies have tended to perform well in the short term and poorly in the long term. John Kay of the Financial Times studied 23 privatised companies and found that in the first two years after privatisation their share prices performed 43% better than the FTSE All-Share index, but after that performed worse by -39%. On average they underperformed the index by -14%.
• Many other European companies followed Britain's lead and have embarked on privatisation programmes.

A set of accounts, usually prepared annually, which depict a company's trading performance and are normally read in conjunction with the balance sheet and cash flow data. The profit and loss account can broadly be shown as follows:

• Turnover (sales) less manufacturing costs (or cost of sales if for example a retailing company) = gross profit or loss
• Gross profit plus any non-trading income less operating costs = operating profit
• Operating profit less interest payments on bank loans or loan stock = profit before tax (pre tax profit)
• Pre-tax profit, less tax = net profit after tax

Part of the net profit after tax may be used to pay a dividend with the balance being retained within the business for future investment.

Operating profit as a percentage of sales (or turnover). To calculate profit margin, multiply operating profit by 100, and divide the result by turnover.

• Example: Company X made an operating profit of £500m on a turnover of £3,000m. Profit margin was therefore (500 x 100) / 3000= 16.66%

Profit margin tells you about the underlying profitability of a company's trading activities, not whether it is actually making money for shareholders. Note that it is calculated before taking account of interest charges or tax.

An independent non profit making company set up in 1992 with funding from the government, the London Stock Exchange and 22 companies to encourage wider share ownership for private individuals and employees.

It is currently funded by charitable donations from over 100 member companies and by grants from the London Stock Exchange, the Gatsby Trust and Sir John Templeton, but also has a commercial dimension, particularly in selling manuals to investment clubs.

ProShare seeks to make share investing more accessible to everyone and to promote the advantages of share ownership as an integral part of long term savings and investment. Its objectives are achieved by media comment via radio, television and the press and by making available a range of literature in printed form and on its website.

www.proshare.org
Tel: 020 7444 7111
6th Floor, 100 Cannon Street, London, EC4N 6EU

A company registered as a public company which has an unlimited number of shareholders, and can offer its shares to the public.

Most UK companies are incorporated as limited companies. Some of them grow to the point where they want to expand their shareholder base, and raise capital by listing on the London Stock Exchange. To do that, they need to convert their status to that of a plc.

Formerly known as Public Sector Borrowing Requirement (PSBR), PSNCR is the difference between the expenditure of the public sector and its income. Where there is a deficit it is financed by borrowing - principally via the sale of government gilt edged stocks (gilts).

Public sector net borrowing also measures the difference between the expenditure and income of the public sector but differs from the net cash requirement in that it is measured on an accruals basis whereas the net cash requirement is mainly a cash measure.

An option which gives the holder the right but not the obligation to sell shares (or other financial instrument) at a fixed price on or before a given date.

Every put option has an exercise price. This is the price at which the holder is entitled to sell the shares to the option writer. If the price of the share falls below the exercise price, the option is said to be 'in the money' and to have an intrinsic value which is equal to the difference between the two.

For instance, an option which entitles the holder to sell shares in XYZ at 80p has an intrinsic value of 8p if the price of XYZ's shares falls to 72p.

If the price of XYZ's shares rose to 90p, on the other hand, the put option would have no intrinsic value because it would not be in the holder's interests to sell the shares at 80p. The only value which the put option would then have would be its time value.