EQUITY INVESTMENTS: EQUITY: MARKET ORGANIZATION,

MARKET INDICES, AND MARKET EFFICIENCY

OVERVIEW OF EQUITY SECURITIES

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 TYPES OF EQUITY AND VOTING SYSTEMS

Common shares – residual claim on firm’s asset and have voting rights.
Share is an indivisible unit of capital, expressing the ownership relationship
between the company and the shareholder. It represents the residual assets of the
company that would be due to stockholders after discharge of all senior claims such
as secured and unsecured debt.

Statutory voting – each share is assigned one vote in the election of each member
of the Board.
Cumulative voting – can allocate votes to one or more candidates.

Callable common shares – well, can be called. Also putable common shares.

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 PERFORMANCE OF UK CANAL AND RAILROAD STOCKS 1811 -1851

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 PREFERRED STOCK

Preferred stock – typically make fixed payments to investors but don’t have voting
rights.
Cumulative preference shares – have promised fixed dividends, accumulate over
time.
Convertible preference shares – well, can be converted to common stock.

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 THE REASONS TO STAY PRIVATE

1. Less liquidity
2. Share price is negotiated
3. No government reqirement to full financial dosclosure
4. Lower reporting costs
5. Potentially weaker corporate governance
6. Greater ability to focus on long-term returns.

3 types: VC, LBO, PE.

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 OVERSEAS EQUITY

Depository receipt – trading in the other countries in local currency.

GDRs – issued outside US and issuer’s home country.

ADRs – trade in US and are denominated in USD.

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 WHAT ARE LESS RISKY EQUITY INVESTMENTS?

Source of income – price change, dividends, foreign currency.

1. Callable shares
2. Common stock
3. Preferred stock (less risky due to the dividends)
4. Cumulative preferred shares (receive any missed dividends)

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 BOOK VALUE VS. MARKET VALUE

Role: used to purchase long-term assets, equipment, research, expansion into new
business or geographic areas.

Book value = asset’s on the balance sheet minus liabilities.

Increases when firm has positive net income.

Market value = number of shares * share price (reflects expectations about future
performance)

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 CALCULATING ROE AND COST OF EQUITY

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 HOMEWORK ASSIGNMENT
READING
CFA® Level I Curriculum (2019) Volume V  Reading 47

PRACTICE PROBLEMS
CFA® Level I Curriculum (2019) Volume V  Reading 47  Practice Problems
MOODLE  CFA® Level I 2019  TESTS  Equity #4

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