S11: Equity Securities Flashcards
Equity Securities
Issued by a firm to raise money for projects, investors contribute money to firm in exchange for a % of ownership
Bankruptcy
Inability to meet DEBT obligations, an all equity firm can’t go bankrupt
Raising Capital
Often a mix of debt and equity, optimal mix depends on a firm’s financial position, stage of development, and market conditions
Cost of Debt
Interest, coupons, yields
Cost of Equity (Riskier)
Dividends (if paid), give up ownership, capital gains
Common stock rights
Voting at firm’s annual meeting, dividends if paid, residual claim, preemptive rights
Residual Claim
What remains after debt paid if liquidation occurs
Preemptive Rights
Sometimes have ability to buy new stock first before it is offered to public, not common but beneficial for shareholders who don’t want their ownership to be diluted if more equity is raised
Voting
Generally 1 share = 1 vote, thus large shareholders can exert significantly more influence
Deal Class Share Structure (voting)
Some shares have more than 1 vote to protect founders’ power over the firm
Straight Voting (voting)
Cast votes for each director
Cumulative Voting (voting)
Cast all votes for one or few directors (may give more power to smaller voters, uncommon in US)
Proxy (voting)
Submitting vote via ballot or a grant of authority to another individual to vote your share(s)
Proxy Fight (voting)
Occurs when shareholders attempt to oust existing directors by soliciting proxies from other dissatisfied voters
Staggered/Classified Boards (voting)
Occurs when firm only has some of their directors up for election at an annual meeting rather than all - unpopular with stakeholders bc it protects management
Preferred Stock
Equity shares that pay cumulative dividends, no voting rights and may be callable, payed before common stock in liquidation events
Cumulative Dividends
If dividends are skipped, payouts build and must be paid first before common stockholders receive any dividends
Why are banks and financial institutions among the largest issuers of preferred stock?
It allows them to raise capital while maintaining legal capital requirements (e.g. debt to equity ratio)
Equity Primary Markets
Firm raises money through the sale of stocks or bonds (such as an IPO)
Equity Secondary Markets
Equity securities exchange hands among dealers, brokers, and investors (firm itself doesn’t make $)
Dealers
Own inventories of securities and make $ through bid-ask spread. This is more risky than being a broker because they actually need to by the securities and can lose money if no one wants to by them
Brokers
Match traders and transact on their client’s behalf. They make $ through commissions and fees from matching buyers and sellers.
Broker-Dealers
Serve both roles as intermediary by matching buyers and sellers or trading from their own account
Exchanges and Dealer Networks
Venues where trading of securities takes place
Electronic Communication Networks (ECN)
Match buyers and sellers directly via electronic networks
New York Stock Exchange (NYSE)
In person exchange with floor brokers and designated market
Floor Broker
Receive requests from their clients to buy or sell a stock, then seek out a dealer on NYSE floor (DMM)
Designated Market Maker (DMM)
Buy or sell shares, or can match them with another broker who has that stock
National Association of Securities Dealers Automated Quotations (NASDAQ)
An electronic market of dealers only, they post their bid and ask prices and transact directly with one another by trading over the counter virtually
Capital Market Efficiency
Stock prices vary through time as buyers and sellers of securities bid up prices of securities or sell out and reduce their price. Their actions are based on reactions to news info, practically immediately, after news comes to market
Efficient Market Hypothesis
Idea that security prices reflect all available information - thus stock prices “effectively” reflect news and info
High Frequency Traders (HFT)
Making thousands of transactions per second, like Citadel, need to be slowed down by speed bumps at times
Speed Bump
Actual physical long wires between HFTs and trading network to slow them down
Weak Form Market Efficiency
Security prices reflect all past and publicly known stock price info, looking forward analysis may be helpful
Semi-Strong Form Market Efficiency
Security prices reflect everything in weak form as well as investor’s expectations about the future, insider info is useful but illegal
Strong Form Market Efficiency
Security prices reflect everything before as well as private info
Intrinsic Value of Stock
Price qual to the “true” value with all possible news already included
