Equities Flashcards
1
Q
equilibrium interest rate
A
equilibrium interest rate is the rate at which the amount individuals, businesses, and governments desire to borrow is equal to the amount that individuals, businesses, and governments desire to lend. Equilibrium rates for different types of borrowing and lending will differ due to differences in risk, liquidity, and maturity.
2
Q
Real Assets
A
Real assets include real estate, equipment, commodities, and other physical assets.
3
Q
Financial Assets
A
Financial assets include securities (stocks and bonds), derivative contracts, and currencies.
4
Q
Debt Securities
A
Debt securities are promises to repay borrowed funds
5
Q
Derivative contracts
A
Derivative contracts have values that depend on (are derived from) the values of other assets.
6
Q
Equity securities
A
represent ownership positions.
7
Q
Financial derivative contracts
A
Financial derivative contracts are based on equities, equity indexes, debt, debt indexes, or other financial contracts.
8
Q
Physical derivative contracts
A
Physical derivative contracts derive their values from the values of physical assets such as gold, oil, and wheat.
9
Q
Common Stock
A
Common stock is a residual claim on a firm’s assets. Common stock dividends are paid only after interest is paid to debtholders and dividends are paid to preferred stockholders. Furthermore, in the event of firm liquidation, debtholders and preferred stockholders have priority over common stockholders and are usually paid in full before common stockholders receive any payment.
10
Q
Preferred Stock
A
Preferred stock is an equity security with scheduled dividends that typically do not change over the security’s life and must be paid before any dividends on common stock may be paid.
11
Q
Warrants
A
Warrants are similar to options in that they give the holder the right to buy a firm’s equity shares (usually common stock) at a fixed exercise price prior to the warrant’s expiration.
11
Q
Exchange-traded funds (ETFs) and exchange-traded notes (ETNs)
A
Exchange-traded funds (ETFs) and exchange-traded notes (ETNs) trade like closed-end funds but have special provisions allowing conversion into individual portfolio securities, or exchange of portfolio shares for ETF shares, that keep their market prices close to the value of their proportional interest in the overall portfolio. These funds are sometimes referred to as depositories, with their shares referred to as depository receipts.
12
Q
Hedge Funds
A
Hedge funds are organized as limited partnerships, with the investors as the limited partners and the fund manager as the general partner. Hedge funds utilize various strategies and purchase is usually restricted to investors of substantial wealth and investment knowledge. Hedge funds often use leverage. Hedge fund managers are compensated based on the amount of assets under management as well as on their investment results.
13
Q
Contracts
A
Contracts are agreements between two parties that require some action in the future, such as exchanging an asset for cash. Financial contracts are often based on securities, currencies, commodities, or security indexes (portfolios). They include futures, forwards, options, swaps, and insurance contracts.
14
Q
Forward Contract
A
A forward contract is an agreement to buy or sell an asset in the future at a price specified in the contract at its inception. An agreement to purchase 100 ounces of gold 90 days from now for $2,000 per ounce is a forward contract. Forward contracts are not traded on exchanges or in dealer markets.
15
Q
Swap Contract
A
In a swap contract, two parties make payments that are equivalent to one asset being traded (swapped) for another. In a simple interest rate swap, floating rate interest payments are exchanged for fixed-rate payments over multiple settlement dates. A currency swap involves a loan in one currency for the loan of another currency for a period of time. An equity swap involves the exchange of the return on an equity index or portfolio for the interest payment on a debt instrument.
16
Q
Option Contract
A
An option contract gives its owner the right to buy or sell an asset at a specific exercise price at some specified time in the future. A call option gives the option buyer the right (but not the obligation) to buy an asset. A put option gives the option buyer the right (but not the obligation) to sell an asset.
17
Q
Credit Default Swaps
A
Credit default swaps are a form of insurance that makes a payment if an issuer defaults on its bonds. They can be used by bond investors to hedge default risk. They can also be used by parties that will experience losses if an issuer experiences financial distress and by others who are speculating that the issuer will experience more or less financial trouble than is currently expected.
18
Q
Call Markets
A
Assets are traded only at specific times
vs continuous markets - trading at anytime as long as market is open
19
Q
Alternative investments
A
Real estate, commodities etc
20
Q
Arbitrageurs
A
arbitrage refers to buying an asset in one market and reselling it in another at a higher price. By doing so, arbitrageurs act as intermediaries, providing liquidity to participants in the market where the asset is purchased and transferring the asset to the market where it is sold.
21
Q
Long position
A
An investor who owns an asset, or has the right or obligation under a contract to purchase an asset, is said to have a long position
In general, investors who are long benefit from an increase in the price of an asset and those who are short benefit when the asset price declines.
22
Q
Short Position
A
A short position can result from borrowing an asset and selling it, with the obligation to replace the asset in the future (a short sale). The party to a contract who must sell or deliver an asset in the future is also said to have a short position.
22
Q
Hedgers
A
Hedgers use short positions in one asset to hedge an existing risk from a long position in another asset that has returns that are strongly correlated with the returns of the asset shorted. For example, wheat farmers may take a short position in (i.e., sell) wheat futures contracts. If wheat prices fall, the resulting increase in the value of the short futures position offsets, partially or fully, the loss in the value of the farmer’s crop.
23
Buyer of an Option Contract
is in the long position.
24
Short Sale
Basics of a Short Sale:
The short seller borrows and sells securities through a broker.
The short seller must return the borrowed securities when requested or when the short sale is closed.
A portion of the short sale proceeds must be kept on deposit with the broker.
Profit is made if the security’s price falls, allowing the short seller to buy back at a lower price to cover the short position.
Payments and Responsibilities:
The short seller must pay any dividends or interest the lender would have received (called payments-in-lieu).
The proceeds from the short sale are held as collateral by the broker to guarantee repurchase.
Short Rebate and Interest:
Brokers earn interest on the collateral, returning a portion to institutional investors as the short rebate rate.
The short rebate rate is typically 0.1% less than overnight interest rates.
For hard-to-borrow securities, the short rebate rate may be lower or negative.
Margin Requirements:
Short sellers may be required to deposit additional margin, which can include cash or short-term riskless securities.
Lender’s Return:
The lender of the securities earns the difference between the interest on the short sale proceeds and the short rebate paid to the short seller.
24
Dealer
A dealer is a financial intermediary that buys and sells securities for its own account, aiming to make a profit from the price difference between buying and selling. In this scenario, the intermediary buys the stock and resells it a few days later at a higher price, which is typical dealer behavior.
25
Buying a 'Put'
Buying a put option gives the investor the right to sell the underlying asset at a specific price (the strike price) within a certain period. This strategy profits when the price of the underlying asset declines, which is similar to holding a short position in the asset.
A short position involves selling the asset with the expectation of buying it back at a lower price in the future, thus benefiting from a decrease in the asset's price. Similarly, buying a put allows the investor to profit from a decline in the asset's price because the put option gains value as the underlying asset's price falls.
26
An investor buys 1,000 shares of a stock on margin at a price of $50 per share. The initial margin requirement is 40% and the margin lending rate is 3%. The investor's broker charges a commission of $0.01 per share on purchases and sales. The stock pays an annual dividend of $0.30 per share. One year later, the investor sells the 1,000 shares at a price of $56 per share. The investor's rate of return is
The total purchase price is 1,000 × $50 = $50,000. The investor must post initial margin of 40% × $50,000 = $20,000. The remaining $30,000 is borrowed. The commission on the purchase is 1,000 × $0.01 = $10. Thus, the initial equity investment is $20,010.
In one year, the sales price is 1,000 × $56 = $56,000. Dividends received are 1,000 × $0.30 = $300. Interest paid is $30,000 × 3% = $900. The commission on the sale is 1,000 × $0.01 = $10. Thus, the ending value is $56,000 − $30,000 + $300 − $900 − $10 = $25,390.
The return on the equity investment is $25,390 / $20,010 − 1 = 26.89%
27
Stop order
Stop orders are those that are not executed unless the stop price has been met. They are often referred to as stop loss orders because they can be used to prevent losses or to protect profits.
28
Quote driven market
In quote-driven markets, traders transact with dealers (market makers) who post bid and ask prices. Dealers maintain an inventory of securities. Quote-driven markets are thus sometimes called dealer markets, price-driven markets, or over-the-counter markets. Most securities other than stocks trade in quote-driven markets. Trading often takes place electronically.
29
Order-Driven Markets
In order-driven markets, orders are executed using trading rules, which are necessary because traders are usually anonymous. Exchanges and automated trading systems are examples of order-driven markets. Two sets of rules are used in these markets: order matching rules and trade pricing rules.
30
Underwritten offer
Investment bank guarantees security sale
31
Order Behind the Market
A limit buy order behind the market is placed below the current bid price.
This means it is too low to attract sellers in the current market conditions.
It will likely remain unexecuted unless the price drops significantly.
31
fundamental weighting
An index that uses fundamental weighting uses weights based on firm fundamentals, such as earnings, dividends, or cash flow. In contrast to market capitalization index weights, these weights are unaffected by the share prices of the index stocks (although related to them over the long term). Fundamental weights can be based on a single measure or some combination of fundamental measures.
An advantage of a fundamental-weighted index is that it avoids the bias of market capitalization-weighted indexes toward the performance of the shares of overvalued firms and away from the performance of the shares of undervalued firms. A fundamental-weighted index will actually have a value tilt, overweighting firms with high value-based metrics such as book-to-market ratios or earnings yields. Note that a firm with a high earnings yield (total earnings to total market value) relative to other index firms will by construction have a higher weight in an earnings-weighted index because, among index stocks, its earnings are high relative to its market value.
31
A Marketable Order
marketable limit buy order is placed at or above the current best ask price.
Since it is close to the market price, it has a high probability of execution.
32
Order Making a New Market
This order sets a new bid price, meaning it is the highest buy order in the order book.
It improves the market liquidity but might not execute immediately.
However, it has a better chance of execution than an order behind the market.
33
price-weighted index
Price Weighting
A price-weighted index adds the market prices of each stock in the index and divides this total by the number of stocks in the index. The divisor, however, must be adjusted for stock splits and other changes in the index portfolio to maintain the continuity of the series over time.
price-weighted index
=
sum of stock prices /
number of stocks in index adjusted for splits
34
Rebalancing
Rebalancing refers to adjusting the weights of securities in a portfolio to their target weights after price changes have affected the weights. For index calculations, rebalancing to target weights on the index securities is done on a periodic basis, usually quarterly. Because the weights in price- and value-weighted indexes (portfolios) are adjusted to their correct values by changes in prices, rebalancing is an issue primarily for equal-weighted indexes.
35
Index Reconstitution
Index reconstitution refers to periodically adding and deleting securities that make up an index. Securities are deleted if they no longer meet the index criteria and are replaced by other securities that do. Indexes are reconstituted to reflect corporate events such as bankruptcy or delisting of index firms and are at the subjective judgment of a committee.
36
Broad market index
Provides a measure of a market's overall performance and usually contains more than 90% of the market's total value. For example, the Wilshire 5000 Index contains more than 6,000 equity securities and is, therefore, a good representation of the overall performance of the U.S. equity market.
37
Multi-market index
Typically constructed from the indexes of markets in several countries and is used to measure the equity returns of a geographic region (e.g., Latin America indexes), markets based on their stage of economic development (e.g., emerging markets indexes), or the entire world (e.g., MSCI World Index).
38
Multi-market index with fundamental weighting.
Uses market capitalization-weighting for the country indexes but then weights the country index returns in the global index by a fundamental factor (e.g., GDP). This prevents a country with previously high stock returns from being overweighted in a multi-market index.
39
Sector Index
Measures the returns for an industry sector such as health care, financial, or consumer goods firms. Investors can use these indexes in cyclical analysis because some sectors do better than others in various phases of the business cycle. Sector indexes can be for a particular country or global. These indexes are used to evaluate portfolio managers and to construct index portfolios.
40
Style Index
Measures the returns to market capitalization and value or growth strategies. Some indexes reflect a combination of the two (e.g., small-cap value fund). Because there is no widely accepted definition of large-cap, mid-cap, or small-cap stocks, different indexes use different definitions
41
Large universe of securities.
The fixed-income security universe is much broader than the universe of stocks. Fixed-income securities are issued not just by firms, but also by governments and government agencies. Each of these entities may also issue various types of fixed-income securities. Also, unlike stocks, bonds mature and must be replaced in fixed-income indexes. As a result, turnover is high in fixed-income indexes.
42
Dealer markets and infrequent trading
Fixed-income securities are primarily traded by dealers, so index providers must depend on dealers for recent prices. Because fixed-income securities are typically illiquid, a lack of recent trades may require index providers to estimate the value of index securities from recent prices of securities with similar characteristics.
43
Indexes are used for the following purposes:
Reflection of market sentiment.
Benchmark of manager performance.
Measure of market return.
Measure of beta and excess return.
Model portfolio for index funds.
44
Informationally efficient capital market
An informationally efficient capital market is one in which the current price of a security fully, quickly, and rationally reflects all available information about that security. This is really a statistical concept. An academic might say, "Given all available information, current securities prices are unbiased estimates of their values, so that the expected return on any security is just the equilibrium return necessary to compensate investors for the risk (uncertainty) regarding its future cash flows." This concept is often put more intuitively as, "You can't beat the market."
45
When should investors use a passive investment strategy?
In a perfectly efficient market, investors should use a passive investment strategy (i.e., buying a broad market index of stocks and holding it) because active investment strategies will underperform due to transactions costs and management fees. However, to the extent that market prices are inefficient, active investment strategies can generate positive risk-adjusted returns.
46
Market Value of an investment
its current price
47
Intrinsic Value (fundamental value
is the value that a rational investor with full knowledge about the asset's characteristics would willingly pay. For example, a bond investor would fully know and understand a bond's coupon, maturity, default risk, liquidity, and other characteristics and would use these to estimate its intrinsic value.
48
Impediments to trading - Arbitrage
refers to buying an asset in one market and simultaneously selling it at a higher price in another market. This buying and selling of assets will continue until the prices in the two markets are equal. Impediments to arbitrage, such as high transactions costs or lack of information, will limit arbitrage activity and allow some price inefficiencies (i.e., mispricing of assets) to persist.
49
Abnormal profit (or risk-adjusted returns)
Abnormal profit (or risk-adjusted returns) calculations are often used to test market efficiency. To calculate abnormal profits, the expected return for a trading strategy is calculated given its risk, using a model of expected returns such as the CAPM or a multifactor model. If returns are, on average, greater than equilibrium expected returns, we can reject the hypothesis of efficient prices with respect to the information on which the strategy is based.
50
Technical Analysis
Technical analysis seeks to earn positive risk-adjusted returns by using historical price and volume (trading) data. Tests of weak-form market efficiency have examined whether technical analysis produces abnormal profits
51
Fundamental Analysis
Fundamental analysis is based on public information such as earnings, dividends, and various accounting ratios and estimates. The semi-strong form of market efficiency suggests that all public information is already reflected in stock prices. As a result, investors should not be able to earn abnormal profits by trading on this information.
52
If markets are semi-strong form efficient, investors should invest _______
passively
53
Loss Aversion
Loss aversion, which refers to the tendency of investors to be more risk averse when faced with potential losses than they are when faced with potential gains. Put another way, investors dislike a loss more than they like a gain of an equal amount.
54
Investor Overconfidence
a tendency of investors to overestimate their abilities to analyze security information and identify differences between securities' market prices and intrinsic values.
55
Herding
a tendency of investors to act in concert on the same side of the market, acting not on private analysis, but mimicking the investment actions of other investors.
56
Information Cascade
An information cascade results when investors mimic the decisions of others. The idea is that uninformed or less-informed traders watch the actions of informed traders and follow their investment actions. If those who act first are more knowledgeable investors, others following their actions may, in fact, be part of the process of incorporating new information into securities prices and actually move market prices toward their intrinsic values, improving informational efficiency.
57
Common Shares
Common shares are the most common form of equity and represent an ownership interest. Common shareholders have a residual claim (after the claims of debtholders and preferred stockholders) on firm assets if the firm is liquidated and govern the corporation through voting rights. Firms are under no obligation to pay dividends on common equity; the firm determines what dividend will be paid periodically. Common stockholders are able to vote for the board of directors, on merger decisions, and on the selection of auditors
58
Statutory Voting
each share held is assigned one vote in the election of each member of the board of directors
59
Cumulative Voting
shareholders can allocate their votes to one or more candidates as they choose.
Cumulative voting makes it possible for a minority shareholder to have more proportional representation on the board
60
Preference Shares
Preference shares (or preferred stock) have features of both common stock and debt. As with common stock, preferred stock dividends are not a contractual obligation and the shares usually do not mature. Like debt, preferred shares typically make fixed periodic payments to investors and do not usually have voting rights. Preference shares may be callable, giving the firm the right to repurchase the shares at a pre-specified call price. They may also be putable, giving the shareholder the right to sell the preference shares back to the issuer at a specified price.
61
Cumulative Preference Shares
Cumulative preference shares are usually promised fixed dividends, and any dividends that are not paid must be made up before common shareholders can receive dividends. The dividends of non-cumulative preference shares do not accumulate over time when they are not paid, but dividends for any period must be paid before common shareholders can receive dividends.
62
Describe differences in voting rights and other ownership characteristics among different equity classes.
A firm may have different classes of common stock (e.g., "Class A" and "Class B" shares). One class may have greater voting power and seniority if the firm's assets are liquidated. The classes may also be treated differently with respect to dividends, stock splits, and other transactions with shareholders. Information on the ownership and voting rights of different classes of equity shares can be found in the company's filings with securities regulators, such as the Securities and Exchange Commission in the United States.
63
Compared to public equity, private equity has the following characteristics:
Less liquidity because no public market for the shares exists.
Share price is negotiated between the firm and its investors, not determined in a market.
More limited firm financial disclosure because there is no government or exchange requirement to do so.
Lower reporting costs because of less onerous reporting requirements.
Potentially weaker corporate governance because of reduced reporting requirements and less public scrutiny.
Greater ability to focus on long-term prospects because there is no public pressure for short-term results.
Potentially greater return for investors once the firm goes public.
64
Revenue Drivers (Top up & Top down)
In a bottom-up analysis, revenue is broken down into specific drivers such as price and volume, business segments, or geography. In a top-down analysis, macroeconomic variables such as market share or GDP growth serve as drivers of revenue. Analysts often use both approaches to evaluate a company.C
65
Commoditization
Commoditization describes an industry that is evolving toward this state as more participants enter the market. In a commoditizing industry, participants tend to innovate less and imitate each other more.
66
A company's financial statements reflect 3 types of costs:
operating costs
investing costs (e.g., purchase of capital and intangible assets)
financing costs (e.g., interest expense)
67
Formula for operating profit in terms of fixed and variable costs
operating profit = [Q × (P – VC)] – FC
where:
Q = number of units sold
P = price per unit
VC = variable costs per unit, those that change with the level of output (e.g., materials, direct labor)
FC = fixed costs in total, those that do not change within a specific range of output (e.g., rent, management salaries)
The term (P – VC) in this equation is known as the contribution margin (CM) per unit. A company will earn profits when the CM per unit is positive and Q is large enough that the total contribution margin is greater than fixed costs.
68
Gross Profit formula
Gross profit = revenue – cost of sales
69
EBITDA
EBITDA = gross profit – operating expenses
70
EBIT
EBIT = EBITDA – depreciation and amortization
71
Economies of Scale
Economies of scale occur when increasing output decreases unit costs. The basic idea is that the company's fixed costs are being allocated over a greater amount of output. However, even a company with a high proportion of variable costs can experience economies of scale if it becomes large enough to exert greater bargaining power over its suppliers and reduce its variable costs over time.
72
Economies of Scope
Economies of scope occur when adding divisions or product lines results in decreasing unit costs. This can result if multiple divisions or product lines share costs and reduce redundancies. For example, each division would need its own human resources department if it were a stand-alone company, but as divisions of a larger firm they can use the same human resources department.
73
Porters 5 Forces
Rivalry among existing competitors.
Threat of entry.
Threat of substitutes.
Power of buyers.
Power of suppliers.
74
Industry and competitive analysis involves five steps:
Define the industry
Survey th industry
Analyze the industry structure using frameworks such as Porters and/or Pestle
Examine external influences
75
PESTLE Analysis
PESTLE analysis considers political, economic, social, technological, legal, and environmental factors. Because the nature of external factors is that they tend to evolve gradually, a PESTLE analysis does not need to be performed as frequently as an analysis of competitive forces. Not all of the influences might be key for a specific industry; analysis should focus on only the key influences.
Political influences
Economic influences
Social influences
Technology influences
Legal influences
Environmental influences
76
Cost Leadership Strategy
In a cost leadership strategy, the firm seeks to have the lowest costs of production in its industry, offer the lowest prices, and generate enough volume to make a superior return. The strategy can be used defensively to protect market share, or offensively to gain market share. A cost leadership firm should have managerial incentives that are geared toward improving operating efficiency.
77
Differentiation Strategy
In a differentiation strategy, the firm's products and services should be distinctive in terms of type, quality, or delivery. For success, the firm's cost of differentiation must be less than the price premium that buyers are willing to pay for it. The price premium should also be sustainable over time. Successful differentiators will have outstanding marketing research teams (to allow for premium pricing), strong production personnel (to allow for superior quality), and creative advertising personnel (to promote unique product features).
78
Focus Strategy
A focus strategy refers to targeting a niche market . Executing a focus strategy can include aspects of both cost leadership and differentiation.
79
The four key forecast objects include the following
Financial statement lines with clear drivers (# of stores &
Financial statement items without clear drivers
Summary measures
Ad hoc items
80
Forecast Approaches
The following four forecast approaches can be used individually or combined:
Base forecasts on historical results.
Assume results will converge to a historical base rate.
Use management guidance.
Use other methods to make discretionary forecasts.
81
Historial Results
The most basic forecasting method is to use actual past results as the starting point and assume the results will continue in the future. Of course, the major drawback is that past conditions might not be the same in the future. Using historical results works best for companies and industries that are noncyclical or in the mature stage. As well, using historical results is often done to forecast objects considered immaterial.
`History
82
Historical Base Rate Convergence
An analyst might assume that a forecasting object , such as a company's growth rate, will converge to an industry average or median growth rate (or even the rate of GDP growth, if appropriate). This base rate should be computed over a sufficiently long and representative time period. The approach makes sense for established industries with many competitors that are publicly traded, and for industries where few structural changes or external disruptions are expected. It also makes sense for relatively new companies that are transitioning to become more like their larger and more established competitors.
83
Forecast COGS
Forecast COGS = (historical COGS / revenue) × estimate of future revenue
Forecast COGS = (1 – gross margin) × estimate of future revenue
84
Forecasting Working Capital
3 balance sheet items comprise working capital forecasts
- Accounts Receivable
- Inventories
- Accounts Payable
85
Forecasted Days Sales Outstanding
(How long it takes your customer takes to pay you once invoiced)
DSO = accts receivable / (revenues/265)
DSO = 365 / receivables turnover
Receivables Turnover = revenues / avg receivables
Accts Receivable = DSO x (revenues / 365)
86
Forecasting Inventory Turnover
DOH = Inventory / (COGS / 365)
DOH = 365 / inventory turnover
Inventory turnover = annual COGS / avg inventory
Inventory = DOH x (COGS / 365)
87
Forecasting Accounts Payable
DPO = accts payable / (COGS / 365)
DPO = 365 / payables turnover
Payables turnover = purchases / accounts payable
Accts payable = DPO x (COGS / 365)
88
Bottom up analysis
Bottom-up analysis starts with an individual company or its reportable segments. Examples of bottom-up drivers include the following:
Average selling prices and volumes
Product-line or segment revenues
Capacity-based measures
Return- or yield-based measures
Nonrecurring items should be analyzed on a stand-alone basis.
89
Cash Dividend
Cash dividends, as the name implies, are payments made to shareholders in cash. They may be regularly scheduled dividends or one-time special dividends
90
Regular dividend
Regular dividends occur when a company pays out a portion of profits on a consistent schedule (e.g., quarterly). A long-term record of stable or increasing dividends is widely viewed by investors as a sign of a company's financial stability.
91
Special Dividend
Special dividends are used when favorable circumstances allow the firm to make a one-time cash payment to shareholders, in addition to any regular dividends the firm pays. Many cyclical firms (e.g., automakers) will use a special dividend to share profits with shareholders when times are good but maintain the flexibility to conserve cash when profits are poor. Other names for special dividends include extra dividends and irregular dividends.
92
Stock Dividends
Stock dividends are dividends paid out in new shares of stock rather than cash. In this case, there will be more shares outstanding, but each one will be worth less. Total shareholders' equity remains unchanged. Stock dividends are commonly expressed as a percentage. A 20% stock dividend means every shareholder gets 20% more stock.
93
Stock Splits
Stock splits divide each existing share into multiple shares, creating more shares. There are now more shares, but the price of each share will drop correspondingly to the number of shares created, so there is no change in the owner's wealth. Splits are expressed as a ratio. In a 3-for-1 stock split, each old share is split into three new shares. Stock splits are currently more common than stock dividends.
94
Reverse Stock Splits
Reverse stock splits are the opposite of stock splits. After a reverse split, there are fewer shares outstanding but there is a higher stock price. Because these factors offset one another, shareholder wealth is unchanged.
95
Share Repurchase
A share repurchase is a transaction in which a company buys outstanding shares of its own common stock. Share repurchases are an alternative to cash dividends as a way of distributing cash to shareholders, and they have the same effect on shareholders' wealth as cash dividends of the same size. A company might repurchase shares to support their price or to signal that management believes the shares are undervalued.
96
Declaration date
Declaration date. The date the board of directors approves payment of a dividend, specifying the per-share dividend amount, the date shareholders must own the stock to receive the dividend (record date), and the date the dividend payment will be made (payment date).
97
Ex-Dividend Date
Ex-dividend date. The first day on which a share purchaser will not receive the next dividend. The ex-dividend date is one or two business days before the holder-of-record date, depending on the settlement period for stock purchases. If you buy the share on or after the ex-dividend date, you will not receive the dividend.
98
Price Multiplier
P/E ratio
R/S ratio
P/BV
P/CF
99
Enterprise Value multiplier
EV/S
EV/EBITDA -> E+D
100
P/E Ratio
stock price / earnings per share
101
P/S Ratio
stock price / sales per share
102
P/B Ratio
Rock price /. book value per share
103
P/CF ratio
Stock price / cash flow per share
where cash flow = operating cash flow o free cash flow
104
Enterprise value EV Multiple
EV = Market value of common stock + market value of debt - Cash and short term investments
105
Market Float of a Stock
Market float of a stock is best described as its:
✅ Total outstanding shares available for public trading, excluding shares held by insiders, controlling shareholders, and the government.
Explanation:
Market float (also called free float) represents the portion of a company’s shares that are actively traded in the market and available to investors. It excludes shares that are:
Held by company insiders (executives, board members, founders)
Owned by the government
Restricted from trading (such as certain employee stock options)
Formula:
Market Float
=
Total Shares Outstanding
−
Restricted Shares
Market Float=Total Shares Outstanding−Restricted Shares
Why is Market Float Important?
Liquidity – Stocks with a higher float tend to have better liquidity and lower bid-ask spreads.
Volatility – Stocks with low float are often more volatile because fewer shares are available for trading.
Index Inclusion – Many indexes (e.g., S&P 500) use float-adjusted market capitalization instead of total market capitalization to determine weightings.
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Rebalancing
Rebalancing refers to adjusting the index's composition to maintain its intended weighting method. The frequency of rebalancing depends on how weights shift over time.
1. Equal-Weighted Index (Most Frequent Rebalancing)
In an equal-weighted index, each stock is given an equal percentage weight regardless of its price or market capitalization.
As stock prices change, their weights in the index shift, requiring frequent rebalancing (typically quarterly or more often) to restore equal weights.
Example: If an index has three stocks, each initially weighted at 33.33%, but one stock increases significantly in price, it may now represent 40% of the index. To maintain equal weighting, the index must rebalance.
✅Most frequent rebalancing needed due to constant deviations from equal weights.
