stocks and bond markets Flashcards
what is the stock market
financial marketplace where buying, selling and issuing shares of publicly held companies take place
- provides platform for companies to raise capital by selling ownership stakes to investors
what are shares/ stocks
represents ownership in a company
- when u own it, u become a shareholder and have a claim on a portion of the company’s assets and earnings
what are listed companies
companies that offer their shares for public trading are listed on a stock exchange
what are primary markets
a financial market in which new issues of shares are sold to initial buyers
- this facilitates new financing to corporations
what is a secondary market
one in which securities that have been previously issued are resold
- most of the trading of securities take place here
what 2 important functions do secondary markets serve
- they make financial securities more liquid - makes securities more desirable to investors = easier to sell in primary market
- set the price of the securities the firms sell in the primary market
what are stockbrokers
investors sell and buy stocks through stockbrokers - act as intermediaries
what are stock market indices
provide a snapshot of the overall market or specific sectors
what are bull and bear markets
bull market
- period of rising stock prices and optimism
bear market
- period of falling prices and pessimism
what is market capitalisation
the total value of a company’s outstanding shares of stock
- multiply the share price by the number of outstanding shares
what are dividends
some companies distribute a portion of their profits to shareholders in the form of dividends
- such payments are one way investors can receive returns on their investment
what is dividend yield
financial ratio that represents the annual dividend income an investor can expect to receive from an investment ( expressed as a percentage of the investments current market price)
- annual dividend/ current share price
- higher this - higher income relative to the investments current market price
- high this may also be because of declining stock price = financial distress
what is price to earnings ratio
valuation metric that compares a company’s current stock price to its per-share earnings
- provides insights into how much investors are willing to pay for each dollar of a company’s earnings
- current share price/ earnings per share
- high P/E = investors expect higher future earnings growth - willing to pay a premium =overvaluation
how do we determine the value of a company and its shares
- market value - price of the share x the number of shares issued
- look at the company’s balance sheet and identify the total value of the company’s assets and minus the liabilities
- tells us the book value of the company’s equity
what is equity
what is owned by the shareholders and essentially includes all the issued shares plus all the profits made by the company and not returned to shareholders but, instead, reinvested back into the company
why is the book value of a company’s assets considerably lower than the market value
the book value = a historical measure of the firm’s asset value after paying off debts
the market value = forwards looking measure of the firms ability to generate earnings from its existing assets and future investments
how do we determine the value of an asset
sum of the present value of all cash flows generated by an asset
what is the problem with the dividend discount model
impractical to use - we dk the all the dividends paid by a stock until infinity
- we may only be able to estimate the next one or two dividends based on analysis of the company
- cant use the model for valuing a stock without making an assumption about how dividends evolve over time
what are the 3 assi,pitons that are commonly used to make the dividend discount model usable
- dividends are constant - no growth over time
- dividends grow at a constant rate
- dividends grow at different rates over different periods of time
what are bonds
debt securities that are traded in markets issued by companies and governments to raise money from investors today in exchange for a promised future payment
- terms of the bond : bond certificate - indicates amounts and dates of all payments to be made
- payments of the bond are made until a final repayment date = maturity date
- they have maturity of greater than one year
- provide source of long-term finance
- referred to as fixed interest as the cash flows they deliver to an investor and the dates the cash flows are paid tend to be known in advance
what is par value
the nominal value of the bond that is repaid to the bondholders at maturity
- oso known as the principal or face value
what is a coupon
periodic payment of interest on a bond
- general paid semi-annually
- coupon rate is the coupon expressed as a percentage of the par value
what is maturity date
the specified date on which the par value of the bond must be repaid
what are the different type of bonds
- zero coupon bond - bond that pays no interest (coupon)
- the only payment is par value
- compensated for the time value of your money : sold at a discount to par value so an investor will receive return in the form of capital appreciation - coupon bond
- bond that pays both coupons and par value