Equity Flashcards
Market vs Limit Orders
A market order instructs the broker to execute the trade immediately at the best possible price. Advantage is immediate execution (i.e. you may have news on the stock). The disadvantage is it may execute st an unfavorable price, especially less liquid names.
A limit order places a minimum execution price on sell orders and a maximum execution price on buy orders. The disadvantage is the order may not get filled
For example, a buy order with a limit of $6 will be executed immediately as long as the shares can be purchased for $6 or less.
Stop Orders/Stop Loss Orders
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.
Stop Sell Order
Meant to be executed when prices are falling. An investor is long a position and specifies a sell price. Buys shares at 50 and wants to sell out if shares fall to 45. The risk is trade me be executed below 45
Stop Buy Order
A stop-buy is entered with at stop (trigger) above the current market price. Meant to be executed if price rises.
Holder of a short position may use this to avoid potential loss.
Margin Call Price
The stock price that will result in a margin call is:
Margin Call Price = Initial Purchase Price * (1 - initial margin / 1 - maintenance margin)
Value Calc - price weighted index
take the average of the prices in the index
sum of stock prices/# of stock adjusted for splits
to adjust for splits . . . first calc the value of the index. when there’s a split adjust the price for the split and calc the new denominator.
(P1+ P2 + P3/2) / d = original index value. Solve for d
Calc Margin Call Price
= Price * (1 - initial margin %) / (1 - maintenance margin %)
Gordon Growth Model
constant growth DDM or infinite period DDM,
Assumes divd will grow at a certain rate forever
Price = Divd / Required return on equity - growth rate
or
Required Rate of Return = Divd/Price + growth rate
Note: required rate of return is in the denominator, not expected return. use capm to calc required return when the question give you beta and the risk free rate.
Sustainable Growth Rate
sustainable growth = (1 – dividend payout ratio) × ROE
The quantity (1 – dividend payout ratio) is also referred to as the retention rate, the proportion of net income that is not paid out as dividends and goes to retained earnings, thus increasing equity.
Value Calc - Market Cap Weighted Index
(Value of all securities in index for current period /
Value of all securities in a base period) * 100
Value Calc - Equal Weight Index
First calc the return which is the average of the returns in the portfolio. i.e. (5% + 6% + 10%) / 3 = 7%
Next take the initial value of the index * the return
i.e 100 * 1.07 = 107
Unemployment Rate, Labor Force and Participation
Unemployment Rate = Unemployed seekers / Labor Force
Labor Force = Employed + Unemployed
Participation Rate = Labor Force / Working Age Population
Define inflation, disinflation and deflation
Inflation - persistent increase in the price level over time. A single jump in price that does not continue is not inflation.
Disinflation refers to an inflation rate that is decreasing over time but remains greater than zero.
Deflation - If the inflation rate is negative, an economy is said to be experiencing deflation
Security Market Line - SML
Remember, all stocks should plot on the SML; any stock not plotting on the SML is mispriced. a security is underpriced if the required return (CAPM) is less than the holding period (or expected, analyst calc) return, is overpriced if the required return is greater the holding period (or expected) return, and is correctly priced if the required return equals the holding period (or expected) return.
Slope of the SML is the market risk premium
Capital Allocation Line
The line of possible portfolio risk and return combinations given the risk-free rate and the risk and return of a portfolio of risky assets
