Chapter 19 Flashcards
Common Shares
Represent ownership in the issuing corporation. Entitled to whatever is left over after preferred
Restricted voting common shares
subject to some restriction on the number or percentage of shares that may be voted
Subordinated voting common shares
fewer voting rights per share than the higher class of common shares
Regular dividends
can expect on an ongoing basis unless significant reduction in earnings or large loss
Stock dividends
paid in the form of common shares instead of cash and allow the company to preserve its cash for internal use
Four market imperfections to consider when looking at company’s dividend payout policy:
- Income tax efficiency
- Investor efforts
- Management incentives
- Management signals
Preferred Shares
Represent ownership interest in the issuing company and are characterized by their par value and dividend rate. Have a claim on the company’s assets equal to the share’s par value
Cumulative Preferred Shares
dividends not paid out accrue and must be paid ahead of common shares
Why are preferred shares considered more like a debt security?
Their value tends to fall when interest rates go up and rise when interest rates go down
Alternative Trading Systems (ATSs)
off-exchange, private, electronic network that discreetly and directly matches buyers and sellers, requiring no intermediaries and avoiding market impact
Industry Analysis
involves researching, analyzing, and forecasting the factors that contribute to or detract from the success of all companies within the industry
Company Analysis
involves understanding a company’s business, analyzing its financial statements, and forecasting its future financial performance
Equity Valuation
use models and certain valuation processes to estimate value of a company’s stock
Quantitative Analysis
Combining historical and fundamental data with statistical analyses
Technical Analysts
Follow a process of analyzing historical market action to determine probable future price trends
What is the broadest level of research performed by equity analysts?
Industry/Sector analysis
What are the three types of analysis that equity analysts perform?
- industry analysis
- company analysis
- equity valuation
Sector Rotation
Involves adjusting the portfolio weights of different economic sectors or industry categories in anticipation of stock market trends
Management’s Discussion and Analysis
MD&A should be read in conjunction with the financial statements and notes because it may contain clues to the company’s health that do not appear in those documents
Notes to financial statements
The notes explain the company’s accounting policies and provide more detailed information about individual items in the company’s financial statement
Liquidity Ratios
Measure a company’s ability to meet its short-term obligations
Risk Analysis Ratios
Used to determine how well the company deals with its debt obligations, measure the company’s ability to service required debt payments (i.e., debt coverage) and to assume more debt (i.e., capacity)
Operating Performance Ratios
Help determine a company’s long-term growth and survival prospects
Value Ratios
gauge the market’s perception of the value of a company’s shares relative to its dividends, earnings, or other measures, such as the equity value (or book value) per common share
4 Areas of Focus for qualitative analysis of a company
- Corporate issues
- Products and markets
- Production and distribution
- Level of competition
Passive vs. Active investors beliefs
- Passive investors believe that all information about a company’s stock is reflected in its current market price so valuation is not a concern
- Active investors believe that a stock’s current market price might differ from its actual value
Absolute Valuation Models
determine a precise value (called a point estimate) for the intrinsic value of a stock based on a set of forecast company fundamentals. If the market value of the stock is less than the model’s intrinsic value, the stock is undervalued; if it is greater, then the stock is overvalued
Relative Value Models
determine intrinsic value by comparing one or more of the stock’s value ratios or price multiples to a benchmark value for the price multiple
Three Assumptions of Technical Analysis
- All known market influences are fully reflected in market prices
- Prices move in trends, and those trends tend to persist for relatively long periods of time
- The future can be found in the past
Three types of technical analysis
- Chart analysis
- Statistical analysis
- Sentiment analysis
Chart Analysis
The study of graphical representations of stock or stock index price movements over a defined period
Statistical Analysis
Form of technical analysis use several indicators to confirm the existence of trends identified in chart analysis
Sentiment Analysis
Involves studying investor views or opinions, or data that reflect those opinions, to determine their degree of bullishness or bearishness about a particular stock or stock index
Fundamental Analysts
try to understand all influences that drive the market and attach a price forecast based on that information
Three Purposes for Technical Analysis
- to improve market timing
- to forecast price movements
- to act as a leading indicator
Bottom Up Approach
Begin with a focus on individual stocks based on forecasted risk and return
Bottom Up Approach - Style based
focus on a particular set of stocks that have similar fundamental characteristics and performance patterns
Bottom Up Approach - Non-style based
involve a search for stocks with the best chance of meeting particular objectives
Value stocks
- investors focus on the company’s share price and look at stocks that are trading at a price that reflects a lower-than-justified PB ratio
- lower PE and PB and high dividend yields
Growth Stocks
- investors focus on company’s earnings and believe that higher earnings growth translates into a higher book value, which, assuming the company’s P/B ratio stays the same, will translate into a higher stock price
- high PE and PB and low dividend yields
Three Categories of Value Investors
- Investors who focus solely on stocks with low P/B ratios, which typically include stocks of depressed cyclical companies and stocks of companies with low dividend yields and little or no current earnings
- Investors who focus on low P/E ratios, which are typical of stocks in defensive, cyclical, or out-of-favour industries
- Yield investors, who focus on stocks with above-average dividend yields
Top Down Style Based approaches can be divided into:
- value vs. growth stocks
2. large cap vs. small cap stocks
Bottom Up Approach Non-Style based can be divided into:
- pure fundamental approach (look at fin. statements)
- pure quantitative approach (look at historical data)
- pure technical approach (nothing gained from analysis, already reflected so look at historical market action)
Top Down Approach
- Macroeconomic approach (market trends and forecasts, look at sectors then stocks)
- style based approach
