Equity Securities (AssetClasses2) Flashcards
What are equity securities?
Equity securities are a way for investors to become partial owners of a company, sharing in both the company’s risks and rewards.
(stocks)
You can either buy common stock or preferred stock.
What is common stock?
Common stock (equities) is a security that represents ownership in a corporation. Each share entitles its owner
to one vote on corporate policies and on the election of the board of directors. Shareholders also have a
proportional share in the financial benefits of ownership (e.g. dividends).
If a shareholder doesn’t attend, they can vote by —
proxy
(allowing someone else, usually management, to vote on their behalf)
Characteristics of common stock
- residual claim
- limited liability
- stock listings
- Shareholders on an ongoing firm
are only entitled to the part of operating income left after interest and taxes have been paid - shareholders are not personally liable
- Equities are “listed”: officially registered to trade on an exchange like the NYSE.
Each listed stock has a spot on the stock
exchange’s board, displaying info like…
- firm’s ticker symbol (unique code)
- daily volume traded
- expected dividend, dividend yield and P/E ratio
Dividend Yield Formula
Dividend yield= expected dividend per share / price
P/E ratio formula:
price to earnings ratio
P/E = price / earnings per share
What is the P/E ratio for?
helps investors understand how expensive or cheap a company’s stock is relative to its earnings
it is a measure of the relative valuation of a company
What is Preferred Stock?
Preferred stock is a hybrid security. It is an equity security in that it does represent ownership of a corporation, but resembles a perpetual bond in that it promises to pay a fixed income (dividends) each year and does not give the holder voting rights.
has characteristics of both equity (ownership) and debt (fixed income)
Preferred dividends are paid — any dividends to common stockholders.
before
In contrast, coupons on perpetuals have to be serviced in time and form. Failure
would trigger a default.
What bond-like features does preferred stock have?
- call options (in this case, we call it redeemable)
- convertible
- adjustable-rate clauses
- they can bee redeemed (bought back) by the company before set date
- can be converted into common stock
- adjustable dividends that change based on current interest rates (similar to floating rate bond)
What are ADRs?
American Depository Receipts
American Depository Receipts
negotiable certificates issued (by a depository bank) and traded in the US that represent ownership of a specified number of shares of a foreign company´s stock. ADRs offer investors the possibility to invest in a foreign company, not listed in the US.
