Midterm Review (Prof. Hamid)
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| Money Market | < 1 year
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| Capital Market | > 1 year
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| Money market securities give you: | capital gains
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| Cash Account | Trades using only the investor's money are used on this account
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| Margin Account | Part of the investment is financed through loan from the banker on this account
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| Formula: Margin | Margin = equity / market value of securities (% investment funded by investor's money)
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| Hypothetication Agreement | Allows brokerage firm to pledge the investor's securities as collateral for bank loans of securities purchased using a margin account; securities purchased through margin accounts are registered under broker's name
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| Initial Margin Requirement | The Federal Reserve has the power under Regulation "T" to specify the minimum initial margin (currently 50%)
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| Return on Equity (ROE) | ROE = leverage factor (x) return on stock; which is the (change in price / original price)
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| Leverage Factor (LF) | LF = 1 / IM
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| Formula: Call Price (Long Position) | P(c) = P(buy) x (1-IM / 1-MM)
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| Formula: Call Price (Short Position) | P(c) = P(sell) x (1+IM / 1+MM)
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| Buying Power | Additional amount investors can borrow and invest in securities w/o putting up additional cash; you can borrow up to the amount that makes your margin 50%
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| Formula: Buying Power (BP) | BP = [(1/IM) - 1] (x) equity (x) debt
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| Profit (Long Position) | end.value - beg.value + dividends - buy comm. - sell comm. - interest paid on margin loan
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| Profit (Short Position) | beg.value - end.value - dividends - sell comm. - buy comm. - interest paid on margin loan + interest recv'd on margin deposit
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| Formula: Stock Price Index | Index(t) = ∑P(t) / n
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| Problems w/ Stock Price Index | (1) ignores no. of shares outstanding (2) does not account for stock splits (3) does not account for new listing or delisting
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| Solution to Stock Price Index Issues | Given three stocks (A)=10, (B)=11, (C)=12; w/ stock split of A, Index(t) = 9.33 but should equal 11; solution? Find new divisor. Index after the split: (5+11+12) / d =11, so d = (5+11+12) / 11 = 2.5454
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| Formula: Value Weighted Index | Index(t) = ∑MV(t) / n
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| Problems w/ Value Weighted Index | (1) listing and delisting (2) scale
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| Solution to Value Weighted Index Issues | For listing and delisting, change divisor so that index does not change; for issues w/ scale (total MV can be in billions) convert to % of base index
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| Formula: Equally Weighted Index | Index(t) = ∑R(i) / n
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| Stock Return | R = (P1-P0+D) / P0
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| Stock Return (2-for-1 split) | Dividend before the split: R = (2*P1-P0+D) / P0; After the split: R = (2*P1-P0+2*D) / P0
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| Formula: Net of Tax Return | R(net) = R(gross)*(1-t)
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| Formula: Real Return (adjusted for inflation) | R(R) = [(1+R(N)) / (1+inflation)] - 1
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| Arithmetic Link | ∑R(i)
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| Geometric Link | π(1+Ri) - 1
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| Geometric Mean | GM = [π(1+Ri)]^(1/n) - 1; for reporting past performance, GM is best.
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| Formula: Future Value | FV = PV(1+R)^n
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| Formula: Beta | β = Cov(i,m) / Var(m)
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| Beta of Company w/ no debt (βu) | βu = βL / [(1+(1-t)*(D/E)]
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| Beta of Company w/ debt (βL) | βL = βu[1+(1-t)*(D/E)]
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| Fundamental Theorem of Valuation | The value of an asset is the present value of its expected cash flows. In equilibrium, price is the PV of expected future cash flows
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| Steps in valuation: | (1) forecast future CF's (2) estimating cost of capital (3) calculate PV
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| Stock Valuation Assumption | Stocks never mature; live forever; cash flows are perpetual
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| Dividend Growth Model | Stocks pay dividends, therefore the natural model of stock valuation is the Dividend Discount Model
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| CAPM | Required(R) = Rf + (Rm - Rf) * β
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| Primary Markets | Market where new securities are sold and funds go to issuing unit.
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| Secondary Markets | Market where existing securities are bought and sold by investors; provides liquidity and price discovery (Ex. NYSE, NASDAQ, TSE, LSE)
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| Broker | Intermediary between buyers and sellers; gets the buyer and sellers together to execute a trade for a commission; bears no risk
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| Dealer | Trades on its own account; holds an inventory of stocks; buys from sellers and sells to buyers hoping to make a profit; bears risk
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| New York Stock Exchange (NYSE) | Largest organized securities market in the US; broker/dealer market; approx. 2,850 companies listed; total market value about $12 trillion; avg. daily trading of about $52 billion
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| Commission Brokers | Execute customer buy and sell orders
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| Floor Brokers | Broker's broker; used by CB when there are excess orders; less important now because of the electronic Super DOT system
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| Registered Traders | Also called floor traders; trade only on their own account; try to profit off temporary mispricing; add liquidity and are highly regulated
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| Odd Lot Dealers | Deal in odd lots orders (<100 shares); one-third of all orders are odd lot
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| Specialists | (1) Act as dealer, or market maker, in specific stocks; must maintain a fair and orderly market in these stocks; handles 15 stocks on avg. (2) Act as a broker for limit orders (3) Ultimate insiders; highly regulated; randomly audited 8 times a year
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| National Association of Security Dealer Automatic Quotation (NASDAQ) | Network of electronic quotation systems for the OTC market; bid-ask spread is greater since dealers make money on spread; makes dealer quotes available immediately; largest segment of US secondary market in terms of no. of issues
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| NASDAQ - figures | (1) total market value about $3 trillion (2) avg. daily trading value about $31 billion (3) about 20% of all trading is done on ATS
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| NASDAQ - Level 1 Access to Quotes | Level 1: provides single median representative quote for each stock; quote is for brokers and clients that buy and sell
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| NASDAQ - Level 2 Access to Quotes | Level 2: provides instant current quotes on stocks by all market makes in a stock; it is for firms that consistently trade OTC stocks; brokers check quotes and contact dealer w/ best quote
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| NASDAQ - Level 3 Access to Quotes | Level 3: is for OTC market makers; allows market makers to change their own quotations
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| Block Trades | transaction of > 10,000 shares
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| Third Market | Trading of exchange listed stocks by dealers and brokers in the OTC marker
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| Fourth Market | Trade between 2 parties without a broker intermediary; usually between 2 institutions for large orders; uses alternative trading systems (computerized electronic brokers)
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| Electronic Communication Networks (ECNs) | Electronic brokers for small orders involving mostly retail and small institutional trading
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| Electronic Crossing Systems (ECSs) | Electronic brokers for large orders
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| New System: Super Dot (NYSE) | Electronic order-routing system; report of execution returned electronically; 85% of NYSE orders enter through Super Dot system
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| New System: Display Book (NYSE) | Electronic workstation that keeps track of all limit orders and incoming market orders, including Super Dot limit orders
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| New System: Opening Automated Report Service (OARS) for NYSE | Pre-opening market orders for Super Dot system; automatically and continuously pairs buy and sell orders; presents imbalance to the specialist; helps determine opening price
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| Investment Banker (roles Pt.1) | (a) advise and counsel; provide expertise; evaluate market (b) underwriting; purchase IPO or new seasoned issues of stocks and bonds from firms as a dealer and sell them to buyers; IB often guarantees the issue
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| Investment Banker (roles Pt.2) | (c) advisors and deal makers for mergers and acquisitions (d) provide bridge loans (e) create new products: derivatives and asset-backed securities
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| Underwriting | When the investment banker purchases the entire stocks or bonds from the issuer and resells the security for a profit.
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| Syndicated Underwriting | For large issues, the sale is usually done through a group of underwriters
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| Shelf Registration | Rule 415 allows firms to register securities and sell them piece by piece over the next two years
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| Market orders | Buy and sell stated no. of shares immediately
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| Limit order | Customer specifies maximum price for buy order, and minimum price for sell order
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| Stop-Sell order | Sell if price falls to or below stop price
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| Stop-Buy order | For short positions, buy if price increases to or above stop-buy price
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| Stop-Limit Orders | When investors specify two prices: a stop price and a limit price
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| Illegal Trading Activities | (1) bucket trade (2) churning (3) cross trade (4) wash sale (5) ponzi schemes
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| Dividend Discount Model | For capital budgeting: Ke = (D1/P0) + g
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| Constant Dividend Growth Model | P* = D1 / (Ke-g)
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| Formula: Dividend per Share | Div/Share = payout ratio (x) EPS
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| To forecast growth: | g = retention rate (x) ROE, in which the retention rate is equal to (1-payout)
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Created by:
mgonz06
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