Week 10 Flashcards
What is price discovery?
Typically price impact is bad for us because it makes our price worse as the trade occurs and it will return to normal afterwards. However, if we are an informed trader then our informed trading can push the price to reflect our information, this is known as price discovery, in this case the higher and higher prices (or lower and lower if we are selling) are not temporary and our shares will stay more valuable.
What is price slippage?
Price slippage refers to the movement in price that can occur in between deciding to place an order, placing that order, and having it filled.
What does the buy side of the asset management landscape consist of? What about the sell side?
people like investment managers, or retail investors, the sell side sells investments to the buy side and includes services like research and consists of things like brokers, analysts, dealers, market makers, and investment banks. The buy side is usually in a natural position of seraching for assets to buy.
Note that we must not use buy and sell side to refer to the bid side and ask side of the CLOB respectively, this is abuse of reserved finance terms.
What is an off-market trade? What are some special things about them?
A privately negotiated deal usually between institutions, though sometimes one counterparty is an individual. Doing this can be useful when two parties wish to exchange a large number of shares, as otherwise they will eat through every limit order, causing price impact. They are executed outside the CLOB, but at an execution price at or within the CLOB bid-ask spread if executed during regular trading hours.
They can even have more fine increments of prices. These trades are not price setting, because they are a price taking rather than price making trade.
Where are price making and price taking trades executed?
A price taking trade is executed outside the CLOB, a price making trade is executed in the CLOB.
How does shorting a stock work?
The stock is borrowed from someone who likely will not need it soon (done by broker), these are typically from index or mutual funds. Then the stock is sold in the marketplace, any proceeds and extra margin money serves as collateral for the stock loan. If the shorted stock receives a dividence we must pay that dividend to whoever we have borrowed the stock from.
What are some reasons to short a stock?
Speculating on a price fall, holding a speculative long-short position, we are an options market maker hedging a put option we sold, or we could be short a stock to hedge a risk.
What is a long-short position?
We go long on a selection of perceived good stocks, and then short the market, this causes our beta of the portfolio to be effectively 0, helping our performance be stable at the cost of some performance. A long-short position will also mean that its return is uncorrelated with other positions.
What are some reasons for a company to pay or not pay a dividend?
- They have nothing better to do with the money, cannot produce a return good enough to justify not paying a dividend.
- Agency issues, in that investors worry that if managers retain earnings they may waste the money on frivolous things, so dividends are paid instead.
- Clientele reasons. Some investors like dividend income and as such demand it, which rival firms may supply.
- Dividend policy is a signal from managment of expected future earnings.
- The tax treatment of dividends can influence corporate policy.
- Some theoretical option-related arguments suggest that managers compensated with options might be less likely to pay dividends because dividends decrease stock bolatility and as such reduce the value of options.
What are the important dividend dates?
Declaration/announcement date, at which point the dividend becomes a legal liability.
The ex-dividend day, if you buy the stock on or after this day you do not get the dividend, all before do.
The date of record, also called book closing, is then those entitled to the dividend are acknowledged.
The payment date, this is when the dividend is actually paid.
What is an Ex-rec regime in dividends?
In an Ex-rec regime the ex-date comes before the record date, preventing cconfusion that may occur if the record date is earlier than the latest date to buy the stock for the dividend.
What does T+2 settlement mean? Why can this be important for dividends? What occurs if we sell a stock on or after the ex dividend date?
It takes 2 business days for a shares transaction to properly settle, New Zealand has this.
We will only be paid a dividend if the transaction settles on or before the record date. If we sell a stock on or after the ex-dividend date we will still get the dividend.
Does cutting a dividend hurt stock prices? What about increasing it without strong fundamentals?
stockholders and managers view a cut in dividends as a signal that future earnings will be insufficient to sustain dividends at the current level. This lowers stock prices if management cuts dividends. Management therefore aims to not give unsustainable dividend increases, even forgoing positive net present value investments, and borrowing, rather than cutting the dividend.
Firms however, cannot fool the market by increasing dividends, only the underlying profitability increases the stock price over the long run.
Stocks do get bid up roughly 10% if a company announces dividends after 10 years of no dividends, and lowers stock prices roughly 20% if a company announces no dividend after 10 years of paying one.
What are the two main things CFO’s look at for choosing dividends?
the level of current and expected future earnings, and the pattern or continuity of past dividends are CFO’s primary motivators for dividends.
What are the three legs of retirement?
personal savings, a private Direct benefit pention from your employer and government social security.
