savings borrowing debt issuing equity risk management exchange asset utilizing information (information-motivated traders)

Balancing supply and demand for money (The balance point depends on risk, liquidity, maturity)

The money in the market is limited, so ppt5-7 needs to be configured appropriately.

fixed income vs. equity securities

Pooled Investment Vehicles (collective investment products, generally referred to as funds)

public vs. private

Exchange rate represents an economic strength

basic information

how securities are sold

basic information

When trading in the secondary market

how securities are sold

Leveraged Positions (in short, borrow money to invest) Definition: An investor is said to be take leveraged positions if he borrowed funds to purchase an asset. Buy on margin: Investors who use leverage to buy securities by borrowing from their brokers are said to buy on margin and the borrowed funds are referred to as a margin loan.The interest rate paid on the funds is the call money rate. Leverage ratio: The leverage ratio of a margin investment is the value of the asset divided by the value of the equity position. (Own funds 2 purchase stocks with a price of 10, and the leverage ratio is 10/2=5.

Initial Margin（IM）

Maintenance Margin(MM)

Margin Call

Margin Call Price for a Leverage Position (answer the call when it falls to how much)

Make the market: The buying and selling price of the limit price is the best buying and selling price in the current market, providing liquidity.

Make a new market: The limit-price buyer is higher than the best buying price in the current market, but lower than the best selling price, providing liquidity.

Take the market: The limited selling price is equal to the best buying price in the market, and the transaction can be completed immediately, reducing market liquidity.

Behind the market: The limited buying price is lower than the best buying price in the market, or the limited seller price is higher than the best selling price in the market, providing liquidity.

Far from the market: The limited buyer price is far lower than the best buying price in the current market, or the limited selling price is much higher than the best selling price in the current market, providing liquidity.

All-or-nothing orders execute only if the whole order can be filled

Hidden orders only traders can see the order, the market is not displayed

Iceberg orders only show part of the order

A price-weighted index is an arithmetic average of current security prices, which means that indexes movements are influenced by the differential prices of the components. The price-weighted index assumes you purchase an equal number of shares (one) of each stock represented in the index

actual calculation

1. Buy the same number of stocks, simple and easy operation 2. Vulnerable to high-priced stocks 3. If there is a split, adjustments need to be made (2 for 1, one share split into 2 shares, and the market value before the split should be the same). For details, see Sprint Notes P24.

Purchase the same amount, eliminating the impact of receiving high-priced stocks

The geometric mean is always smaller than the arithmetic mean

Actual calculation (first calculate RA, RB, RC, then calculate the average)

Vulnerable to small-cap stocks because their prices are more volatile

A market capitalization-weighted index in which each component's weight is equal to its market capitalization divided by the total market capitalization of all stocks in the index.

actual calculation

Easily affected by large-cap stocks, because large-cap stocks account for a large proportion of the market value in the index, and the momentum effect (momentum effect)

Float-adjusted market-cap weighting: The weight of each stock is determined by the market value of its outstanding shares as a proportion of the total market value.

Excluding the impact of restricted stocks and illiquid stocks, stocks will only have an impact on the market if they can be traded.

The weight of constituent stocks is determined based on value indicators. Value indicators usually use dividends

More value stocks will be purchased, thereby eliminating the shortcomings of the market capitalization weighted method.

value-tilted: more inclined to value stocks

contrarian-style: Adverse selection, generally undervalued stocks are thought to be going down, and they need to be bought when everyone is selling, so they are contrarian.

1. The scope of fixed income is much wider than that of stocks. 2. Fixed income is not only issued by companies, but can also be issued by the government 3. A company can only issue one type of stock, but it can issue multiple types of bonds. 4. The turnover rate of fixed income is relatively high because some expired fixed income will be removed from the index.

Fixed-income securities are mainly traded by market makers, so index creation relies heavily on the prices set by market makers. For example: long-term bonds are illiquid and difficult to price.

In an efficient market, the current price of a security fully, quickly, and reasonably reflects all available information about the security.

1. The time frame for an asset’s price to incorporate information can be used to measure a market’s efficiency. If the time frame of price adjustment allows many traders to earn profits with little risk, then the market is relatively inefficient. 2. An informational efficient capital market is where security prices adjust rapidly to the infusion of new information. 3. Prices should be expected to react only to the elements of information releases that are not anticipated fully by investors. (Information that has been reasonably predicted, and this information actually happens, will not affect the stock price. Only newly released information does not match market expectations, and financial impact affects market expectations.)

Calendar anomalies

The overreaction effect:

Momentum anomalies:

Size effect: Scale effect, the stocks of small companies tend to perform better than the stocks of large companies

Value effect: Value effect, the performance of value stocks is better than the performance of growth stocks

Closed-end investment funds: The value of closed-end investment funds is usually lower than the fund's net asset value because it is less liquid. However, there are costs in trading closed-end funds, so even if they are discounted, they cannot obtain excess returns. It is consistent with the weak efficient market hypothesis.

Earnings announcements: Profit announcements. The company's profit status may not be reflected in the stock price immediately. There will be a time lag in the middle. Then excess returns can be obtained through fundamental analysis, which is consistent with the assumption of weak efficient markets.

Initial public offerings: Overall, the long-term performance of IPO companies is below average, and the performance after the IPO is relatively poor because investment banks consider their own interests and the price at the time of issuance is not fair.

Economic fundamentals: Economic fundamentals, stock fluctuations sometimes deviate from fundamentals (only in the short term), and trading strategies based on dividend yields will not produce sustained abnormal returns.

Common stock is the most common. If the company is liquidated, common shareholders have a residual claim on the assets (after creditors and preferred stock) and have voting rights to manage the company.

voting

Callable common shares redeemable common shares

Putable common shares putable common shares

basic

characteristics

Cumulative preference shares

Convertible preference shares

participating preference shares

Private equity is usually issued to institutional investors via private placements.

Less liquidity because no public market for the shares exists.

Share price is negotiated between the firm and its investors, not determined in a market.

More limited firm financial disclosure because there is no government or exchange requirement to do so.

Lower reporting costs because of less onerous reporting requirements.

Potentially weaker corporate governance because of reduced reporting requirements and less public scrutiny.

Greater ability to focus on long-term prospects because there is no public pressure for short-term results.

Potentially greater return for investors once the firm goes public.

Venture capital

Leveraged buyout (LBO): The risk is small, so leverage is generally used

Private investment in public equity(PIPE)

Buying securities of foreign companies directly in foreign markets, but there are some obstacles: 1. Investments and income are denominated in foreign currencies, which will be subject to the risk of exchange rate fluctuations 2. Some foreign stock exchanges may lack liquidity 3. The reporting requirements in some regions are not strict, which may affect the analysis. 4. Investors must be familiar with local regulations and procedures.

Global Registered Trading: Trade in different currencies on various exchanges around the world Advantages: No need to consider exchange rate risks. Disadvantages: There are too few companies that can register and issue globally, and investment targets are very limited.

definition

classification

Gains from dividends and the reinvestment of dividends have been an important part equity investors’ long-term returns.

For investors who purchase depository receipts or foreign shares directly also subject foreign exchange gains (or losses)

ROE return on equity, investors observe whether the company's management effectively uses capital to generate profits

At any point in time, other conditions remaining unchanged, the expected return rate will increase if the stock price falls, and the expected return rate will decrease if the stock price rises.

A company's cost of equity can be interpreted as the minimum rate of return required to compensate investors for the risk they assume

Generally calculated using the CAPM model: RE=RF β (RM-RF)

Industry analysis is often a critical early step in stock selection and valuation because it provides insights into the issuer’s growth opportunities, competitive dynamics, and business risks.

Industry valuation can be used in an active management strategy to determine which industries to overweight or underweight in a portfolio. Some investors engage in industry rotation, which is overweighting or underweighting industries based on the current phase of the business cycle.

Performance attribution, which addresses the sources of a portfolio’s returns, usually in relation to the portfolios benchmark, includes industry or sector selection. Industry classifications chemes play a role in such performance attribution.

products

services

Cyclical firm: highly dependent on the stage of the business cycle. (Basic manufacturing industry, non-rigid needs)

Non-cyclical firm: demand is relatively stable over the business cycle

definition

limitation

A peer group is a set of similar companies an analyst will use for valuation comparisons.

Rivalry increases when many firms of relatively equal size compete within an industry.

Industries that have significant barriers to entry will find it easier to maintain premium pricing.

Substitute products limit the profit potential of an industry.

Buyers’ ability to bargain for lower prices or higher quality influences industry profitability.

Suppliers’ ability to raise prices or limit supply influences industry profitability.

1. low barriers to entry->little pricing power 2.high barriers to entry do not necessarily mean high pricing power (Overcapacity) 3. Low barriers to exit may have higher pricing power (Exit barriers that are too high will prevent many people from exiting, resulting in too many companies in the industry and a lack of pricing power)

High Industry concentration does not guarantee pricing power (because although concentration is high during recession, pricing power is not large)

Undercapacity -> higher pricing power and higher return on capital Overcapacity -> lower pricing power and lower return on capital

More stable market shares likely indicate less intense competition. If market shares are stable, competition will be less intense and pricing power will be greater.

Can be cyclical or structural (longer-term) trends, most notably economic output as measured by GDP or some other measure, such as interest rates, inflation and education level.

Change an industry dramatically through the introduction of new or improved products.

The demographics include not only the population growth and the age distributions, but also the geographical distribution of people, the changing ethnic mix in a society, and changes in income distribution.

Today’s social trend may be tomorrow’s law, regulation, or tax

How people work, play, spend their money, and conduct their lives.

Consumer perception for certain brands, products, and services

Increased government regulations and protections

Potential disruptions to supply chains and the ability to operate, such as an increase in natural disasters or resource shortages in water or energy

Firm overview, including information on operations, governance, and strengths and weaknesses.

Industry characteristics.

Product demand.

A product costs.

Pricing environment.

A financial ratios, with comparisons to other firms and over time.

Projected financial statements and firm valuation.

Cost leadership

Differentiation

Focus

Percentage difference between market prices and estimated values.

Confidence of the appropriateness of the valuation model.

Confidence of the inputs used in the valuation model.

Reasons why stock is mispriced.

Assume that market price will actually move toward estimated intrinsic value and that it will do so to a significant extent within the investment time horizon.

dividend discount models

free cash flow to equity models

the ratio of stock price to fundamentals

the ratio of enterprise value to fundamentals

A dividend is a distribution paid to shareholders based on the number of shares owned, and a cash dividend is a cash distribution made to company’s shareholders.

The dividends paid by a company that does not pay dividends on a regular schedule or a dividend that supplements regular cash dividend with an extra payment.

Stock dividends is a type of dividend in which a company distributes additional shares of its common stock to shareholders instead of cash.

A share repurchase is a transaction in which a company uses cash to buy back its own shares. Shares that have been repurchased are not taken into account in dividends, voting rights and earnings per share calculations.

Signaling a belief that their shares are undervalued;

Flexibility in the amount and timing of distributing cash to shareholders;

Tax efficiency in markets where tax rates on dividends exceed tax rates on capital gains; (Tax avoidance: capital gains tax is lower than dividend tax)

The ability to absorb increase in outstanding shares because of the exercise of employee stock options. (anti-dilution)

The declaration date

The ex-dividend date The ex-dividend date (the date determined by the exchange) The day before it is the last day to buy stocks and get dividends)

Holder-of-record date Equity registration date

Payment dateDividend payment date

equation

Other variable parameters (how to get other parameters)

Assumption

Limitations

Important Conclusion

the growth rate starts at a high level for a relatively short period of time, then reverts to a long-run perpetual level.

Principle: Split cash flow into left and right parts 1. Calculate the present value formula of the first stage according to the discounted cash flow method: PV1=D1/(1 r ) D2/(1 r )² 2. Calculate the present value of sustainable growth according to the GGM model, which is called terminal value. Then discount the terminal value to time 0, which is the second-stage present value. 3. Finally, add the present value of the first stage and the second stage to get the value of the stock.

Adding up the PV of the three stages is the stock valuation.

1.Valuation obtained by using FCFE involves discounting expected future FCFE by the required rate of return on equity. FCFE reflects the firm’s capacity to pay dividends. 2. FCFE is useful the firm that does not pay dividends or pays dividends but the dividends paid differ significantly from the company’s capacity to pay dividends;

basic information

equation

Compare relative values ​​between one firm to another using price multiples with market price.