Chapter 8: Stocks

arrears

when a company fails to generate enough profit to pay its preferred shareholders their required dividend

auction market

a market where an intermediary facilitates buyers and sellers offering competitive prices. a trade occurs when the highest price a buyer is willing to pay equals the lowest price a seller is willing to receive. the NYSE calls its intermediaries designated market makers (DMMs), which used to go by the name 'specialists'. the NYSE is the world's most important stock market and valuable _____ market.

broker

an agent who arranges security transactions among investors

capital gains yield

the portion of the cost of equity that reflects the return a shareholder receives from the stock changing price; for a stock that has constantly growing dividends, the ______ is the same as the growth rate of the dividends

common stock

equity without priority for dividends or in bankruptcy; typically ______ gives the shareholder one vote per share on issues such as selecting the board of directors, approving the choice of an auditor, changes in the corporate bylaws, and more; in general, the _____ has better voting rights than preferred stock

comparables

assets that are in some sense similar to another asset of interest and serve as a benchmark in the valuation of the target asset

comp set

a group of comparable assets that serve as a benchmark when valuing another asset of interest

consistent

in TVM calculations involving the perpetuity formulae, you must define both the payment frequency and the periodic rate over the same unit of time; start with the payment, then determine the rate

cost of equity

common stockholders' required return, which reflects the opportunity cost of the rate of return on the next best stock of similar risk; for the same company, the _______ is greater than the cost of preferred because common stockholders are the residual claimants

cost of preferred

preferred stockholder's required return, which reflects the opportunity cost of the rate of return on the next best stock of similar risk; for the same company, the ______ is less than the cost of equity because preferred stock has a priority claim over common stock

cumulative dividends

dividends that the issuer of preferred stock must pay, either at the due date or at a later date, if necessary

dark pool

an off-exchange trading platform that caters to institutional investors, including high-frequency traders; unlike NASDAQ and NYSE, dark pools lack transparency

designated market maker (DMM) / specialist

an intermediary who matches buyers with sellers on the NYSE through auctions

dividend

a payment by a corporation to shareholders, made in either cash or stock; dividends are not a liability of the company until declared by the boards; that's true for both common and preferred shares

dividend aristocrats / kings

companies that have very long track records of increasing their annual dividend payouts

dividend discount model (DDM)

a model that values a stock as the present value of all expected future dividends

dividend yield

the portion of the cost of equity that reflects the cash flows a shareholder receives, given the price they pay for the stock

dual-class stock

a corporation with multiple share classes, each of which have different voting rights

EBITDA

earnings before interest, taxes, depreciation, and amortization; crude estimate of company's cash flow

electronic communication network (ECN)

a trading platform that matches securities buyers and sellers directly, helping to avoid the transaction costs associated with exchanges

enterprise value / total enterprise value (TEV)

the market value of equity plus the market value of debt, less cash and cash equivalent; a measure of the ______ of a company; PE firms commonly estimate it by multiplying a company's EBITDA by a size and industry-adjusted multiple

free cash flow

the cash available to the company beyond what is necessary to support current operations and maintain the long-term capital assets; the firm can reinvest it to fund future growth opportunities or pay it to the capital providers

fundamental analysis

a DCF approach to stock valuation; typically, an analyst uses SEC filings to project a corporation's expected future free cash flows, then determine their present value and divides by the shares outstanding to estimate what a share is worth

high-frequency trader (HFT)

a type of speculator that uses big data, enormous computing power, and algorithms to run automated trading programs; HFTs represent a significant portion of trading volume

market multiples analysis / comparables valuation

the application of the law of one price by using a benchmark ratio, such as price-earnings or price-sales, to value a stock

NASDAQ

the largest dealer stock market in the U.S. with more than 3000 listed stocks

NYSE

the world's largest auction stock market, with more than 2,500 listed stocks

supernormal growth / the mixed model

a stock valuation model that assumes an early transitory regime of dividends that do not grow constantly forever, followed by a steady state regime where they do

noncumulative dividends

dividends that the issuer of preferred stock does not pay later if unpaid at the due date

preferred stocks

stock with dividend and liquidation priority over common stock, generally with a fixed dividend rate, and most often without voting rights. typically financial companies issue preferred stock and pay a level quarterly dividend. in general, preferred stock has better cash flow rights than common stock

proxy

a grant of authority by a shareholder allowing another individual to vote his or her shares

terminal value

when using DCF to value a stock, it is a common practice to convert the steady-state perpetual stream of cash flows into a lump sum value at the end of the timeline. the terminal value can be considerable and substantially influence the estimated value of the stock