Lecture 4- Equity markets Flashcards
What are the 2 main types of shares?
- Ordinary shares
- Preferred shares
What are the 2 main qualities of preferred shares?
- They pay a fixed dividend
- They rank before ordinary shareholders if the firm goes into liquidation
What are the 3 main entitlements for holders of ordinary shares?
- Are legal owners of the firm
- Have voting rights to appoint and dismiss directors
- Receive a share of profits in dividends after all prior claims
Since a share gives its owner a claim upon the nominal profits of a firm, what are our 2 main expectations for equities?
- We expect dividends to vary but grow in the long-run
- The market value of the shares to grow in the long-run
What are 3 main properties for a firm financed entirely by shares?
- Total market value of the shares represents the value’ of the firm
- A shift in the demand for the shares changes the firm’s market value and could make it target for takeover
- The rate of return required by shareholders represents the firm’s cost of capital
What does it mean when an investment bank underwrites a primary market equity issuance?
It guarantees to buy any shares unsold at the issue price
What is a rights issue and why is it called that?
It is when a firm issues additional shares and it’s called that because existing shareholders have a right to buy the new shares
What are the 2 main secondary market trading arrangements?
- Quote driven
- Auctioneer
Describe quote driven markets
Market makers hold inventories of shares and post prices at which they’re always ready to deal
Describe Auctioneer markets
Auctioneer markets involve the electronic matching of buy and sell orders, often at set intervals rather than continuously
What is turnover in the context of equity markets?
Total value of buying and selling over a period, it’s a measure of secondary market activity
What is the Gordon growth model?
The typically used dividend discount model which assumes constant dividend growth rate
What is the key property of the supply and demand model for secondary equity markets?
Supply is fixed (completely vertical) so only demand affects the price
What does a firm’s share price in relation to the value of its assets tell us?
It’s often said that the price of a firm’s shares values it at more than the values of its assets implying that the equity market has overvalued the firm. This might be a warning that the share price is likely to fall in the future
What does technical analysis or chartism involve?
The study of past share price movements in order to establish patterns which it is believed repeat themselves
