Equity

Equilibrium Interest Rate

rate at which the amount individuals, businesses, and governments desire to borrow equal to the amount businesses are willing to lend

Forward Contract

an agreement to buy or sell an asset in the future at a price specified in the contract at its inception

Futures Contract

similar to forward, except they are standardized and are traded on an exchange (in a secondary market) so they are liquid

Swap Contract

two parties make payments that are equivalent to one asset being traded for another (interest rates, currency, equity to debt)

Option Contract

gives its owners the right to buy or sell an asset at an specific exercise price at some specified time in the future

Call

gives buyer right to buy an asset

Put

gives buyer right to sell an asset

Insurance Contract

pays cash amount if an issuer defaults on its bonds

Credit Default Swaps

a form of insurance that makes a payment if an issuer defaults on its bonds

Commodities

trade in spot, forward, and futures markets

Futures & forwards allow both hedgers and speculators to participate in commodity markets without having to deliver or store physical commodities

Block Brokers

help with large trades, help conceal their client’s intentions so that the market does not move against them

Alternative Trading Systems (ATS)

serve same trading function as exchanges but have no regulatory funciton

Dealers

facilitate trading from own inventory

some dealers also act as brokers which can be a conflict of interest

Moral Hazard

occurs bc the insured may take more risks once they are protected against losses

Adverse Selection

occurs when those most likely to experience losses are the main buyers of insurance

Counterparty Risk

risk that the other party to a transaction will not fulfill its obligations

Long Position

gains when asset value increases, the buyer of an option (call or put) is long

Short Postion

gains when asset values decrease

Financial Leverage

borrow part of purchase price or post less than asset value with futures

Initial Margin Requirement

minimum equity % at time of purchase

Maintenance Margin

minimum equity % after purchase to maintain a leveraged position.

Bid Price

price at which a dealer will buy a security

Ask / Offer Price

price at which a dealer will sell a security

Primary Capital Markets

sales of new issues of stocks & bonds (IPOs and seasoned oferings)

Secondary Capital Markets

where securities trade after their initial offerins (NYSE, NASDAQ, other OTC)

Underwritten offer

investment bank guarantees security sale

Best Efforts

investment bank acts as a broker

Private Placement

sell directly to qualified investors

Shelf Registration

issue securities over time

Rights Offering

sell new shares to current shareholders

Quote-Driven

investors trade w/ dealers

less liquid markets, less demand for shares

Order-Driven

rules used to match buyers & sellers

more liquid markets, no need for dealer

Brokered Markets

brokers find a counterparty for a trade

(where orders come in)

Call Markets

securities trade at specific times

• all bids & asks are accumulated, then price is set that clears the market

• used in smaller markets & to open major markets

Continuous Markets

trades occur any time the market is open

price is set by auction or by dealer bid-ask quotes

Price Weighted Index (PWI)

a stock market index where each component’s weight is based on its price, affecting the overall index movement

places more weight on high-price stocks, stock splits change all weights

Market-Cap Weighted Index (MCWI)

a stock market index where each component’s weight is based on each stock’s % of total market value of index stocks

Market Float-Weighted Index / Value-Weighted Index

# of shares = investable shares

excludes shares of controlling investors & those held by the government or corporation

more closely matches investable shares proportion

Free Float Index

when shares not available to foreign investors are excluded

Fundamental Index Weight

proportion of index (weights) are based on proportion to total value of a fundamental factor (e.g revenue, earnings, book value etc)

has a value tilt

Momentum Tilt

overpriced have higher weights in value-weighted index

Equal Weighted Index

gives same weight to the performance of each index stock (an equal dollar investment is made in each stock in the index)

places more weight on small-cap stocks vs large cap

Rebalancing

updating index weights on a periodic basis

Reconstitution

periodically adding & deleting securities when it does or doesn’t meet criteria

Informational Efficiency

securityprices quickly and fully reflecting available info

Intrinsic Value

value rational investors would place on the asset w/ full knowledge

if markets are not efficient, market values differ from intrinsic

Weak Form

efficient w/ respect to market information

Semistrong Form

efficient w/ Market info and Public Info

can beat market w/ inside info

Strong Form

efficient w/ market info, public info, and private info

can’t beat the market

Time-Series Anomalies

Observed Market Inefficiencies

• Calendar Effects (increased returns in Jan, turn of the month & Friday)

• Overreaction (price inflated by too much after good news)

• Momentum (high short term returns continue in following periods)

Cross Section Anomalies

Observed Market Inefficiencies

• Size-Effect (small cap stocks outperform large cap)

• Value Effect (low P/E, low market to book, high dividend yield tend to outperform)

Gambler’s Fallacy

recent results affect estimates of future probabilities

Information Cascades

uninformed investors mimic actions of informed investors

Cummulative Voting

allows minority shareholders greater representation, by pooling all votes for one candidate

Cummulative Preferred Stock

must receive any unpaid dividends before common shares may be paid dividends (less risk)

Participating Preferred Stock

receives extra payment if firm does well, claim can exceed par value if firm is liquidated

Non-Participating Preferred Stock

have a claim equal to par value in the event of liquidation, and do not share firm’s profits

Convertible Preferred Stock

can be converted to common shares at a conversion ratio

• preferred dividend > comm dividend

• shareholder can benefit from firm growth by converting to common

• less risky than common stock

Callable Preferred Stock

gives firm the right to repurchase the shares at the call price (more risk than regular shares)

Putable Preferred Stock

gives shareholders the right to sell the shares back to the firm at the put price (less risk than regular shares)

Depository Receipts

represents ownership in foreign firm & are traded in the markets of other countries in local market currency

• trade like local stock in local currency

• depositary bank acts as a custodian & manages dividends, stock splits, and other events

Sponsored Depository Receipts

Firm is involved w/ issue, same voting and dividend rights as shareholders, greater reporting requirements

Unsponsored Depository Receipts

Depository buys shares in foreign market, bank returns voting rights

Global Depository Receipts (GDR)

issued outside the U.S, outside the firm’s home country, denominated in USD

American Depository Receipts

traded on U.S. exchange, denominated in USD, oldest and most common

Global Registered Shares

identical common shares that trade in local currencies on stock exchange

Book Value of Equity

value of firm’s balance sheet, A-L

Market Value of Equity

reflects investor expectations regarding firm risk & the amount and timing of future cash flows

Cost of Equity

Investor’s required rate of return on securities: can be greater than, less than, or equal to ROE

Initial Research Reports

Include:

• front matter

• recommendation & rationale

• company description

• industry overview & competitive position

• financial analysis, valuation

• ESG and other risk factors

Subsequent Reports

Include:

• front matter

• recommendation

• analysis of new info

• valuation

• risks (if they’ve changed)

Pricing Power

extent to which a company can determine selling price w/o impacting sales

firm most likely to have power if product is differentiated

Economies of Scale

occur when output increases & there is a corresponding reduction in unit costs bc fixed costs are spread over more output (may also decrease variable costs)

Economies of Scope

occur when there are increases in divisions or product lines that result in a fall in unit costs bc multiple divisons share cost

Style Box

can be used to classify industries by growth rate & business cycle sensitivity

Herfindahl-Hirschman Index (HHI)

sum of the squared market shares of all market participants, measures industry concentration

Porter’s Five Forces

industry competition dependent on:

• rivalry among existing competitors

• threat of new entrants

• threat of substitute products

• bargaining power of customers

• bargaining power of suppliers

PESTLE Analysis

analysis of external factors affecting an industry

Price Multiplier

Equity Valuation Model

ratio of stock price to earnings, sales, book value, or cash flow

Enterprise Value Multiplier

Equity Valuation Model

ratio of Enterprise value to sales or EBITDA

Stock Split

proportionate increase in shares outstanding (2 for 1), does not change value of stock outstanding

Reverse Stock Split

proportionate decrease in shares outstanding ( 1 for 5), does not change value of stock outstanding

Declaration Date

date board approves dividend

Ex-Dividend Date

first day stock trades w/o dividend, purchaser will not receive dividend

Holder of Record Date

date shareholder must own stock to receive dividend

Payment Date

date checks are mailed or funds are transferred (dividend payment)

Free Cash Flow to Equity

cash available after a firm meets its debt obligations & necessary capital expenditures

useful model for firms that currently do not pay dividends, reflects the firm’s capacity to pay dividends

Price to Book Model

useful for valuing firms w/ primarily financial assets, or companies that will cease soon: not good indicator of a firm’s assets & equity, especially if its growing