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Law of one price |
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Law of One PriceThe principle that identical goods should sell for the same price throughout the world if trade were free and frictionless.Law of one priceAn economic rule stating that a given security must have the same price no matter how the security is created. If the payoff of a security can be synthetically created by a package of other securities, the implication is that the price of the package and the price of the security whose payoff it replicates must be equal. If it is unequal, an arbitrage opportunity would present itself.Law of one price Similar MatchesMaking a priceMaking a priceA term used on the London Stock Exchange which refers to the obligation of a market maker to quote a bid price and an offer price on the shares for which he acts as a 'wholesaler'. Market makers' prices are quoted on the Stock Exchange Automatic Quotation Service (SEAQ) which brokers access by computer. Market makers also indicate the number of shares in which they are willing to deal (the 'normal market size' or 'NMS') which will vary from share to share. They are obliged to honour the prices quoted as long as the deal size is within the NMS but not for deals higher than the NMS. Sell priceSell priceSee: Redemption price Price earnings growth factorPrice earnings growth factorThe 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 shareA 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 rateFor 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. Price floorPrice floorA government-imposed lower limit on the price that may be charged for a product. If that limit is binding, it implies a situation of excess supply, which the government may need to purchase itself to keep price from falling. Factor price frontierFactor price frontierA curve in factor space showing the minimum combinations of factor prices consistent with absence of profit in producing one or more goods, given their prices. Since, with perfect competition, profit implies disequilibrium, this shows a lower bound on equilibrium factor prices. Further SuggestionsFactor Price Equalization TheoremConversion price Price specie flow mechanism Public offering price Factor-price space price to sales ratio Call price Convertible price Price level Prices (of equity) spot price Demand price Price leadership Trading price Nominal price Maximum price system Administered price Equilibrium price Arms length price Takes price Price undertaking Offer price closing price Tokyo Stock Price Index Striking Price Intercal |
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