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Reporting requirements less• More able to focus on long term• Potentially greater return for investors once firm goes public
Value of the firm's balance sheet assets minus liabilities
Allows minority shareholders greater representation
Refers to investors viewing events in isolation
Typically refer to debt securities that are promises to repay borrowed money in the future.
1) Commodity Indexes• Indexes of future contracts; performance may
differ from commodity• Wide variety of commodity weights2) Real estate
indexes• Appraisals, repeat sales, REITs3) Hedge Fund indexes• Upward
bias from self-selection and survivorship bias
Uses debt to buy all outstanding stock
• High industry concentration doesn't necessarily imply pricing power•
Absolute market share may not matter as much as relative market share
(having large share than next-largest competitor)• Low industry
concentration (market fragmentation) usually results in strong
competition, little pricing power
• Broad Market - various weighting schemes• Multi-market index•
Multi-market with fundamental (GDP) weighting• Sector - Health care,
technology, finance, consumer goods, etc• Style - Large-cap, mid-cap;
value vs growth
• Match portfolio weights to each stock's % of total market value of
index stocks• Firms with larger market capitalizations influence the
index more than firms with smaller market capitalizations• S&P 500,
NYSE Index, and Willshire 5000 are market-cap weighted indexes• Momentum
Tilt: Overpriced are over-represented
• Shares are deposited in a bank• Claims to deposited shares
(receipts) trade like a local stock in local currency• Accounting
standards and market procedures are those of the local market
• Simply an arithmetic average of the prices of the securities
included in the index• Te divisor of a price-weighted index is adjusted
for stock splits and when securities are added or deleted• e.g Dow Jones
Slower growth, intense competition, increasing overcapacity, declining profitability, cost cutting, increased failures
• Trader who owns a stock trading at 35 might enter a stop-sell order
at 31.50• Trader who is short a stock trading at 35 might enter a
stop-buy order at 39• Technician who believes that a trade above 60
indicates a strong upward move will follow, might enter a stop-buy at 60
Receive a payment, referred to as the option premium, when they sell
the options but incur the obligation to sell (buy) the asset at the
specified price if the option owner chooses to exercise it
Provides financing for early stages of firm development
Can be reallocated more quickly to new industries than physical capacity (e.g. Capital, skills)
Preferred stock is less risky than common stock• Fixed dividend•
Receive distribution before common stock• Claim par value if firm is
liquidated
• Stop-Sell Orders: Execute when market prices are falling• Stop-Buy Orders: Execute when the market is rising
•Physical capacity comes into production more slowly than non-physical
capacity• If capacity is physical and specialized, there maybe
overcapacity if producers overshoot
• Primary capital markets: Sales of new issues stocks and bonds (IPOs
and seasoned offerings); proceeds less underwriting fees to issuer•
Secondary capital markets: where securities trade after their initial
offerings (e.g. NYSE, Nasdaq, other OTC)• Secondary markets are
important because they provide liquidity and information about value to
investors
Gives the option buyer the right (but not the obligation) to buy an asset
When trading occurs in clusters, not necessarily driven by information
• Cyclical: Earnings highly dependent on the business cycle•
Non-Cyclical: Earnings largely independent of the business
cycle-Defensive: Basic goods and services with relatively stable
demand-Growth:Demand is so strong the firm is largely unaffected by
business cycle
• Number of market participants • Availability of information• Impediments to trading • Transactions and information costs
• Investors behave in ways that are not rational• Investors have cognitive biases
• Provides funds to buy productive assets to increase shareholder
wealth• Can be used to buy other companies or for employee incentive
compensation• Decreases firm's reliance on debt financing
Reflects investor expectations regarding firm risk, amount and timing of future cash flows
Security prices quickly and fully reflect available information in a statistical sense
Facilitate comparison over time and across countries • Do not
distinguish between public and private, large and small, for profit and
non-profit• Updated less frequently than commercial systems
Intensity of industry competition depends on:• Rivalry among existing
competitors• Threat of new entrants • Threat of substitute products•
Bargaining power of buyers• Bargaining power of suppliers
If equity< maintenance margin, investor must add cash or marginable
securities, or must close the positionP0 [1-initial
margin/1-maintenance margin]
• Closed-End funds: sell at a discount• Slow adjustments to earnings
surprises• IPOs: Initial overreaction, long-term underperformance •
Stocks react to economic fundamentals (but perhaps they should)
• Market Value: Price at which asset can be bought • Intrinsic Value:
Value that a rational investors with full knowledge about the asset's
characteristics would willingly pay• If market are not efficient, market
values differ from intrinsic values in predictable ways
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