Financial Markets Test 4 Review

Financial Markets Test 4 Review - Financial Markets Test 4...

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Financial Markets Test 4 Review To avoid double taxation, some investors hold stocks in growth companies that reinvest their accumulated earnings instead of paying larger dividends. In common stock shareholders return is derived from dividends and appreciation in stock’s market value. The size of the underwriters spread depends on the underwriters level of uncertainty concerning the shares’ market price. Stable Prices are related to o Breadth- number of varied traders of the stock o Depth- conditional orders to buy and sell below and above the current price. o Resilience- ability of the market to attract buyers/sellers when the stock prices decrease/increase, due to order imbalances. Bid-ask Spread is wider o For low priced stocks due to fixed costs of operations o Trades of few shares o Large block trade o Trades with inside information o NARROW for more frequent trading, where the costs of providing liquidity are less. NYSE is the largest U.S. Stock exchange Market orders- buy or sell at available price Limit orders- buy or sell at designated price Investors ability to invest in foreign stocks is enhanced by American Depository Receipts (ADRs) ADRs are issued in the U.S. and are denominated in U.S. dollars. All cash flows to the investor are in dollars. ADRs and GDRs allow investors to diversify their portfolio globally by reducing both transactions costs and risk for investors.
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The value of a security is the present value of expected cash flows, discounted at the required rate of return. Preferred Stock Valuation o P0=D/r Common Stock Valuation o P0=D1/ (r-g) Systematic risk is market risk that is undiversifiable Unsystematic risk is diversifiable risk. A beta greater than 1 is riskier or an aggressive stock and a beta of less than 1 indentifies a defensive stock. The Security Market Line (SML) depicts the offsetting returns demanded for increased increments of risk, the classic risk/return tradeoff. Stock market indexes are useful to assess the performance of various portfolios of securities. Price weighted index is computed by summing the prices of the individual stocks, then dividing the divisor to determine the base value index. Market-value weighted index is calculated by summing the total market value of the firms in the index. The percentage change in the total market value of the firms is the return on the index. Both composition and weighting affect the value of an index over time. A fixed rate preferred stock approximates a perpetuity and the value can be found by dividing the annual dividends by the discount rate. The value of a stock growing at varied assumed growth rates in the future . o
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This note was uploaded on 08/08/2011 for the course FINN 3053 taught by Professor Staff during the Spring '08 term at Arkansas.

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Financial Markets Test 4 Review - Financial Markets Test 4...

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