Chapter 4 (3Qs)- Type And Characteristic Of Equity Securities Flashcards
Stockholders Equities
Assets-Liabilities= Stock holders equity
Preferred stock
Usually has priority claim over common stock and is issued a fixed dividend
Preferred dividends are paid first before common
Common Stock returns
Historically common stock has provided a higher return than inflation
Property dividends
Shares in a subsidiary company
Dividend yield
Yearly dividend / Stock price
Rights of stockholders
Right to vote
Sell
Give away shares
Free transfer
Right to receive list of shareholders
May not be freely transferred if restricted stock or control stock
Liquidation Order
Unpaid wages
IRS
Secured debt
Unsecured liabilities (includes debentures)
Subordinated debt
Preferred stock Above are senior securities
Common shareholders Residual rights
Preferred Stock
Tends to fluctuate in price with interest rates (interest rate risk or money rate risk)
Mostly non voting
Dividend paid first
Dividend is stated as percent of par (6% preferred)
Usually has no redemption date
Main factor in purchasing should be company ability to pay dividend
Types of preferred
Cumalitive, callable, convertible
Emerging Markets
- Low level income measured by GDP
- Low level of equity capitalization
- questionable liquidity
- Potential restrictions on currency conversion
- high vol
- prospect of economic growth
- high taxes and commissions for foreign investors
- lower regulatory standards
Developed markets
- Larger equity cap
- lower commissions rates
- few currency restrictions
- highly liquid markets
- well-defined regulatory schemes
Country risk
Withholding fees and tax risk
Composite of all risk with investing in a particular country
Some foreign countries withhold capital gains and dividends for taxes
Right
Allow current shareholders to maintain proportionate ownership
Warrant
Usually a long term instrument of 5 years
Attached to debt to sweeten
Exercise price usually higher
Example of a derivative security
Fundamental analysts
Evaluate broad based economic trends
Evaluate quality of a corporations business, finances and management
Within context of an industry and overall economy
Use dividend models (explained next card)
Technical analysts base predictions on charts without attention to current profitability
Dividend models
Value based on dividend
2 different models
- Dividend Discount model- Value should be equal to future dividends
Formula- Year dividend / expected return
- Dividend growth model
Formula- Dividend x 1+growth rate/ required ROR-growth rate
Growth results in a higher stock price projection
Technical analysis
Used to measure market risk
Method of attempting to predict near term Stock strand of next 4-6 weeks
Uses volume to support theories
Trend lines- Straight line of where stock has been
Support level- Bottom of stock price where buyers begin to out way sellers
Resistance level- Where more sellers enter the market than buyers
Breakout- Must be 3% penetration to be a breakout, volume is also higher
Moving average- Take Friday of last 13 weeks and plot straight line
Change in trend would occur if moving below trend line
Technical market theories
Short interest-Number of shares shorted (high is bullish)
Odd-lot theory- (less than 100 shares) if odd lots are bought, you should sell
Advance/Decline theory- Indicates market breadth, how market advances and declines
A B A B A B C
