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Level 72

Equity Markets & Stock Valuation

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Why does a company issue stock?
why would the founders share the profits with thousands of people when They could keep profits to themselves?
the company pays Dividends
What are the two ways Shareholders receive cash?
How does the forecasting of dividends work?
-Analysts can estimate future earnings by observing past performance, and adjusting for future macroeconomic and firm-specific conditions
Define Common stock
Equity without desire for dividends or bankruptcy
What are some Shareholders Rights for common stock?
Shareholders elect directors through annual meeting who, in turn, hire management to carry out their instructions
How many votes can a shareholder of common stock have?
a shareholder can have countless votes depending on the amount of shares that that shareholder has
How might voting for directors differ in some companies?
The most important difference is whether shares be voted cumulatively or voted straight
Define Cumulative Voting and its features
A procedure in which a shareholder may cast all votes for one member of directors
Total allowed Votes = Number of shares (Owned) x Number of directors to be elected
How do you find out how many votes a shareholder can cast if cumulative voting is permitted?
N = (ds / D+1) +1
What is the formula to find how many votes someone needs to get a seat for a director position?
Define Straight voting and its features
With straight voting, you have a number of votes equal to the number of shares you have, and you vote on each director's seat separately
What is the difference between Straight voting and Cumulative voting?
-With straight voting, you have a number of votes equal to the number of shares you have, and you vote on each director's seat separately.
the question here is how many shares of stock It Will take to get a seat.
Stock in JRJ corporation $20 sells for $20 per share and features cumulative voting. There are 10,000 shares outstanding. If there directors are up for election, how much does it cost to ensure yourself a seat on the board?
Define Staggered Elections
a staggered board of directors (also known as a classified board) is a board that is made up of different classes of directors
Here is an example of a Staggered Election:
Thus, if only two directors are up for election at any one time, it will take 1/(2 + 1) = 33.33% of the stock plus one share to guarantee a seat
What are the effect of Staggering
Overall, staggering has two basic effects:
Define Proxy
A grant of authority by a shareholder allowing another individual to vote that shareholders shares
How does a Proxy fight work?
-The typical way that a proxy fight works is that shareholder activists are dissatisfied with a particular aspect of the company, and seek to effect change in that area; however, they often run into resist…
Why do firms have different classes of stock?
The main reason control over the firm: If such stocks exists, management of a firm can raise equity capital vy issuing nonvoting or limited-voting stock while maintain control
What is preemptive right?
a preemptive right means that a company that wishes to sell stock must First offer It to the existing stockholders before offering It to the General Public
Define Dividends
Payments by a corporation to shareholders, made in either cash or stock
future Earnings
Future dividends are a function of:
Define Preferred Stock and some of the main features
a class of ownership in a corporation that has a higher claim on the assets and Earnings than Common stock.
What are some features of preferred stock?
Preferred stock generally has a dividend that must be paid out before Dividends to Common stockholders
What are some similarities of preferred stock and common stock?
both Preferred and Common Dividends are voluntary (even though Preferred Dividends are paid before Common Dividends)
Define a Primary Market
The primary markets are where investors can get first crack at a new security issuance
Define a Secondary Market
The secondary markets is where investors can purchases existing shares traded among investors
It involves a dealer and a broker
Which type of people are involved in most securitiy transactions?
Define a Dealer
A Dealer maintins an inventory and stands ready to buy and sell at any time
Define a Broker
A Broker brings buys and sellers together, but does not maintain an inventory
Historically, how many members did the NYSE have?
What happened at the NYSE in 2006?
If you owned a trading license you were considered a member.
What privilege to do you get with owning a license?
You can buy and sell securties on the floor of the stock exchange
What happened to the NYSE in 2007?
the NYSE completed a merger with Euronext to form the NYSE Euronext.
Define Floor Brokers and their Features
-They are NYSE member's who execute trades for consumers, with an emphasis on getting the best price possible
What is a specialist and their duities?
They are NYSE members who act as dealers in particular stocks
to attract order flow
What is the the NYSE's operational goal?
Define Order Flow
The flow of customer orders to buy and sell
What is the NASDAQ?
-Introduced in 1971, the NASDAQ market is a computer network of securities dealers who disseminate timely security price quotes to NASDAQ subscribers.
What the difference between NASDAQ and the NYSE?
-Unlike the NYSE DMM system, NASDAQ relies on multiple market makers for actively traded stocks
How does the NASDAQ Operate?
The NASDAQ network operates with three levels of information access
Describe Electronic communications networks (ECN)
ECNs are Basically websites that allow investors to trade Directly with one another.
Remember to read "Stock Market reporting" on Pg. 226!!!!!
Remember to read "Stock Market reporting" on Pg. 226!!!!