Ch 17 Equities Flashcards
How are returns on equity investment driven
Short term : supply and demand
Long term : financial performance
T or F : equities are appropriate investments for long term real liabilities
True
What are the two types of equity
Ordinary shares
Preference shares
What are ordinary shares
The everyday shares we talk about
No dividends obligations
Income : dividends and share growth
There are voting rights
Lowest ranking form of finance issued by companies
What are preference shares
Less common
Fixed stream of income
Guaranteed dividends
Fixed dividend
No voting rights
What are the classifications of equities
Industry grouping
Size of the company
Exposure of the economic cycle
What industry grouping
Shares grouped according to industry due to similar factors affecting them
Same reproduces same input costs supply to same markets and be affected by changes in demand
Why is it difficult to classify some companies
Some companies operate across several sectors
Companies in same sector very different
Explain size of the company affects volatility
Large company has less volatile share price as they can weather a bad economic downturn
Explain the difference between cyclical and non cyclical companies
Cyclical companies perform well when the economy is doing ex. Tourist industry
Non cyclical performs well all the time as they aren’t really affected by economic down turns ex. Food
What is differential between discount rate and risk free rate known as
Equity risk premium
What methods are used to evaluate equities
Earnings per share (EPS)
Price/Earnings ratio (PE)
Dividend yield
How could a PE ratio be distorted
The way companies calculate earnings
The industry in which a company operates
Once off events in a company’s life time
What is an equity index
Statistical measure that represents relative changes in the share prices of the constituent company which makes up the index.
Shows share price fluctuation
