Chapter 12 Supplement B: Equity Securities Chapter 12 Supplement B Equity Securities

 2005 Kaplan Financial 2 Chapter 12 Supplement B: Equity Securities Basic Concepts of Ownership- Type Investments What Ownership Means Dividends Capital Appreciation Voting Maintaining Ownership Percentage Liability

 2005 Kaplan Financial 3 Chapter 12 Supplement B: Equity Securities Types of Equity Securities Common stock Preferred stock Foreign securities

 2005 Kaplan Financial 4 Chapter 12 Supplement B: Equity Securities Categories of Common Stocks Defensive stocks Cyclical stocks Blue chip stocks Growth stocks Income stocks Interest-sensitive stocks Value stocks New economy stocks

 2005 Kaplan Financial 5 Chapter 12 Supplement B: Equity Securities 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

 2005 Kaplan Financial 6 Chapter 12 Supplement B: Equity Securities 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

 2005 Kaplan Financial 7 Chapter 12 Supplement B: Equity Securities Risks of Equity Securities Systematic Risks Market risk Interest-rate risk Exchange-rate risk Unsystematic Risks Business risk Financial risk Country risk

 2005 Kaplan Financial 8 Chapter 12 Supplement B: Equity Securities Equity Markets and Benchmarks Primary market – where new issues of securities are first offered to the public Secondary market – where investors can 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

 2005 Kaplan Financial 9 Chapter 12 Supplement B: Equity Securities Equity Markets and Benchmarks (cont.) Market Indexes and Averages Dow Jones Industrial Average (DJIA) Standard & Poor’s 500 Index (S & P 500) Nasdaq Russell Indexes Wilshire 5000 Index EAFE Index

 2005 Kaplan Financial 10 Chapter 12 Supplement B: Equity Securities Equity Markets and Benchmarks (cont.) Characteristics of a good benchmark include: Unambiguous Investable Measurable Appropriate Reflective Specified in advance

 2005 Kaplan Financial 11 Chapter 12 Supplement B: Equity Securities Measures of Return Holding Period Return Arithmetic Mean Geometric Mean Time-Weighted and Dollar-Weighted Returns Dividend Yields

 2005 Kaplan Financial 12 Chapter 12 Supplement B: Equity Securities Purchasing Equity Securities Long Positions Short Positions Margin Accounts Types of Orders Market Limit Stop Loss Stop Limit

 2005 Kaplan Financial 13 Chapter 12 Supplement B: Equity Securities Valuation Methods Technical Analysis Fundamental Analysis

 2005 Kaplan Financial 14 Chapter 12 Supplement B: Equity Securities Valuation Models Valuing preferred stock Dividend discount model Price to earnings (P/E) ratio Valuing the company vs. valuing the stock Capital Asset Pricing Model E(R p ) = R f + B(R m – R f ) V= D k V0V0 = D1D1 k-g P/E= D 1 /E k-g