LECTURE #1 – EQUITIES
Stock Markets are Volatile
Another work for equities is stocks – traded on the stock market
Volatile – means that it moves around a lot
Huge drop between 2011-2012 → markets were ignoring problems in the euro market and as the year progressed, there was more and more talk about Greece needing a bailout → important because they are "first in line"/indicators
Investment Performance
Historically stocks have the highest historic return and the greatest risk
Excess return = equities (stocks) – treasury (bonds)
Volatility – standard deviation in returns (measure of riskiness) → stocks more volatile than bonds
What's the outlook for the stock market?
Stock prices rise when corporate earnings are expected to increase
Earnings expectations rise when the economy is getting stronger so investors watch all new economic data
US stocks are rising now because investors believe that the US economy is strengthening
European market uncertainty (Greece, Spain, and euro zone generally have introduced a lot of volatility in the market)
What are stocks (shares)?
Stocks – claim on the residual income produced by a company after all expenses and taxes are paid
Represent part ownership of the firm and are (generally) accompanied by voting rights which afford the owner some measure of control over the organization
Companies will sell claims on their future income (stocks) in order to raise capital for large investments; Initial and
Seasoned Equity offerings (IPOs & SEOs)
"equity" means ownership o Net income – have two choices: either to (a) retain all of it to reinvest in the firm; or (b) pay dividends to shareholders Features of Common Equity
Limited liability o Most traded companies are corporations: Inc, Ltd, PLC o Shareholder is only at risk for the initial shareholder's capital (i.e. stops at corporate level)
Separate legal existence o Can sue and be sued (signing authority; officers of the company) o Corporation taxes
Companies can be: o Public – ease of exchanging ownership (private: limited transfer rights) o Listed – on an exchange to make exchange of ownership (trading) easier o Accessing public markets brings in securities legislation whether the stock is listed or not
Shareholder Rights
Canadian Business Corporations Act 24-3 defines the rights of shareholders when there is one class of shares as: o A) the right to vote at any meeting of the shareholders of the corporation
The right to vote confers the right to choose the board of directors which in turn chooses management and determines control of the company o B) to receive any dividend declared by the corporation
Dividends have to be declared by the Board of Directors and shareholders cannot force payment
When a company pays a dividend, this is a negative signal to investors because it indicates that the company no longer needs to reinvest in their own firms (i.e. stagnant or decreasing growth) o C) to receive the remaining property of the corporation on dissolution (bankruptcy)
When bankrupt, creditors (bondholders) and banks get paid first; common shareholders are last to get paid (residual right)
Multiple Classes of Shares
These thee rights can be assigned to different classes of shares: o Preference (preferred) shares – limited voting rights when dividends are not paid
Preferential right to a dividend (rank above common shareholders)
Cumulative or non-cumulative
Limited voting rights when dividends are in arrears
Have par value of $25
Only created by banks and utilities
EXAMPLE: preferred shares (class C)
No voting rights unless dividends in arrears for two years, after which each share gets one vote
A dividend of $0.30/share every quarter when declared by the board of directors
Payment of $25 par value before any payments to class A and B shares on wind up of company o Non-voting or limited voting common shares
EXAMPLE: non-voting shares (class A)
No voting rights
