Equities Flashcards by Alex Brangham

What are the two capital structures in a corporation?

1) Risk Capital (equity, ordinary shares)
2) Debt, borrowings

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Which of the capital structures is last in line if the company winds up?

1) Risk Capital

hence the name

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What rights does an ordinary share get?

1) Right to dividend
2) Right to vote

Lowers priority for dividends & wind up capital

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Key points on preference shares

Receive a fixed payment (twice yearly)
Rarely have the right to vote
Only paid when company has the profit to do so
(can have the right to vote if dividends fall into arrears)

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What is the gordon growth model formula?

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When a company gets large enough what might it seek to do?

IPO

Can list on main market
alternate market
or overseas

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What is a depository receipt

An instrument created by a

Represents shares in a foreign company
allows it to trade like a domestic stock
e.g. Dividend and price in USD
no FX / cross border hassle

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How does investment theory price a share?

NPV of all future cash flows

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What is one flaw in the Gordon Growth model?

Assumes the company pays a dividend

e.g. Microsoft and Apple didn’t

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What types of companies are more likely to pay dividends?

More mature companies

Smaller companies have to reinvest in themselves

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What is the M&M theory

Payout via growth / dividend is irrelevant

Price is based on a companies ability to grow & increase profits

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What assumptions does the M&M theory make?

1) No Taxes
2) No transaction costs
3) Leverage has no impact on WACC

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What is liquidity dependant on in equity markets?

Division of Opinion

Liquidity is a determinent of share price

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What does a near consensus opinion cause in equity markets

Liquidity Evaporates

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What is the most popular framework for equity markets?

Electronic Orderbook

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Give an example of a market which does not use an electronic market book:

London Metal Exchange (LME)

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What are 8 pieces of information that influence share price?

1) Firm Specific Factors (Profit / Growth Outlook)
2) Macro (Cycle, interest rates etc.)
3) Legal Issues
4) Government Policy (Fiscal / Monetary)
5) Other Stock Markets
6) Geopolitcal Risks (Trade, War & Terrorism)
7) Economic Surveys (e.g. PMI)
8) Board Membership

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What does consistent dividend growth signal to the market?

What is the effect of a change in dividend?

Solidity in the company

Unsettles the market, can lead to a sell-off. E.g. COVID

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Some companies / industries are more affected by the wider market. Give an example:

Housebuilders

Struggle with high interest Rates

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Points about markets being correlated:

Globalisation has caused a convergence in performance
Western equities highly correlated
US 0.98 to MSCI World
In BRIC and Emerging countries, the correlation to the west is far lower.

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How can behavioural factors influence share price.

Disposition Effect
Net buyers of attention grabbing stocks
Buy prices rises
Sell falls (& bad news)

There is no rational reasoning behind these.

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Who create classifications for equity fund types?

The investment association (IA)

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What is UK All Companies?

(IA)

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Invests at least 80% in UK equities

(objective of capital growth)

What is APAC ex-Japan

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80% in APAC

Max 5% in Japan

What is Global Equity Income? ## Footnote IA

80% Equities (diversified geographically) (Yield of >100% of MSCI world) ## Footnote 100% on 3yr rolling & 90% of annual basis

What correlation helps reduce concentrated losses?

Low or Negative

What are the risks of equity?

- Volatile - No guarentee of Dividend - Capital at risk - Risk of dillution - Not a large enough shareholder to have a meaningful voice - Rank last in liquidation

What are the benefits of equity investing?

- Potentially unlimited gain - Dividend payment - Voting Right - Best returning asset class - Higher liquidity

What does Beta show?

The correlation of the return on an qeuity to a return on the market.

What do these Beta's show: 1) B=1 2) B=2 3) B=0.5 4) B=0 5) B=-1

1) Moves in line 2) Moves Wider 3) Moves less wide 4) Doesn't move with market 5) Inverse

What is the most common way equities are traded?

Through a broker

What are the two types of brokerage service:

Discretionary Non-Discretionary

What is discretionary brokerage?

The broker has discretion to execute trades without client input (within defined perameters)

What are the two types of non-Discretionary brokerage?

1) Advisory - Client has final say but receives advice 2) XO - Broker carries out client instructions (no advice)

What are brokers expected to consider at all times?

The appropriateness of the service based on client circumstances

What is algorithm trading?

Using computers to buy or sell securities under a set of instructions (e.g. price, size, time etc.)

What problem was algorithm trading introduced to solve?

A fund place a large trade 1) Other firms front run 2) Risk is placed onto original firm 3) agile traders could position themselves to unduly benefit

How did algorithm trading solve the issue of front running?

Algorithms can seek out pools of liquidity. Larger trades are now fragmented and executed over time at the optimal price

How has fragmentation of trades negatively effected equity trading?

Order books are less transparent as it is unclear if a trade is small or part of a larger trade. It has also led to the development and use dark pools.

Why have MAR laws been introduced re: Algo Trading

Algorithm trading has been blamed for flash crashes due to the volatility it can cause. ## Footnote GBP/USD fell 9% for 40 seconds due to algos

What are the three forms of market efficiency

1) Weak Form 2) Semi-Strong 3) Strong

What does weak form EMH say?

Current asset prices reflect historic market information

What does semi-strong form EMH say?

Prices reflect all publicly available information

What does strong form EMH say?

Prices reflect all information, both public and private. ## Footnote Would argue that excess alpha is impossible to consistetly generate.

What does random walk theory claim?

Share price movements cannot be predicted based on historic movements. Only new information can influecne the price of a share, and this itself is random.

What two observable effects can argue against the random walk theory?

1) Monday Effect 2) January Effect - highest price rises at beginning of year ## Footnote January effect - potentially a result of end of tax year in the US.

What is the underpinning notion of behavioural finance?

Investors are not rational. They exhibit cognitive biases

What is loss aversion and how can it be overcome?

Loss aversion is the belief that given an equal gain or loss. The emotion from a loss is more significant. This causes individuals to hold onto their stocks for too long. Don't get emotionally attached to investments

What is Overconfidence Bias? How can it be overcome?

Too much belief in personal abilities - leads to overtrading To avoid this, trade less, invest more.

What is anchoring?

Setting an initial value as a refernce point and not moving it.

What is herd bias?

The tendency to follow / copy others investments / behaviours as it is popular

Two types of stock tip reports:

1) Press Recommendations 2) Analyst / Broker Recommendations

How do stock tip / recommendations received by the market?

Prices can increase or fall due to reports. However, in some cases the fall can be coincidental.

How do speculators operate in the equity market?

1) Short term view 2) Long or short for quick profit 3) Can naked short sell 4) Can be susceptible to short squeezes

How do takeovers / M&A affect share price?

Acquirer has to pay premium which drives up the target share price. Acquirer won't see share price move up so often.

What 3 other factors influence share price?

1) Index membership 2) Programme Trading 3) Corporate Actions

What is equity crowdfunding? Give 3 examples of platforms:

Allows investment for a stake in the business, value rises or falls with the success of the project. 1) Seedrs 2) Crowdcube 3) Yielders (Sharia Compliant) ## Footnote Seedrs have introduced a secondary market that enables the trading of shares in unlisted companies on a secondary market.

Equities Flashcards

(57 cards)