Equity Securities

1
Chapter 14

• Equity Securities

2
Basic Concepts of Ownership Type Investments

• What Ownership Means
• Dividends
• Capital Appreciation
• Voting
• Maintaining Ownership Percentage
• Liability

3
Basic Concepts of Ownership Type Investments
(cont.)

• Industry Life Cycle
• Start Up
• Rapid Growth
• Growth/Consolidation
• Maturity
• Decline
• Which phase is the best time to invest?

4
Types of Equity Securities

• Common stock
• Preferred stock
• Foreign securities

5
Categories of Common Stocks

• Defensive stocks
• Cyclical stocks
• Blue chip stocks
• Growth stocks
• Income stocks
• Interest-sensitive stocks
• Value stocks
• New economy stocks

6
Preferred Stock

• Preferred stock
• has characteristics of both fixed-income
  investments and of common stock
• dividend payments must be paid each year prior to
  paying a dividend to the common shareholders

7
Methods of Investing in Foreign Securities

• American Depositary Receipts (ADRs)
• Foreign Mutual Funds
• Foreign Closed-end Funds
• Purchasing Foreign Shares on foreign stock
  exchanges
• International iShares

8
Risks of Equity Securities

• Systematic Risks
• Market risk
• Interest rate risk
• Exchange rate risk
• Unsystematic Risks
• Business risk
• Financial risk
• Country risk

9
Equity Markets and Benchmarks

• Primary market where new issues of securities
  are first offered to the public
• Secondary market where investors can freely buy
  and sell securities with other investors
• Third market over-the-counter trading of equity
  shares listed on an exchange
• Fourth market institutional traders that trade
  without the help of brokers

10
Equity Markets and Benchmarks (cont.)

• Market Indexes and Averages
• Dow Jones Industrial Average (DJIA)
• Standard Poors 500 Index
• Nasdaq
• Russell Indexes
• Wilshire 5000 Index
• EAFE Index

11
Equity Markets and Benchmarks (cont.)

• Characteristics of a good benchmark include
• Unambiguous
• Investable
• Measurable
• Appropriate
• Reflective
• Specified in advance

12
Measures of Return

• Holding Period Return
• Arithmetic Mean
• Geometric Mean
• Time-Weighted and Dollar-Weighted Returns
• Dividend Yields

13
Purchasing Equity Securities

• Long Positions
• Short Positions
• Margin Accounts
• Types of Orders
• Market
• Limit
• Stop Loss
• Stop Limit

14
Valuation Methods

• Technical Analysis
• Fundamental Analysis

15
Valuation Models
D

• Valuing preferred stock
• Dividend discount model
• Price to earnings (P/E) ratio
• Valuing the company vs. valuing the stock
• Capital Asset Pricing Model
• E(Rp) Rf B(Rm Rf)

D