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CWM Financial Markets > Equities > Flashcards

Equities Flashcards

1
Q

What are the two capital structures in a corporation?

A

1) Risk Capital (equity, ordinary shares)
2) Debt, borrowings

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2
Q

Which of the capital structures is last in line if the company winds up?

A

1) Risk Capital

hence the name

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3
Q

What rights does an ordinary share get?

A

1) Right to dividend
2) Right to vote

Lowers priority for dividends & wind up capital

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4
Q

Key points on preference shares

A
  • Receive a fixed payment (twice yearly)
  • Rarely have the right to vote
  • Only paid when company has the profit to do so
  • (can have the right to vote if dividends fall into arrears)
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5
Q

What is the gordon growth model formula?

A
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6
Q

When a company gets large enough what might it seek to do?

A

IPO

Can list on main market
alternate market
or overseas

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7
Q

What is a depository receipt

A

An instrument created by a

  • Represents shares in a foreign company
  • allows it to trade like a domestic stock
  • e.g. Dividend and price in USD
  • no FX / cross border hassle
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8
Q

How does investment theory price a share?

A

NPV of all future cash flows

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9
Q

What is one flaw in the Gordon Growth model?

A

Assumes the company pays a dividend

e.g. Microsoft and Apple didn’t

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10
Q

What types of companies are more likely to pay dividends?

A

More mature companies

Smaller companies have to reinvest in themselves

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11
Q

What is the M&M theory

A

Payout via growth / dividend is irrelevant

Price is based on a companies ability to grow & increase profits

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12
Q

What assumptions does the M&M theory make?

A

1) No Taxes
2) No transaction costs
3) Leverage has no impact on WACC

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13
Q

What is liquidity dependant on in equity markets?

A

Division of Opinion

Liquidity is a determinent of share price

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14
Q

What does a near consensus opinion cause in equity markets

A

Liquidity Evaporates

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15
Q

What is the most popular framework for equity markets?

A

Electronic Orderbook

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16
Q

Give an example of a market which does not use an electronic market book:

A

London Metal Exchange (LME)

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17
Q

What are 8 pieces of information that influence share price?

A

1) Firm Specific Factors (Profit / Growth Outlook)
2) Macro (Cycle, interest rates etc.)
3) Legal Issues
4) Government Policy (Fiscal / Monetary)
5) Other Stock Markets
6) Geopolitcal Risks (Trade, War & Terrorism)
7) Economic Surveys (e.g. PMI)
8) Board Membership

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18
Q

What does consistent dividend growth signal to the market?

What is the effect of a change in dividend?

A

Solidity in the company

Unsettles the market, can lead to a sell-off. E.g. COVID

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19
Q

Some companies / industries are more affected by the wider market. Give an example:

A

Housebuilders

  • Struggle with high interest Rates
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20
Q

Points about markets being correlated:

A
  • Globalisation has caused a convergence in performance
  • Western equities highly correlated
  • US 0.98 to MSCI World
  • In BRIC and Emerging countries, the correlation to the west is far lower.
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21
Q

How can behavioural factors influence share price.

A
  • Disposition Effect
  • Net buyers of attention grabbing stocks
  • Buy prices rises
  • Sell falls (& bad news)

There is no rational reasoning behind these.

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22
Q

Who create classifications for equity fund types?

A

The investment association (IA)

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23
Q

What is UK All Companies?

(IA)

A

Invests at least 80% in UK equities

(objective of capital growth)

24
Q

What is APAC ex-Japan

IA

A

80% in APAC

Max 5% in Japan

25
Q

What is Global Equity Income?

IA

A

80% Equities (diversified geographically)

(Yield of >100% of MSCI world)

100% on 3yr rolling & 90% of annual basis

26
Q

What correlation helps reduce concentrated losses?

A

Low or Negative

27
Q

What are the risks of equity?

A
  • Volatile
  • No guarentee of Dividend
  • Capital at risk
  • Risk of dillution
  • Not a large enough shareholder to have a meaningful voice
  • Rank last in liquidation
28
Q

What are the benefits of equity investing?

A
  • Potentially unlimited gain
  • Dividend payment
  • Voting Right
  • Best returning asset class
  • Higher liquidity
29
Q

What does Beta show?

A

The correlation of the return on an qeuity to a return on the market.

30
Q

What do these Beta’s show:

1) B=1
2) B=2
3) B=0.5
4) B=0
5) B=-1

A

1) Moves in line
2) Moves Wider
3) Moves less wide
4) Doesn’t move with market
5) Inverse

31
Q

What is the most common way equities are traded?

A

Through a broker

32
Q

What are the two types of brokerage service:

A

Discretionary
Non-Discretionary

33
Q

What is discretionary brokerage?

A

The broker has discretion to execute trades without client input

(within defined perameters)

34
Q

What are the two types of non-Discretionary brokerage?

A

1) Advisory - Client has final say but receives advice
2) XO - Broker carries out client instructions (no advice)

35
Q

What are brokers expected to consider at all times?

A

The appropriateness of the service based on client circumstances

36
Q

What is algorithm trading?

A

Using computers to buy or sell securities under a set of instructions (e.g. price, size, time etc.)

37
Q

What problem was algorithm trading introduced to solve?

A

A fund place a large trade
1) Other firms front run
2) Risk is placed onto original firm
3) agile traders could position themselves to unduly benefit

38
Q

How did algorithm trading solve the issue of front running?

A

Algorithms can seek out pools of liquidity.

Larger trades are now fragmented and executed over time at the optimal price

39
Q

How has fragmentation of trades negatively effected equity trading?

A

Order books are less transparent as it is unclear if a trade is small or part of a larger trade.

It has also led to the development and use dark pools.

40
Q

Why have MAR laws been introduced re: Algo Trading

A

Algorithm trading has been blamed for flash crashes due to the volatility it can cause.

GBP/USD fell 9% for 40 seconds due to algos

41
Q

What are the three forms of market efficiency

A

1) Weak Form
2) Semi-Strong
3) Strong

42
Q

What does weak form EMH say?

A

Current asset prices reflect historic market information

43
Q

What does semi-strong form EMH say?

A

Prices reflect all publicly available information

44
Q

What does strong form EMH say?

A

Prices reflect all information, both public and private.

Would argue that excess alpha is impossible to consistetly generate.

45
Q

What does random walk theory claim?

A

Share price movements cannot be predicted based on historic movements.

Only new information can influecne the price of a share, and this itself is random.

46
Q

What two observable effects can argue against the random walk theory?

A

1) Monday Effect
2) January Effect - highest price rises at beginning of year

January effect - potentially a result of end of tax year in the US.

47
Q

What is the underpinning notion of behavioural finance?

A

Investors are not rational.

They exhibit cognitive biases

48
Q

What is loss aversion and how can it be overcome?

A

Loss aversion is the belief that given an equal gain or loss. The emotion from a loss is more significant. This causes individuals to hold onto their stocks for too long.

Don’t get emotionally attached to investments

49
Q

What is Overconfidence Bias?

How can it be overcome?

A

Too much belief in personal abilities - leads to overtrading

To avoid this, trade less, invest more.

50
Q

What is anchoring?

A

Setting an initial value as a refernce point and not moving it.

51
Q

What is herd bias?

A

The tendency to follow / copy others investments / behaviours as it is popular

52
Q

Two types of stock tip reports:

A

1) Press Recommendations
2) Analyst / Broker Recommendations

53
Q

How do stock tip / recommendations received by the market?

A

Prices can increase or fall due to reports. However, in some cases the fall can be coincidental.

54
Q

How do speculators operate in the equity market?

A

1) Short term view
2) Long or short for quick profit
3) Can naked short sell
4) Can be susceptible to short squeezes

55
Q

How do takeovers / M&A affect share price?

A

Acquirer has to pay premium which drives up the target share price.

Acquirer won’t see share price move up so often.

56
Q

What 3 other factors influence share price?

A

1) Index membership
2) Programme Trading
3) Corporate Actions

57
Q

What is equity crowdfunding?

Give 3 examples of platforms:

A

Allows investment for a stake in the business, value rises or falls with the success of the project.

1) Seedrs
2) Crowdcube
3) Yielders (Sharia Compliant)

Seedrs have introduced a secondary market that enables the trading of shares in unlisted companies on a secondary market.

CWM Financial Markets (58 decks)

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