Equity

Question 1

Define:

All-or-nothing

Answer 1

An order with the instruction to trade only if the entire quantity fills.

Question 2

Define:

American depositary receipt

Answer 2

A US dollar-denominated security, representing shares in a foreign entity, which trades like a common share on US exchanges.

Issued by US banks.

Question 3

Define:

American depositary share

Answer 3

The underlying shares on which American depositary receipts are based. They trade in the issuing company’s domestic market.

Key to note the difference between american depositary receipts and shares.

Question 4

Define:

Alternative trading systems

Answer 4

Trading venues which function like exchanges but do not exercise regulatory authority over their subscribers.

Question 5

Define:

Arbitrage

Answer 5

Simultaneously going long an undervalued asset and shorting an overvalued but equivalent asset. Doing so results in a riskless profit on the price differential. Taking advantage of a market inefficiency in a risk-free manner.

Question 6

Define:

Ask (Offer)

Answer 6

The price at which a participant is willing to sell an asset.

Question 7

Define:

Asset-based valuation models

Answer 7

Valuation based on the market value of a company’s assets.

Question 8

Define:

Asset beta

Answer 8

Unlevered beta; reflects the business risk of the assets.

The asset’s systematic risk.

Question 9

Define:

Bid

Answer 9

Price at which a participant is willing to buy an asset.

Question 10

Define:

Bid–ask spread

Answer 10

The difference between the prices which market participants are willing to buy or sell an asset at.

Often used as an indicator of liquidity.

Question 11

Define:

Bottom-up analysis

Answer 11

An approach, when selecting an investment, that starts by considering the merit of all securities within a specified investment universe. (Rather than starting with a macro economic focus and then narrowing down the universe first).

Question 12

Define:

Call market

Answer 12

A market in which trades occur only at a particular time and place (i.e., when the market is called).

e.g., auctions

Question 13

Define:

Closed-end fund

Answer 13

A mutual fund in which no new investment money is accepted. New investors can buy existing shares, and current investors liquidate by selling their shares.

No new shares.

Question 14

Define:

Common shares

Answer 14

Security which represents an ownership interest in a company.

Question 15

Define:

Constituent securities

Answer 15

The individual securities within an index.

Question 16

Define:

Continuous trading market

Answer 16

A market in which trades can be arranged and executed any time the market is open.

As opposed to a call market.

Question 17

Define:

Crossing networks

Answer 17

Trading systems which match buyers and sellers trading at prices obtained from other markets.

Question 18

Define:

Cumulative preference shares

Answer 18

Preference (preferred) shares where any dividends missed/not paid accrue. They must be paid before dividends on common shares can be paid.

Question 19

Define:

Dark pools

Answer 19

Alternative trading systems which do not display orders received.

Question 20

Define:

Dealers

Answer 20

Financial intermediary that acts as a principal in trades.

Question 21

Define:

Depository institutions

Answer 21

Financial institutions which raise funds from depositors and other investors and lend it to borrowers.

Question 22

Define:

Depositary receipt

Answer 22

A security which trades like an ordinary share on a local exchange but represents an economic interest in a foreign company.

Note that American Depositary Receipts only trade on American exchanges.

Question 23

Define:

Discriminatory pricing rule

Answer 23

A pricing rule in continuous markets- limit price of the order which arrived first determines the trade price.

Question 24

Define:

Dividend discount model

(DDM)

Answer 24

A present value model used to estimate the intrinsic value of equity as the present value of its expected future dividends.

Question 25

# Define: Dividend payout ratio

Answer 25

Cash dividends paid divided by earnings for a given period.

Question 26

# Define: DuPont analysis

Answer 26

Used to **deconstruct** return on investment (**return on equity**) as the product of other financial ratios.

Question 27

# Define: Earnings per share

Answer 27

Net income in a period per share of common stock. ## Footnote NI/Shares outstanding

Question 28

# Define: Efficient market

Answer 28

A market in which asset **prices reflect new information quickly and rationally**.

Question 29

# Define: Enterprise value

Answer 29

A measure of a company’s **total market value**. ## Footnote Equity + Debt - cash and short-term investments.

Question 30

# Define: Equal weighting

Answer 30

Index weighting method- an equal weight is assigned to each constituent security at inception. ## Footnote Requires constant rebalancing.

Question 31

# Define: Exchanges

Answer 31

Where traders meet to arrange their trades.

Question 32

# Define: Execution instructions

Answer 32

Instructions that indicate how to execute (fill) an order.

Question 33

# Define: Free cash flow to equity | (FCFE)

Answer 33

The cash flow available to a company’s common shareholders. ## Footnote After all operating expenses, interest, principal repayments, and necessary investments in working and fixed capital have been made.

Question 34

# Define: Free cash flow to the firm | (FCFF)

Answer 34

The cash flow available to all of the company’s suppliers of capital. ## Footnote After all operating expenses have been paid and necessary investments in working capital and fixed capital have been made.

Question 35

# Define: Free-cash-flow-to-equity models

Answer 35

Valuation models where expected FCFE is discounted to arrive at a PV.

Question 36

# Define: Fundamental weighting

Answer 36

Index weighting method- weight assigned to each constituent security is based on the company’s size or a fundamental metric. ## Footnote ex. revenue, book value Independent of the constituent security’s price, thus reducing momentum tilt (results in more of a value tilt).

Question 37

# Define: Global registered share

Answer 37

A common share that is traded on different stock exchanges around the world in different currencies.

Question 38

# Define: Global depositary receipt

Answer 38

A depositary receipt issued outside of the company’s home country *and outside of the United States.*

Question 39

# Define: Herding

Answer 39

When many trade together, often following the decisions of others. ## Footnote May or may not be based on valid information.

Question 40

# Define: Homogeneity of expectations

Answer 40

The assumption that all investors have the same economic expectations.

Question 41

# Define: Initial margin requirement

Answer 41

The amount of equity that must be in an account in order to borrow to invest. This is done as a means of protecting the lender. ## Footnote The margin requirement on the first day of a transaction.

Question 42

# Define: Initial public offering | (IPO)

Answer 42

When common shares are first issued in the public market. Typically by a formerly private corporation. ## Footnote Done with assistance from Investment Banks.

Question 43

# Define: January effect

Answer 43

Anomaly- stock market returns in January are significantly higher compared to the rest of the months of the year. ## Footnote Most of the returns are in the first 5 trading days.

Question 44

# Define: Life-cycle stage

Answer 44

The point a business is at within the business life cycle. ## Footnote embryonic, growth, shakeout, mature, declining

Question 45

# Define: Leveraged buyout | (LBO)

Answer 45

A transaction where a firm uses leverage (borrowing) to purchase a target company and converts it to a privately held company.

Question 46

# Define: Limit order

Answer 46

Instructions to buy or sell at the best price available, while not accepting a price higher (buying) or lower (selling) than a specified price (the limit price).

Question 47

# Define: Long position

Answer 47

A position in an asset or contract in which one **owns** the asset or a right under the contract. ## Footnote Short positions do not own the asset/right, what they hold is an obligation.

Question 48

# Define: Maintenance margin

Answer 48

Minimum amount of capital required to maintain a margin account or position. If margin balances drop below the required maintenance margin -> must contribute more to their accounts. ## Footnote If drops below and isn't replenished, clearinghouse/exchange may close positions.

Question 49

# Define: Margin

Answer 49

The amount of money that a trader has in a margin account. A certain amount of capital must be in the account, and this margin capital grants the trader access to trades with greater exposure than just the margin in the account.

Question 50

# Define: Margin call

Answer 50

When the margin in the account falls below the required level (maintenance margin), the broker/exchange sends this **request to deposit additional funds**

Question 51

# Define: Market

Answer 51

**Where buyers and sellers are brought together** to exchange goods and services.

Question 52

# Define: Market anomaly

Answer 52

Movement in price of a security which isn't explained by current known information or the release of new information. ## Footnote Opposes Efficient Market Hypothesis

Question 53

# Define: Market-capitalization weighting

Answer 53

Index weighting method- the weight of each constituent security is determined by dividing its market capitalization by the total market capitalization of all securities in the index. ## Footnote aka value weighting

Question 54

# Define: Market multiple models ## Footnote aka multiplier models

Answer 54

Valuation models based on multiples ## Footnote Share price or enterprise value multiples.

Question 55

# Define: Market order

Answer 55

Execution Instructions to **buy or sell at the best price immediately available.**

Question 56

# Define: Open-end fund

Answer 56

A mutual fund that **accepts new investment money (issues additional shares)** at a value equal to the current net asset value.

Question 57

# Define: Order-driven markets

Answer 57

A market where trades are arranged based on the orders that traders submit. ## Footnote Main driver is the orders submitted, not the quotes provided by dealers.

Question 58

# Define: Order precedence hierarchy

Answer 58

Rules determining which orders execute before other orders (which take precedence).

Question 59

# Define: Over-the-counter markets | (OTC)

Answer 59

A decentralized market where buy and sell orders initiated from various locations are matched through a communications network.

Question 60

# Define: Participating preference shares

Answer 60

Preference shares which pay the standard preferred dividend plus grant holders an opportunity to receive an additional dividend (if the company’s profits exceed a pre-specified level). ## Footnote Get to participate in some of the success of the company.

Question 61

# Define: Passive investment

Answer 61

A long-term buy and hold approach (not influenced by short term movements). ## Footnote Contrasted with active investment.

Question 62

# Define: Price multiple

Answer 62

Comparing the relationship between share price and some sort of monetary flow or value (e.g., revenue, book value, etc.) to discern a relative value for the equity shares.

Question 63

# Define: Price return

Answer 63

The price appreciation (percentage change in price) for the securities in an index or portfolio. ## Footnote Differs from total return which also includes income.

Question 64

# Define: Price weighting

Answer 64

Index weighting method- weight assigned to each constituent security is determined by dividing price by the sum of all the prices of the constituent securities.

Question 65

# Define: Primary market

Answer 65

The market where securities are **sold for the first time**. Issuers receive the proceeds.

Question 66

# Define: Private investment in public equity | PIPE

Answer 66

An investment by a private investor in shares of a public company. ## Footnote Usually purchased at a discount.

Question 67

# Define: Private placement

Answer 67

Typically an unregistered offering of securities, sold only to an investor or a small group of investors (not open to the public). ## Footnote May use assistance from investment bank

Question 68

# Define: Quote-driven market

Answer 68

A market in which quotes provided by dealers drive the activity in the market. ## Footnote Dealers act as principals.

Question 69

# Define: Reverse stock split

Answer 69

When a firm decides to reduce the number of shares outstanding. Doing so results in a corresponding increase in share price, but no change to the company’s underlying fundamentals.

Question 70

# Define: Secondary market

Answer 70

The market where securities are traded among investors. ## Footnote As opposed to primary markets, where securities are initially sold by the issuer to the investors.

Question 71

# Define: Sector

Answer 71

A group of related industries.

Question 72

# Define: Security market index

Answer 72

A portfolio of securities which represent a market, market segment, or asset class.

Question 73

# Define: Semi-strong-form efficient market

Answer 73

A market in which security prices reflect all publicly known and available information. ## Footnote Investing based on fundamentals shouldn't be able to produce returns in excess of the market return.

Question 74

# Define: Short position

Answer 74

A position in an asset or contract that **results in holding an obligation** (either to buy back the security or to fulfill the contract). ## Footnote Benefit from the value of the asset or contract declining.

Question 75

# Define: Stock split

Answer 75

When a firm decides to **increase the number of shares outstanding**, resulting in a decrease in share price but no change to the company’s underlying fundamentals.

Question 76

# Define: Stop order ## Footnote aka stop loss order

Answer 76

When a stop price order is placed, the order specifies a price at which to initiate a sale. ## Footnote If the price declines to the specified level, sell the security.

Question 77

# Define: Terminal value

Answer 77

The expected value at the end of the investment horizon.

Question 78

# Define: Total return

Answer 78

Measures the price appreciation plus any income received over the period. ## Footnote As opposed to price return.

Question 79

# Define: Validity instructions

Answer 79

Instructions which indicate **when the order may be filled.**

Question 80

# Define: Warrant

Answer 80

An attached option that giving the right to buy the underlying stock of the issuing company at a fixed exercise price until the expiration date.

Question 81

# Define: Weak-form efficient market

Answer 81

Belief that security prices fully reflect all past market data (price and volume data). ## Footnote Technical Analysis shouldn't provide returns in excess of the market return.

Question 82

# Define: Perfect capital markets

Answer 82

Markets without trading frictions (taxes, transaction costs, etc.) and where investors have equal information.

Question 83

# Define: Strong-form efficient market

Answer 83

When **all information (public or private) is fully and immediately reflected in asset prices**. No investor having access to public information, private information, or insider information, can consistently achieve higher returns than the market average.