Capital Markets - Equity Markets

Flashcards on Equity Markets

Convertible Preferred Shares

Entitle the shareholders to convert their shares into a specified number of common shares where the conversion ratio is determined at issuance.

Commercial Banks Participation in Stock Markets

Issue stock to boost their capital base and manage trust funds that usually contain stocks.

Stock-Owned Savings Institutions Participation in Stock Markets

Issue stock to boost their capital base.

Savings Banks Participation in Stock Markets

Invest in stocks for their investment portfolios.

Finance Companies Participation in Stock Markets

Issue stock to boost their capital base.

Stock Mutual Funds Participation in Stock Markets

Use the proceeds from selling shares to individual investors to invest in stocks.

Securities Firms Participation in Stock Markets

Issue stock to boost their capital base, place new issues of stock, offer advice to corporations that consider acquiring the stock of other companies, and execute buy and sell stock transactions of investors.

Insurance Companies Participation in Stock Markets

Issue stock to boost their capital base and invest a large proportion of their premiums in the stock market.

Pension Funds Participation in Stock Markets

Invest a large proportion of pension fund contributions in the stock market.

Initial Public Offering (IPO)

A first-time offering of shares by a specific firm to the public.

Prospectus

A document containing detailed information about the firm, including financial statements and a discussion of risks, filed with the SEC during the process of going public.

Lead Underwriter

Determines the offer price at which the shares will be offered during the IPO.

Syndicate

A group of other securities firms used to participate in the underwriting process and share the fees to be received for the underwriting.

Flipping

A strategy adopted by some investors who know about the unusually high initial returns on many IPOs; they attempt to purchase the stock at the offer price and sell the stock shortly afterward.

Overallotment Option

Allows the underwriter to allocate an additional 15% of the firm’s shares for a period of up to 30 days after the IPO.

Lockup

Prevents the original owners of the firm and the VC firms from selling their shares for a specified period.

Spinning

Occurs when the underwriter allocates shares from an IPO to corporate executives who may be considering an IPO, or to another business that will require the help of a securities firm.

Laddering

Brokers encourage investors to place first-day bids for the shares that are above the offer price.

Secondary Market

Allows investors to sell stocks that they previously purchased to other investors, creating liquidity for investors who invest in stocks.

Intrinsic Value

Based on an analysis of investment fundamentals and characteristics.

Secondary Stock Offering

A new stock offering by a firm whose stock is already publicly traded.

Preemptive Rights

Corporations sometimes direct their sales of stock toward their existing shareholders by giving them preemptive rights.

Shelf Registration

Corporations can publicly place securities without the time lag often caused by registering with the SEC.

Stock Repurchases

Firms tend to repurchase some of their shares when share prices are at very low levels, signaling management’s perception that the shares are undervalued.

Designated Market Makers

Match orders of buyers and sellers in organized exchanges.

OTC Bulletin Board

Lists stocks that have a price below $1 per share, which are sometimes referred to as penny stocks.

OTC Markets Group

Has three segments where even smaller stocks are traded: OTCQX, OTCQB, and Pink.

Dividend Yield

Annual dividend per share as a percentage of the stock’s prevailing price.

Price-Earnings Ratio

Represents its prevailing stock price per share divided by the firm’s earnings per share generated over the last year.

Dow Jones Industrial Average

A value-weighted average of stock prices of 30 large U.S. firms.

Standard & Poor’s 500

A value-weighted index of stock prices of 500 large U.S. firms.

Wilshire 5000 Total Market Index

An index containing more than 5,000 stocks and is the broadest index of the U.S. stock market.

Dividend Policy

Dictates the amount of dividends paid out by the company and the frequency with which the dividends are paid out.

Payout Ratio

The proportion of earnings that are distributed as dividends (Dividends / Net Income).

Ex-dividend date

The first date that a share trades without the dividend

Stock Dividend

A type of dividend in which a company distributes additional shares of its common stock to shareholders instead of cash.

Stock Split

Involves an increase in the number of shares outstanding with a consequent decrease in share price.

Reverse Stock Split

Involves a reduction in the number of shares outstanding with a corresponding increase in share price.

Limit Order

Places a limit on the price at which a stock can be purchased or sold.

Stop-Loss Order

Investor specifies a selling price that is below the current market price of the stock, designed to protect gains or to limit losses.

Stop-Buy Order

Investor specifies a purchase price that is above the current market price.

Margin Trading

Investors use cash along with funds borrowed from their broker to make the purchase.

Maintenance Margin

The minimum proportion of equity that an investor must maintain in the account as a proportion of the market value of the stock.

Short Selling

Investors place an order to sell a stock that they do not own, borrowing the stock from another investor and returning it later.

Spread

The difference between the ask price and the bid price.

Trading Halts

Stock exchanges may impose trading halts on particular stocks when they believe market participants need more time to receive and absorb material information that could affect the stock’s value.

Blue Chip Stocks

Companies that have demonstrated their ability to pay dividends in both good and bad times.

Growth Stocks

Shares of corporations whose earnings are expected to grow at an above-average rate relative to the market.

Defensive Stocks

Shares that provide regular dividends and stable earnings, regardless of the overall condition of the stock market.

Transaction Fee

0.005% of the value of transaction in the Philippine Stock Market, exclusive of 12% value-added tax (VAT).

Private Equity

Issued primarily to institutional investors via non-public offerings, such as private placements.

Venture Capital (VC)

Provides “seed” capital, start-up capital, or early-stage financing to companies that are in the early stages of development and require additional capital for expansion.

Leveraged Buyout (LBO)

Occurs when a group of investors uses a large amount of debt to purchase all of the outstanding common shares of a publicly traded company.

Public Equity

When a firm goes public, it issues stock in the primary market in exchange for cash.

Common Stock

Represents partial ownership in a corporation and a predominant type of equity security.

Cumulative Voting

Allow shareholders to direct their total voting rights to specific candidates instead of allocating their voting rights evenly among all candidates.

Preferred Stock

Represents equity interest in a firm that usually does not allow for significant voting rights but ranks above common shares in terms of dividend payments and of distribution of net assets upon liquidation.

Derivatives

A financial instrument that derives its performance from the performance of an underlying asset.

Seller (Writer, Short)

In derivatives, referred to as the short because he holds a short position.

Forward Contracts

An OTC derivative contract in which parties agree that one party (buyer) will purchase an underlying asset from the other party (seller) at a later date at a fixed price they agree on when the contract is signed.

Futures Contracts

A standardized derivative contract created and traded on a futures exchange in which two parties agree that one party (buyer) will purchase an underlying asset from the other party (seller) at a later date and at a price agreed on by the two parties when the contract is initiated and in which there is a daily settling of gains and losses and a credit guarantee by the futures exchange through its clearinghouse.

Mark to Market

At the end of each day, the clearinghouse engages in a practice to determine an average of the final futures trades of the day and designates that price as the settlement price. All contracts are then said to be marked to the settlement price.

Margin Call

A request to deposit additional funds to bring the balance to the initial margin.

Cost of Carry

The holding, storing, or "carrying" of an asset is said to incur a net cost that is essentially what it takes to "carry" an assets.

Backwardation

When futures prices are lower than the spot price, the commodity forward curve is downward sloping.

Contango

When futures price higher than spot price, the commodity forward curve is upward sloping.

Convergence

Over time, as the futures contract approaches maturity, the futures price will converge with the spot price, otherwise an arbitrage opportunity would exist.

Swap contracts

An OTC derivative contract in which two parties agree to exchange a series of cash flows whereby one party pays a variable series that will be determined by an underlying asset or rate and the other party pays either (1) a variable series determined by a different underlying asset or rate or (2) a fixed series.

Options

A derivative contract in which one party pays a sum of money to the other party and receives the right to either buy or sell an underlying asset at a fixed price either on a specific expiration date or at any time prior to the expiration date.

Credit Derivative

A class of derivative contracts between two parties, a credit protection buyer and a credit protection seller, in which the latter provides protection to the former against a specific credit loss.

Credit Default Swap

A derivative contract between two parties, a credit protection buyer and a credit protection seller, in which the buyer makes a series of cash payments to the seller and receives a promise of compensation for credit losses resulting from the default of a third party.

Protective put

Composed of holding a long position in the underlying asset and purchasing a put option

Fiduciary call

Composed of purchasing a call option and risk-free zero-coupon bond that will pay X at expiration

Option Arbitrage

Refers to the buying and selling of options to take advantage of mispricing in the premium or price of options