Equity Investments Flashcards
Financial Assets
Securities (stocks and bonds), derivative contracts, currencies
Real assets
Real estate, equipment, commodities and other physical assets
Derivative contracts
Values derived from other assets
If pysical derviative contracts, dervides from oil, gold, wheat
Financial derviative contracts
Based on equities, equity indexes, debt, debt indexes, or other financial contracts
Spot markets
markets for immidiate delivery
Primary/secondary markets
Newly issued securities/sebsequent sales of securities
Money markets/Capital markets
Debt securities with maturity of < 1 year/ Longer-term debt security markets
Warrants
similar to options in that they give the holder the right to buy a firm’s equity shares at a fixed exercise price prior to the warrant’s expiration.
Financial contracts
based on securities, currencies, commodities, or security indexes (portfolios). They include futures, forwards, options, swaps, and insurance contracts.
Forward contracts
agreements to buy or sell an asset in the future at a price specified in the contract at its inception and are not typically traded on exchanges or in dealer markets.
Futures contracts
similar to forward contracts except that they are standardized as to amount, asset characteristics, and delivery time, and are traded on an exchange.
Insurance contract
Pays cash amount if a future event occurs
Brokers
Connect buyers and sellers of same security at same location and time
Dealers
Match buyers and sellers of same security at different points in time. Dealer will hold an inventory
Arbitageurs
Transact with buyers and sellers of same security at same time, but in different markets
Securitizers, depositary institutions
Sell interest in a diversified pool of assets - pool assets together and sell the interest to investors
Short position
Gains when asset value decreases - selling short means borrowing asset and selling it in the market, buy back at lower price and pocket difference
Maintanance margin (margin call)
If margin percentage falls below minimum, more cash or securities must be deposited in order to maintain the position
Rate of return on margin transaction
Gain or loss on security position / margin deposit
Trigger price (for margin call)
Po x {(1- initial margin) / (1 - maintanance margin)}
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bid price
Best price at which a dealer will buy a security
Ask/offer price is the price at which a dealer will sell a security
Ask/offer price is the price at which a dealer will sell a security
Market order
Instructs broker to execute the trade immidiately at the best available price
Limit order
Places a minimum execution price on sell orders and a max execution price at buy orders
Day order
expire if unfilled buy the end of the trading day
Immidiate or cancel orders
Canceled unless they can be filled immidiately
Stop (stop loss) orders
A trade at the stop (trigger) price activates a market order
Good-on-close orders
are only filled at the end of the trading day (if the are market orders, they are referred to as market-on-close orders)
Quote-driven markets
Investors trade with dealers (inventory) - less liquid markets
Order-driven markets
There are rules in place which are used to match buyers and sellers (more liquid markets)
Brokered markets
Brokers find counterparty for a trade
A market is said to be complete if: (4 things)
Investors can save for the future at fair rates of return.
Creditworthy borrowers can obtain funds.
Hedgers can manage their risks.
Traders can obtain the currencies, commodities, and other assets they need.
Security market index
is used to represent the performance of an asset class, security market, or segment of a market.
Price return
Looks at movement in price. (ending price/ beginning price) - 1
Total return
Includes cash flow from the securities in the index. {(ending value + CF) / beginning value} - 1
Price-weighted index
sum of stock prices / #stocks in index, adjusted for splits
Higher priced stock have more weight than lower priced stock
Market-Cap Weighted Index
returns are weights based on the market capitalization of each index stock (current stock price times the number of shares outstanding) as a proportion of the total market capitalization of all the stocks in the index.
Float-adjusted market capitalization-weighted index
Index with investable shares
Fundamental index weights
Weights are based on proportion of total value of fundamental factor (e.g. revenue, earnings, book value, cash flow)
Equal-weighted index returns
To calculate the performance of an equal-weighted index, you take the arithmetic average of the returns of all the stocks in the index
Index Rebalancing
Refers to periodically adjusting the weights of securities in an index or portfolio to their target weights
Index reconstitution
occurs when the securities that make up an index are changed. Securities are deleted if they no longer meet the index criteria and are replaced by securities that do.
Types of equity indexes
- Broad market
- Multi-market market cap
- Multi-market with fundamental weighting
- Sector
- Style
Fixed income indexes
- Broad universe, high turnover (bonds mature)
- Lack of price data
- Illiquidity
Informational efficiency
Security prices quickly and fully reflect available info
Weak-form market efficiency
Reflect currently available security market data. If it holds, purely technical analysis has no value
Semistrong form market efficiency
weak-form + incorporate public info. If stock prices are semistrong form efficient, neither technical nor fundamental analysis has any value in stock selection.
Market anomaly
A market anomaly is something that would lead us to reject the hypothesis of market efficiency.
Behavioral finance
Examines investor behavior, its effect on financial markets, how cognitive biases may result in anomalies, and whether investors are rational.
Depository receipts (DRs)
Shares are deposited in a bank. Claims to deposited shares (receipts) trade like local stock in local currency.
