Equities Flashcards
Market
Alternative Trading System (ATS)
Definition
Dark Pool definition
Non-exchange trading venues.
Do not have regulatory authority over subscribers, do not discipline other than exclusion from trading.
Examples are electronic communication networks.
A dark pool is a type which doesn’t display orders (usually very large).
Market
Dealer
Definition
A dealer is somebody who trades for their own accounts.
They provide liquidity by trading securities for themselves.
Market
Leveraged Positions
If you buy a stock on margin, what is the investors equity amount?
This is the market value of the stock minus the amount borrowed.
Market
Orders
How does a stop order work?
Also known as a stop-loss order, this basically sells your position if the market falls below a certain level. So if the market is at $20, you bought at $10, you can place a stop order to sell at $15. If the market falls to $15 the broker will exit your position at around a $5 profit.
Market
Primary Markets
What is rule 415?
Rule 415 says that large firms can register primary security issues and sell the shares over the next 2 years. Called shelf-registration. Allows a single registration to be filed for the issuance of multiple securities.
Market
Primary Markets
What is rule 144A?
144A - Private Placement
This allows corporations (including non-US) to place securities privately with large, sophisticated investors.
This is a private placement with lower issuing costs due to low marketing and registration requirements.
A higher return is likely to be required due to the lack of a secondary issue.
Market
What is a call market?
What is the opposite called?
A call market is when trading takes place at specified times. Bids and asks are gathered together and a single price is determined to match them off.
The alternative is the more usual continuous market. This is where securities are traded continuously during market open hours.
Note that exchanges are usually continuous markets but employ call market mechanisms (eg closing auctions).
Market
4 features of a well functioning market
CLOI
- Complete markets - Instruments needed to solve investment and risk management problems are available to trade
- Liquidity
- Operating efficiency - low transaction costs
- Information (or external) efficiency
Indices
What is float-adjusted market cap weighting?
This is when the free-float portion of the market capitalisation of the company is used to calculate the weighting, rather than the full market cap.
Indices
What is fundamental weighting?
This is when some fundamental measure such as an accounting figure is used to weight the stocks in an index.
Indices
What is “reconstitution”?
As opposed to rebalancing, which is adjusting weights of index constituents to maintain the weighting of the index. Note price weighted indices never need rebalancing.
Changing the composition of the index (i.e. kicking stocks out and adding new ones) to ensure the index represents the desired target market, is called reconstitution.
Efficiency
Define an efficient capital market
Alternative name
An efficient capital market is one in which:
- securities prices adjust rapidly to the arrival of new information and
- current prices of securities reflect all information about the security.
Thus it is also known as an informationally efficient capital market.
Efficiency
Intrinsic Value of stocks
Market Value of stocks
Relevance to market efficiency
Intrinsic value is the true, actual value of an asset, what it is really worth.
Market value is the market price of the asset, what buyers are willing to pay for it.
In an efficient market the two values should always be very close or the same.
Efficiency
Efficient Markets Hypothesis
What are the weak, semi-strong and strong forms?
Weak form says that stock prices reflect all information that can be derived by examining market trading data. Therefore technical analysis is pointless
Semi-strong form says all publicly available information is reflected in prices.
Strong form says that all information relevant to the firm is reflected in prices.
Efficiency
Market Anomaly
Definition
A market anomoly is a security price distortion in the market which seems to contradict efficient market hypothesis.
These basically looks like inefficiencies in the market and present trading strategies to investors who spot them.
Efficiency
Market Anomoly
Calendar Anomalies
An example
Calendar anomalies suggest that there are regularities in rates of return during the calendar year which allow investors to predict returns.
The January anomaly suggests that people sell loss making stocks towards the end of the year for CGT purposes and wait until Jan to put their money back in. The effect is stronger for smaller stocks. Could also be caused by portfolio managers getting loss-makers out of their portfolio before their annual reports at year end.
Efficiency
Market Anomoly
Momentum/Overreaction anomalies
Suggests that selling stocks that have performed well in the last 3 to 5 years, and buying poor performers over that period, will give good returns.
The anomoly seems to exist but researchers argue that the existence of momentum is rational and that the extra return is at the expense of increased risk.
Efficiency
Cross-sectional anomalies
Size effect
Value effect
The size effect says that small firms outperform large firms after considering risk and transaction costs.
The value effect says that risk-adjusted returns for stocks in the lowest P/E ratio quintile are superior to those in the highest P/E ratio quintile.
These two effects can have a dramatic effect when considered together.
Efficiency
Market Anomaly
Closed-end investment fund discounts
Closed-end investment funds tend to trade at a discount to net asset values.
This can partially be explained by capital gains taxes (taxes still need to be paid on unrealised gains held by the fund), agency costs and underlying stock liquidity.
However there still appears to be an unexplained discount.
