Stock and Stock Market Flashcards
(21 cards)
What are ordinary shares?
Common stocks where owners have voting rights and a residual claim on profits (variable dividends)
What are preference shares?
Preferred shares which have fixed dividends paid before ordinary shareholders.
How are stocks traded?
Primary Market, Secondary Market, ECNs
What is the primary market?
Where new shares are issued by companies
What is the secondary market?
Where existing shares are traded by investors
What is ECN?
Electronic Communication Networks which are automated systems that connect traders
What are rights issues?
When a firm goes public there is an Initial public offering. But if the firm is already public there will be a second equity offering but this can lead to share dilution as profit spread across more shares
What are ETFs?
Exchange-traded funds are a collection of stocks, bonds or commodities traded together. They lead to portfolio diversification as highly liquid and flexible.
Why are ETFs so desirable?
Low transaction cost, highly liquidable, good for portfolio diversifying
Give two examples of stock indices?
Standard and Poors 500, FTSE 100
What is intrinsic value?
The true value based on future cash flows
What is the market price?
The current trading price
Intrinsic > Market
Buy (undervalued)
Intrinsic < Market
Sell (overvalued)
Intrinsic = Market
Hold
How to calculate the balance sheet model?
Work out equity (assets - liabilities) then divide by number of shares outstanding and this gives us book value per share. calculate equity per share and whoever has highest is a firm that should be valued higher
How to work out relative valuation and market multiples?
Estimate average of median values and multiply this average P/E ratio by expected earnings to estimate stock price
How to work out P/E ratio?
Share price/earnings per share
How to get liquidation value?
When doing a balance sheet model, minus liabilities from the market value of assets
How to do relative valuation?
Values a stock by comparing it to other firms using financial ratios. Then work out average P/E and multiply by the expected earnings of the company to get a stock price
What are the problems with the DDM?
Assumes firms pay dividends, requires many assumptions regarding growth rate
