Equity investments part 1 Flashcards
Q: What are the main asset classes in the investment universe
A: The main asset classes in the investment universe are equity investments, fixed income securities, derivatives, and alternative investments.
Q: How do equity investments differ from fixed income securities in terms of risk and return
A: Equity investments are considered medium to high risk/return, while fixed income securities are considered low to medium risk/return.
A: Equity investments are considered medium to high risk/return, while fixed income securities are considered low to medium risk/return.
A: The characteristics of a well-functioning market include timely and accurate information on price and volume of past transactions, liquidity, internal efficiency, and informational (external) efficiency.
Q: What is the primary market
A: The primary market is where securities are initially offered to the public, and most issues are distributed with the aid of an underwriter.
Q: What is the secondary market
A: The secondary market is where existing securities are traded, and it includes functions such as liquidity and providing information about market prices.
Q: What is the Over-the-counter market
A: Over-the-counter markets include the trading of securities not listed on registered exchanges.
Q: How do derivatives differ from equity investments in terms of risk and liquidity
A: Derivatives are considered high risk/return and medium to high liquidity, while equity investments are considered medium to high risk/return and high to medium liquidity.
Q: What is the role of an underwriter in the primary market
A: In the primary market, an underwriter provides three services: origination, risk bearing, and distribution. They assist in the design, planning, and registration of an issue, insure or guarantee the price by purchasing the securities, and help to sell the issue.
Q: How do security exchanges differ in terms of trading methods
A: Security exchanges can be structured as call markets or continuous markets. In call markets, the stock is only traded at specific times and a market clearing price is set. On continuous markets, the price is set by either the auction process or by dealer bid-ask quotes.
Q: How do NYSE, Nasdaq, LSE, and TSE compare in terms of trading volume
A: These are the largest security exchanges in terms of volume, with NYSE, Nasdaq, LSE, and TSE being the largest.
Q: What are the main functions of the OTC markets
A: Over-the-counter markets include the trading of all securities not listed on one of the registered (national or regional) exchanges. OTC markets are negotiated markets, where investors negotiate directly with dealers.
Q: How does the size of OTC markets compare to the NYSE in terms of value
A: In terms of numbers, OTC markets are the largest market in the U.S., while in terms of value it is about 60% of the NYSE size.
Q: How do you calculate the price-to-earnings ratio (P/E ratio) for a stock
A: To calculate the P/E ratio, divide the current market price per share by the earnings per share (EPS). For example, if a stock is currently trading at $50 per share and has EPS of $5, the P/E ratio would be 10.
Q: How do you calculate the dividend yield for a stock
A: To calculate the dividend yield, divide the annual dividend per share by the current market price per share. For example, if a stock has an annual dividend per share of $2 and is currently trading at $50 per share, the dividend yield would be 4%.
Q: How do you calculate the return on equity (ROE) for a company
A: To calculate the ROE, divide the net income by the shareholder’s equity. For example, if a company has net income of $10 million and shareholder’s equity of $50 million, the ROE would be 20%.
