Stock Markets

Equity securities represent

ownership interest in a corporation.

The opinions of investors about the economic prospect of a company are expressed through

the trades they execute

Investing in equity: common stock

Right to vote and pay dividends

Investing in equity: Preferred stock

Usually no right to vote, but pay fixed dividends (higher priority)

Why does the stock market outperform T-bills?

Stocks are riskier

Stocks are not just riskier but more exposed

systematic fluctuations

in equilibrium, stocks should provide_ _ _ in order to induce investors to hold them

higher expected returns

Return for holding a share comes in two forms

Dividend & capital gains (or price appreciation) Mathematical notation"

r (return) should be _ than the T-Bill rate

Higher

The difference between the expected return on equity and the risk-free rate is called the

equity risk premium.

High systematic risk leads to

High expected Return

What measures how much compensation investors receive for taking on risk

equity risk premium

"We value equities the same way we value any other asset!

We discount the future stream of cash flows.

This approach is called the"

dividend discount model

What valuation models do firms use if they don't pay a dividend or its dividend pattern is irregular

"Multiple valuation

Discount Cash flow model (DCF)"

Multiple phases

this is a flexible method to value stocks

First step in when looking at phases

identify growth stages

Second Step when looking at phases

Calculate the PV of each stage.

Third Step when looking at Phases

Sum everything together

Stock market indices are frequently used

"to monitor the behavior of a group of stocks"

Stock market indices represent

the returns on certain portfolios.

Different way stocks can be weighted

"Price-weighted average (e.g., DJIA)

Equally-weighted average (e.g., Value Line Composite)

ª Value-weighted average (e.g., S&P 500, Nasdaq Composite)"

Assume to buy 1 share of each stock. What weighted average is this?

Price weighted average

Assume to invest the same dollar amount in each stock. What weighted average is this?

Equally weighted average

Assume to invest in stocks proportional to their market values. What weighted average is this?

Value weighted average

A price-weighted index based on

30 large US corporations.

A value-weighted index based on

500 large US corporations

The S&P 500 uses a

market capitalization weighting method

The DJIA is a

Price-weighted index

ETFs are like

mutual funds but traded like stocks in an exchange

can contain various securities

ETFs

allow investors to take various investment positions

ETFs

can be passively or actively managed

ETFs

depositary receipt (DR) is a

"negotiable certificate representing shares in a foreign company traded on its local/foreign stock exchange"

What does ADR stand for

American depositary receipt

What does GDR stand for

Global depositary receipt