Equity Investments (Terms)

Order Hierarchy

the first rule is price priority. The next rule is display precedence at a given price.

Price Return

Only change in price of stocks.

If index is price-weighted then just HPR

If index is Equal-weighted then calculate return for each stock and then arithmetic average it

Total Return of an investment

Price return + income/dividends

Price weighted index (Based on stock price)

Sum of each security price divided by # of securities.

To calculate return just HPR

Market cap index (Based on # of SO / Market Cap)

Index based on market cap

To calculate return you must do it for each stock independently 

Equal weighted (Based on equal $ invested in each stock)

Arthimetic average of price change for each stock times the initial index value

To calculate return you must do it for each stock independently adn then arthimetic average the change

Fundamental

Usually based on xyz metric

Reconstitution

Check if any current stocks in index need to be removed or new stocks to be added 

Fixed income idex

Similar to SP500 but for FI. Not typically followed a lot by investors with smaller issuers across emerging market for HY bonds leading to low liquidity. FI market is about 3x size of equity size

Commodity index value

Typically priced on future contract prices. If you actually buy oil/commodity then you’d have to physically store and transport it

Hedge fund indexes

Typically determined by constituents of the index due to survivorship bias. No requirement to report return to investors

Common Share

Has voting rights

Preferred Share

No voting rights. Period payment like debt instrument but not contractual

Cumulative Preferred Share

If a company misses a payment for one period then it will accumulate until the next period and must be paid before common

Participatory Preferred Share

Receives additional dividend if profits are above certain level and can be sold at above par value if liquidated

Sponsored Depository receipt

Termed by the company

Unsponsored Depository Receipt

Termed by the depository bank and faces less requirements

Weak Form Market

Based only price and volume. If weak form efficient then Tech Analysis can’t generate abnormal Returns

Semi-strong form Market

Encompasses all publicly available information. Fundamental analysis can’t generate abnormal Returns

Strong form Market

Reflects all information whether private or public. It is always priced in. Private information is of no value and can’t generate abnormal returns

Future vs Forward

Future is standardized while forward is not.

What is a call market

Orders are accumulated and securities trade only at specific times. In a call market, all trades, bids, and asks are at prices that are set to equate supply and demand.

What is a continuous market

trades occur at any time the market is open with prices set

either by the auction process or by dealer bid-ask quotes

quote-driven markets

investors trade with dealers

order-driven markets

rules are used to match buyers and sellers

brokered markets

investors use brokers to locate a counterparty to a trade