Inv - Types/Char of Equity

Compare P forecasted by growth vs discount

Growth higher

What happens to PRef F during inflation

Int rates go up = P down

1. Preemptive Rights

Let existing stockholders maintain proportional ownership share by buy new issues before public

Tech Analysts look at

MArket as a whole

Technician tries to measure

MArket risk when investing in a particular security

What happens at resistance level

More sellers than buyers

What happens to demand/P at support level

More want to buy than sell, P rises

iii. Short Interest

1. # of shares sold short indicates mandatory demand a. Creates support level for stock P

Fund A looks at what shtuff

1. Financial statements 2. Company management

Advance/Decline looks at

1. Look at # of issues closing/opening on a specific day

iv. Support level

1. Price where a stock P bottoms - MIN

Dividend Growth Model risk

1. Risk: Projections of future growth can be hazy, so best used with other models

Potential use for Dividend Discount Model calc

1. Value Preferred stock

How to confirm a breakout

3% penetration, volume is higher

Expected return also known as

Required Rate of Return

What does a tech do if BO through S

Sell

BO thorugh S is good for

Short sellers

2. Warrant

: Certificate letting owner buy securities from issuer at a set price

Tech Analysis - Main focus

Attempt to predict direction of prices on basis of charts reflecting price and trading volume patterns of certain securities

Which of the following events is of the greatest importance to a technical analyst? A)Standard & Poor's raised the credit rating of the issuer. B)The stock's price recently penetrated its resistance level. C)The company announced the resignation of its chief financial officer. D)The issuer's current book value increased.

B)The stock's price recently penetrated its resistance level. Technical analysts focus on market price patterns. Typically, a technical analyst becomes bullish when a stock's price exceeds its resistance level (it penetrates its former ceiling price). Book values, credit ratings, and the resignation of a company's senior officer are of interest to fundamental analysts.

An analyst interested in measuring the breadth of market movement as an indicator of future market direction would monitor the: A)DJIA. B)advance/decline line. C)betas of the S&P 500 stocks. D)Value Line Index.

B)advance/decline line. The advance/decline line, which measures the number of stocks that have advanced versus the number of stocks that have declined, is an indicator of the breadth of the market's advance or decline.

2. Decline > Advance

Bear

1. When Odd lot investors buy

Bearish

2. High Short interest

Bull

One method used by some analysts to estimate the future value of a stock is the dividend growth model. This model would probably be most useful in the case of a: A)AAA corporate bond. B)small-cap stock. C)large-cap stock. D)cumulative preferred stock.

C)large-cap stock. The dividend growth model is a method to value the common stock of a company on the basis of assumed constant growth of dividends in the future. Therefore, it can only be applied to a corporation whose dividends might be expected to increase. It is far more likely that a large-cap stock will be paying dividends than a small-cap. Bonds don't pay any dividends and, in any event, their interest, just like the dividends on preferred stock, is fixed; there is no growth possible.

A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's: A)previous high. B)200-day moving average. C)support level. D)resistance level.

C)support level. Sell stops are entered below the market. They are used to turn an order into a market order if the current market value falls below the stop level. In technical analysis, support levels are theoretical levels where the market supports the stock price (keeps it from falling below the stated level). A technical analyst who makes investment decisions by watching the technical graphs and numbers would enter a sell stop below a support level in order to sell out if the support level is breached. A breakthrough of a support level is believed to forecast a major market price decline.

Technicians use _ to determine _

Charts to guess future P movement

A technical analyst is least likely to consider which of the following when selecting securities? A)Advance/decline line. B)Short interest ratio. C)Trend lines. D)Corporate earnings.

D)Corporate earnings. Corporate earnings would be of least interest to a technical analyst, who is interested in market statistics indicative of future buying, market statistics that could reflect price or market trends, and trading volume.

Fund A main focus

Study of an individual company's prospects within context of its industry and overall econom

Dividend Discount Model calc

Take expected future returns (dividends) and discount them to find PV 1. Annual Dividend/Expected Return

Fund A looks at

The company

Preferred Char's

a. Equity security - class of ownership b. Fixed rate of return c. Tied to interest rates i. Rising rates = Price drops 1. Inflation leads to higher interest rates d. No preset maturity date

Common Stock benefits (4)

a. Growth/Capital gains i. Long term, usually get returns > inflation b. Income - Dividends c. Limited Liability d. Liquidity

CS risks

a. Market Risk - Short term b. Dividends can increase or decrease c. Lowest priority

b. Dividend Growth Model

i. Assumes amount of annual dividend will grow at constant rate

Tech looks at

i. Current stock price trends and relationship of present trend to old ones

a. Dividend Discount Model

i. Value of a stock should be = to present value of all future dividends

Dividend Growth Model calc

ii. Calc: (Current Div * (1 + Div growth)) / (Required RoR - Expect Growth rate)

Which of the following statements accurately describes the doctrine of limited liability? A)A shareholder of a corporation is not personally liable for the corporation's debts. B)A partner is not personally liable for the debts of the partnership. C)A shareholder of a corporation has some personal liability for the corporation's debts. D)The owner of a sole proprietorship is not personally liable for the proprietorship's debts.

A)A shareholder of a corporation is not personally liable for the corporation's debts. The owners of certain kinds of businesses such as sole proprietorships and partnerships have unlimited liability for the business' debts. The doctrine of limited liability means, however, that the owners of a corporation (the shareholders) are not personally liable for the corporation's debts.

Common stockholders of a publicly traded corporation have which of the following rights and privileges? Residual claim to assets at dissolution. Right to a vote for stock dividends to be paid. Right to receive an audited financial report on an annual basis. Claim against dividends in default. A)I and III. B)II and IV. C)II and III. D)I and IV.

A)I and III. Common stockholders of publicly traded companies have a residual claim to assets of a corporation at dissolution and are entitled to receive an annual report containing audited financial statements. Stockholders never get to vote on dividends.

Proponents of which of the following technical theories assume that small investors are usually wrong? A)Odd lot. B)Short interest. C)Breadth of market. D)Volume of trading.

A)Odd lot. Odd lots are usually traded by small investors; some analysts believe small investors are generally wrong.

If a technician believed in the importance of volume, which of the following would indicate bullish sentiment? A)Prices increase on heavy volume. B)Prices decrease on light volume. C)Prices decrease on heavy volume. D)Prices increase on light volume.

A)Prices increase on heavy volume. Technicians watch volume changes along with price movements as an indicator of changes in supply and demand. A price increase on heavy volume relative to the stock's normal trading volume is interpreted as an indication of bullish activity.

In the technical analysis of the value of securities, which of the following items is NOT important? A)The amount of a company's past earnings. B)The breadth of market volume. C)A prevailing market trend in response to shifts in supply and demand. D)Resistance and support levels.

A)The amount of a company's past earnings. The amount of a company's past earnings is a factor used in the fundamental analysis of securities, but not technical analysis. Technicians rely on market trends and supply and demand factors, as well as chart indications such as resistance and support levels.

When one invests in a common stock, the opportunity cost of doing so exposes him to all of the following risks EXCEPT: A)credit risk. B)business risk. C)market risk. D)systematic risk.

A)credit risk. Opportunity cost is the opportunity given up when an economic decision is made. In the investment field, it generally refers to the risks taken versus keeping money in a risk-free investment such as the 90-day Treasury bill. When one invests in common stock, there is no credit risk because there is no credit - stock is equity, not a debt.

The chief analyst at your firm suggests that some of the IARs add emerging market securities to some client's portfolios. Among the benefits of doing so would be: A)diversification. B)positive correlation. C)tax efficiency. D)increased income.

A)diversification. Adding foreign equity to a portfolio is adding another equity class. This generally has the effect of adding diversification because emerging market securities are NOT positively correlated with domestic securities.

An analytical tool used to predict the future price of a common stock using projected dividends is the: A)dividend discount model. B)dividend payout ratio. C)price/earnings ratio. D)future value computation.

A)dividend discount model. There are two widely accepted forms of common stock price projection using dividends - the dividend discount model and the dividend growth model.

A similarity between common and preferred stock is: A)the dividend must be declared by the board of directors. B)the dividend is fixed. C)they have an equal vote. D)both are evidence of corporate indebtedness.

A)the dividend must be declared by the board of directors. All dividends, both common and preferred, must be declared by the board of directors. Preferred shares usually have a fixed dividend rate and usually have no (or very limited) voting powers. Both types of stock are equity, not debt, securities.

A client approaches the IAR handling the advisory account with a request to find a preferred stock that will offer a 6% income return. The IAR suggests a stock paying a $.28 quarterly dividend. That stock will meet the income objective if it has a current market price of A)$6.72 B)$18.67 C)$4.67 D)$11.91

B)$18.67 The first thing to do is annualize the dividend by multiplying the $.28 by 4. Once we have the annual dividend of $1.12, divide by 6% and the result is $18.6666 or $18.67 properly rounded. If you left your math skills at home, all you have to do is multiply each of the 4 choices by 6% to see which one is closest to $1.12.

A technical analyst would be most interested in which of the following? A)Capitalization ratios. B)200-day moving averages. C)Price-to-earnings ratios. D)Working capital.

B)200-day moving averages. Technical analysts try to predict the market by examining price and volume trends. They expect the market to act in the future as it has in the past. Technical analysts are not interested in the fundamental aspects of a company, such as its financial statement ratios.

Rank the following from most suitable to least suitable for a client whose primary objective is income: Cumulative preferred stock Cyclical common stock Large-cap stock Warrant A)I, II, III, IV B)I, III, II, IV C)III, II, IV, I D)III, I, IV, II

B)I, III, II, IV For a client seeking income, preferred stock, especially one that is cumulative, would likely be the most suitable of the choices given. That would be followed by a large-cap stock, sometimes referred to as a blue-chip stock. Cyclical stocks have income that varies with the economic cycles so their dividends, if any, tend to fluctuate and warrants never provide any income.

Which of the following would be of least interest to a chartist? A)The short interest. B)The relationship between the current market price of an issuer's common stock and most recently reported earnings per share. C)The volume of shares traded during the past month. D)The advance-decline line.

B)The relationship between the current market price of an issuer's common stock and most recently reported earnings per share. A chartist is interested in the volume of shares traded, and the short interest for that particular stock. The advance-decline line is another technical indicator. The price-to-earnings ratio is used in fundamental as opposed to technical (charting) analysis.

A technical analyst would be least concerned with A)advance/decline. B)book value per share. C)S&P 500 index. D)short interest.

B)book value per share. A technical analyst is not concerned with any fundamental aspects of a company, including company financials. Open short interest theory, overall market movements, and advance/decline ratios are of concern to technical analysts.

In the assessment of a company's stock, a technical analyst takes into consideration all of the following EXCEPT: A)price momentum. B)earnings. C)volume. D)market price.

B)earnings. A market technician (technical analyst) deals primarily with timing of activity and market trends, while a fundamental analyst centers on a particular industry or company within an industry and its relative health and market potential.

When using the Dividend Discount Model, A)the discount rate is generally lower than the expected rate of return B)future expected dividends are discounted to compute the present value of the stock C)​​​the degree of accuracy in forecasting the price of preferred stock is less​ than​ that ​obtained by using the dividend growth model D)best results are obtained from stocks that pay irregular dividends

B)future expected dividends are discounted to compute the present value of the stock This method of common stock valuation takes the investor's expected future dividend returns and then discounts that amount by the expected rate of return to arrive at the supposed present value. Expected (or required) rate of return is a component of both the Dividend Discount Model and the Dividend Growth Model, and ​only the DDM is used for preferred stocks because the dividend can never increase. When using any dividend model, the greater the regularity of dividends, the more accurate the forecast.

What does a technician do if BO thorugh R

Buy

What is special about warrant (price)

Buying price higher than current mkt

Which of the following statements about technical analysis are TRUE? Technical analysis tries to identify trends and predict market changes. Technical analysis is often accomplished by reviewing data in the form of charts. Technical analysis looks primarily at past performance to predict future trends. A)II and III. B)I and II. C)I, II and III. D)I and III.

C)I, II and III. Technical analysts attempt to identify trends so they can predict market changes. They do this by reviewing past performance as depicted in charts and graphs. The type of analysis that attempts to value stock by examining a company's financial condition and growth potential is fundamental analysis.

A fundamental analyst would be interested in all of the following EXCEPT: A)statistics of the U.S. Department of Commerce on disposable income. B)corporate annual reports. C)daily trading volumes on the NYSE. D)innovations within the automotive industry.

C)daily trading volumes on the NYSE. Trading volume interests the technical analyst, who looks at fluctuations in the market, not at fundamental economic values.

A technical analyst is least concerned with: A)new highs and lows. B)trading volume. C)declaration of increased dividends. D)open short positions.

C)declaration of increased dividends. A technical analyst is interested in statistics about market or price performance, not the fundamental factors, the market, or the company's dividend policy. Technical analysts are interested in trading volume as a market statistic, new highs and lows, and open short positions, which could indicate future buying potential in the security.

An analyst uses the Dividend Growth Model to assist in determining appropriate stocks to recommend. This analyst would consider all of the following factors EXCEPT: A)required rate of return. B)growth of the dividend. C)dividend payout ratio. D)current dividend.

C)dividend payout ratio. The classic definition of the Dividend Growth Model is "a stock valuation model that deals with dividends and their growth, discounted to today". The payout ratio has nothing to do with this, it is strictly the amount of the dividend that counts.

All of the following are features of preferred stock EXCEPT: A)priority claim to assets at the dissolution of a corporation. B)fixed rate of return. C)fixed maturity. D)typically no voting rights.

C)fixed maturity. Preferred stock has no stated maturity. However, it does have a stated rate of return due to its fixed dividend and has priority over common stock in the liquidation of a corporation. Generally, preferred stock does not have voting rights.

During inflationary periods, what would one expect to happen to the market value of non-convertible preferred stock? A)Its market value increases B)Interest rates and the price of bonds have no impact on the market value of stock C)Its market value remains the same D)Its market value decreases

D)Its market value decreases Inflation invariably leads to higher interest rates. Preferred stocks are interest-rate sensitive, as are other fixed- income investment securities, such as bonds. Thus, if interest rates increase, one would expect the market price to decline.

Which of the following would be of least interest to a technical analyst? A)Trading volume. B)Advance/decline line. C)Short interest ratio. D)PE ratio.

D)PE ratio. Technical analysts rely on price and trading trends to determine when to buy or sell stock. They are not interested in the specific financial information of an issuer; PE ratios are of greater interest to fundamental analysts.

Which of the following is used in technical analysis in an attempt to modify fluctuations of stock prices over the long term into a smoothed trend? A)consolidation. B)support and resistance. C)trend lines. D)moving averages.

D)moving averages. To avoid the volatility frequently present in stock price trends, analysts will frequently use moving averages. These averages reduce short-term distortions to a minimum.

As interest rates fall, prices of straight preferred stock will: A)fall. B)become volatile. C)remain unaffected. D)rise.

D)rise. Preferred stock is interest rate sensitive. As rates fall, prices of preferred stocks tend to rise, and vice versa.

When analyzing a preferred stock, an investment adviser would give the most credence to: A)earnings per share. B)the company's short-term debt obligations. C)book value per share. D)the ability of the company to pay the stated dividend.

D)the ability of the company to pay the stated dividend. Preferred stock is purchased primarily as an income security based on its fixed dividend. Therefore, any analysis would tend to place the ability of the issuer to meet that dividend paramount. Earnings per share and book value per share are computations relevant to common stock only.

All of the following statements would likely be true regarding those who are technical analysts EXCEPT they: A)are more concerned with short-term trading than long-term investing. B)are not concerned with dividend returns. C)analyze market movements. D)would focus on the price to book value.

D)would focus on the price to book value. A technical analyst is concerned with market prices, trends, and volumes of securities, but not fundamentals such as book value and dividend returns.

Fund A commonly used tools

Dividend Models

CS rights

a. Right to vote b. Right to sell/give away

iii. Rights and Warrants

allows investors to buy more shares (certain circumstances)

Fund A tries to measure

business or financial risk inherent to a certain security

Advance/Decline measures

market breadth

Tech analysis good for how long

short erm, 4-6 weeks

Dividend Models belief

that value of stock can be based on current/expected div's