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CFA > Equity > Flashcards

Equity Flashcards

Discover market organization, security market indices, market efficiency, equity securities, industry and company analysis, and equity valuation.

1
Q

Define:

All-or-nothing

A

An order with the instruction to trade only if the entire quantity fills.

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2
Q

Define:

American depository receipt

A

A US dollar-denominated security, representing shares in a foreign entity, which trades like a common share on US exchanges.

Issued by US banks

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3
Q

Define:

American depository share

A

The underlying shares on which American depository receipts are based. They trade in the issuing company’s domestic market.

key to note the difference between american depository receipts and shares.

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4
Q

Define:

Alternative trading systems

A

Trading venues which function like exchanges but do not exercise regulatory authority over their subscribers.

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5
Q

Define:

Arbitrage

A

Simultaneously going long an undervalued asset and shorting an overvalued but equivalent asset. Doing so results in a riskless profit on the price differential. Taking advantage of a market inefficiency in a risk-free manner.

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6
Q

Define:

Ask (Offer)

A

The price at which a participant is willing to sell an asset.

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7
Q

Define:

Asset-based valuation models

A

Valuation based on the market value of a company’s assets.

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8
Q

Define:

Asset beta

A

Unlevered beta; reflects the business risk of the assets.

the asset’s systematic risk

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9
Q

Define:

Bid

A

Price at which a participant is willing to buy an asset.

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10
Q

Define:

Bid–ask spread

A

The difference between the prices which market participants are willing to buy or sell an asset at.

Often used as an indicator of liquidity.

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11
Q

Define:

Bottom-up analysis

A

An approach, when selecting an investment, that starts by considering the merit of all securities within a specified investment universe. (Rather than starting with a macro economic focus and then narrowing down the universe first).

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12
Q

Define:

Call market

A

A market in which trades occur only at a particular time and place (i.e., when the market is called).

ex. auctions

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13
Q

Define:

Closed-end fund

A

A mutual fund in which no new investment money is accepted. New investors can buy existing shares, and current investors liquidate by selling their shares. (No new shares).

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14
Q

Define:

Common shares

A

Security which represent an ownership interest in a company.

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15
Q

Define:

Constituent securities

A

The individual securities within an index.

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16
Q

Define:

Continuous trading market

A

A market in which trades can be arranged and executed any time the market is open.

As opposed to a call market

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17
Q

Define:

Crossing networks

A

Trading systems which match buyers and sellers trading at prices obtained from other markets.

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18
Q

Define:

Cumulative preference shares

A

Preference (preferred) shares where any dividends missed/not paid accrue. They must be paid before dividends on common shares can be paid.

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19
Q

Define:

Dark pools

A

Alternative trading systems which do not display orders received.

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20
Q

Define:

Dealers

A

Financial intermediary that acts as a principal in trades.

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21
Q

Define:

Depository institutions

A

Financial institutions which raise funds from depositors and other investors and lend it to borrowers.

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22
Q

Define:

Depository receipt

A

A security which trades like an ordinary share on a local exchange but represents an economic interest in a foreign company.

Note that American Depository Receipts only trade on American exchanges.

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23
Q

Define:

Discriminatory pricing rule

A

A pricing rule in continuous markets- limit price of the order which arrived first determines the trade price.

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24
Q

Define:

Dividend discount model

DDM

A

A present value model used to estimate the intrinsic value of equity as the present value of its expected future dividends.

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25
Q

Define:

Dividend payout ratio

A

Cash dividends paid:earnings

for a given period

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26
Q

Define:

DuPont analysis

A

Used to deconstruct return on investment (return on equity) as the product of other financial ratios.

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27
Q

Define:

Earnings per share

A

Net income in a period per share of common stock.

NI/Shares outstanding

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28
Q

Define:

Efficient market

A

A market in which asset prices reflect new information quickly and rationally.

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29
Q

Define:

Enterprise value

A

A measure of a company’s total market value.

Equity + Debt - cash and short-term investments

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30
Q

Define:

Equal weighting

A

Index weighting method- an equal weight is assigned to each constituent security at inception.

Requires constant rebalancing

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31
Q

Define:

Exchanges

A

Where traders meet to arrange their trades.

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32
Q

Define:

Execution instructions

A

Instructions that indicate how to execute (fill) an order.

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33
Q

Define:

Free cash flow to equity (FCFE)

A

The cash flow available to a company’s common shareholders

after all operating expenses, interest, principal repayments, and necessary investments in working and fixed capital have been made.

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34
Q

Define:

Free cash flow to the firm (FCFF)

A

The cash flow available to all of the company’s suppliers of capital.

after all operating expenses have been paid and necessary investments in working capital and fixed capital have been made.

35
Q

Define:

Free-cash-flow-to-equity models

A

Valuation models where expected FCFE is discounted to arrive at a PV.

36
Q

Define:

Fundamental weighting

A

Index weighting method- weight assigned to each constituent security is based on the company’s size or a fundamental metric (ex. revenue, book value).

Independent of the constituent security’s price, thus reducing momentum tilt (results in more of a value tilt).

37
Q

Define:

Global registered share

A

A common share that is traded on different stock exchanges around the world in different currencies.

38
Q

Define:

Global depository receipt

A

A depository receipt issued outside of the company’s home country and outside of the United States.

39
Q

Define:

Herding

A

When many trade together, often following the decisions of others.

May or may not be based on valid information.

40
Q

Define:

Homogeneity of expectations

A

The assumption that all investors have the same economic expectations.

41
Q

Define:

Initial margin requirement

A

The amount of equity that must be in an account in order to borrow to invest. This is done as a means of protecting the lender.

The margin requirement on the first day of a transaction.

42
Q

Define:

Initial public offering

IPO

A

When common shares are first issued in the public market. Typically by a formerly private corporation.

Done with assistance from Investment Banks.

43
Q

Define:

January effect

A

Anomaly- stock market returns in January are significantly higher compared to the rest of the months of the year.

Most of the returns are in the first 5 trading days.

44
Q

Define:

Life-cycle stage

A

The point a business is at within the business life cycle.

embryonic, growth, shakeout, mature, declining.

45
Q

Define:

Leveraged buyout

LBO

A

A transaction where a firm uses leaverage (borrowing) to purchase a target company and converts it to a privately held company.

46
Q

Define:

Limit order

A

Instructions to buy or sell at the best price available, while not accepting a price higher (buying) or lower (selling) than a specified price (the limit price).

47
Q

Define:

Long position

A

A position in an asset or contract in which one owns the asset or a right under the contract.

Short positions do not own the asset/right, what they hold is an obligation.

48
Q

Define:

Maintenance margin

A

Minimum amount of capital required to maintain a margin account or position. If margin balances drop below the required maintenance margin -> must contribute more to their accounts.

If drops below and isn’t replenished, clearinghouse/exchange may close positions.

49
Q

Define:

Margin

A

The amount of money that a trader has in a margin account. A certain amount of capital must be in the account, and this margin capital grants the trader access to trades with greater exposure than just the margin in the account.

50
Q

Define:

Margin call

A

When the margin in the account falls below the required level (maintenance margin), the broker/exchange sends this request to deposit additional funds

51
Q

Define:

Market

A

Where buyers and sellers are brought together to exchange goods and services.

52
Q

Define:

Market anomaly

A

Movement in price of a security which isn’t explained by current known information or the release of new information.

Opposes Efficient Market Hypothesis

53
Q

Define:

Market-capitalization weighting

A

Index weighting method- the weight of each constituent security is determined by dividing its market capitalization by the total market capitalization of all securities in the index.

aka value weighting

54
Q

Define:

Market multiple models

aka multiplier models

A

Valuation models based on multiples

share price or enterprise value multiples.

55
Q

Define:

Market order

A

Execution Instructions to buy or sell at the best price immediately available.

56
Q

Define:

Open-end fund

A

A mutual fund that accepts new investment money (issues additional shares) at a value equal to the current net asset value.

57
Q

Define:

Order-driven markets

A

A market where trades are arranged based on the orders that traders submit.

Main driver is the orders submitted, not the quotes provided by dealers.

58
Q

Define:

Order precedence hierarchy

A

Rules determining which orders execute before other orders (which take precedence).

59
Q

Define:

Over-the-counter (OTC) markets

A

A decentralized market where buy and sell orders initiated from various locations are matched through a communications network.

60
Q

Define:

Participating preference shares

A

Preference shares which pay the standard preferred dividend plus grant holders an opportunity to receive an additional dividend (if the company’s profits exceed a pre-specified level).

Get to participate in some of the success of the company.

61
Q

Define:

Passive investment

A

A long-term buy and hold approach (not influenced by short term movements).

Contrasted with active investment.

62
Q

Define:

Price multiple

A

Comparing the relationship between share price and some sort of monetary flow or value (revenue, book value, etc) to discern a relative value for the equity shares.

63
Q

Define:

Price return

A

The price appreciation (percentage change in price) for the securities in an index or portfolio.

Differs from total return which also includes income.

64
Q

Define:

Price weighting

A

Index weighting method- weight assigned to each constituent security is determined by dividing price by the sum of all the prices of the constituent securities.

65
Q

Define:

Primary market

A

The market where securities are sold for the first time. Issuers receive the proceeds.

66
Q

Define:

Private investment in public equity

PIPE

A

An investment by a private investor in shares of a public company. (usually purchased at a discount).

67
Q

Define:

Private placement

A

Typically an unregistered offering of securities, sold only to an investor or a small group of investors (not open to the public).

May use assistance from investment bank

68
Q

Define:

Quote-driven market

A

A market in which quotes provided by dealers drive the activity in the market.

Dealers act as principals.

69
Q

Define:

Reverse stock split

A

When a firm decides to reduce the number of shares outstanding. Doing so results in a corresponding increase in share price, but no change to the company’s underlying fundamentals.

70
Q

Define:

Secondary market

A

The market where securities are traded among investors.

As opposed to primary markets, where securities are initially sold by the issuer to the investors.

71
Q

Define:

Sector

A

A group of related industries.

72
Q

Define:

Security market index

A

A portfolio of securities which represent a market, market segment, or asset class.

73
Q

Define:

Semi-strong-form efficient market

A

A market in which security prices reflect all publicly known and available information.

Investing based on fundamentals shouldn’t be able to produce returns in excess of the market return.

74
Q

Define:

Short position

A

A position in an asset or contract that results in holding an obligation (either to buy back the security or to fulfill the contract).

Benefit from the value of the asset or contract declining.

75
Q

Define:

Stock split

A

When a firm decides to increase the number of shares outstanding, resulting in a decrease in share price but no change to the company’s underlying fundamentals.

76
Q

Define:

Stop order

aka stop loss order

A

When a stop price order is placed, the order specifies a price at which to initiate a sale. (If the price declines to the specified level, sell the security).

77
Q

Define:

Terminal value

A

The expected value at the end of the investment horizon.

78
Q

Define:

Total return

A

Measures the price appreciation plus any income received over the period.

As opposed to price return

79
Q

Define:

Validity instructions

A

Instructions which indicate when the order may be filled.

80
Q

Define:

Warrant

A

Attached option that giving the right to buy the underlying stock of the issuing company at a fixed exercise price until the expiration date.

81
Q

Define:

Weak-form efficient market

A

Belief that security prices fully reflect all past market data (price and volume data).

Technical Analysis shouldn’t provide returns in excess of the market return.

82
Q

Define:

Perfect capital markets

A

Markets without trading frictions (taxes, transaction costs, etc.) and where investors have equal information.

83
Q

Define:

Strong-form efficient market

A

When all information (public or private) is fully and immediately reflected in asset prices. No investor having access to public information, private information, or insider information, can consistently achieve higher returns than the market average

CFA (10 decks)

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