Finance- Chapter 8

DMM's post

A fixed place on the exchange floor where the DMM operates. -each of the counters in the "Big Room" -the DDM's normally operate in front of their posts to monitor and manage trading in the stocks assigned to them.

Dividend growth model

A model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate.

Straight Voting

A procedure in which a shareholder may cast all votes for each member of the board of directors. -directors are elected one at a time.

Zero growth common stock:

D1 = D2 =D3 =D4 =D = constant -constant dividend - Po = D / R (this is per-share value of stock) -can be viewed as an ordinary perpetuity with a cash flow equal to D every period.

1st level of NASDAQ:

Designed to provide a timely, accurate source of price quotations. -These prices are freely available over the Internet.

Common Stock

Equity without priority for dividends or in bankruptcy. -Usually applied to stock that has no special preference either in receiving dividends or in bankruptcy.

3rd level of NASDAQ:

For the use of market makers only. -This access level allows NASDAQ dealers to enter or change their price quote information.

Proxy fight

If shareholders are not satisfied with management, an "outside" group of shareholders can try to obtain votes via proxy. They can vote by proxy in an attempt to replace management by electing enough directors.

R

Required return in the market

Over-the-counter (OTC) market

Securities market in which trading is almost exclusively done through dealers who buy and sell for their own inventories.

Ask price

The price at which the dealer will sell. -sometimes called asked, offered, or offering price

Bid price

The price the dealer is willing to pay.

Hybrid market

Trading takes place both electronically and face-to-face.

Dealer

an agent who buys and sells securities from inventory. -maintains an inventory and stands ready to buy and sell at any time. -exp: car dealer, maintains and sells from inventory

Members

as of 2006, a member is the owner of a trading license on the NYSE.

Preferred stock

has zero growth and is constant through time.

The interaction between floor brokers and DMMs is:

the key to non electronic trading on the NYSE.

Customer of NYSE:

the millions of individual investors and tens of thousands of institutional investors who place their orders to buy and sell shares in NYSE- listed companies.

For a very actively traded stock in the Big room:

there may be many buyers and sellers around the DMM's post and most of the trading will be done directly between brokers. -called trading in the "crowd".

goal of NYSE:

to generate as much liquidity as possible, which makes it easier for ordinary investors to quickly buys and sell at prevailing prices.

Valuation using multiples:

used for stocks that don't pay dividends or have erratic dividend growth rates

Primary Market

The market in which new securities are originally sold to investors. -shares of stock are first brought to market and sold to investors. -companies sell securities to raise money

Secondary Market

The market in which previously issued securities are traded among investors. -existing shares are traded among investors

Market Cap

The number of shares outstanding multiplied by the current price per share.

Non constant growth common stock

"supernormal" growth rates over some finite length of time. -the growth rate can exceed the discount rate for some number of years with this type of common stock, however, they require the dividends to grow at a constant rate sometime in the future.

PV of common stock =

(Dividend + FV) / (1 + r)

NASDAQ Global Select Market:

-Lists about 1,600 companies (as of early 2017), including some of the best-known companies in the world, such as Microsoft and Intel.

Nasdaq

-Second largest stock market in the United States in terms of total dollar volume of trading. -NASDAQ used to stand for National Association of Securities Dealers Automated Quotations system, but is now a name in its own right. -Market makers trade on an inventory basis- using their inventory as a buffer to absorb buy and sell order imbalances. -Feature multiple market makers for actively traded stocks. -often referred to as an OTC market.

the NASDAQ Capital Market:

-The smallest companies listed on NASDAQ. -About 820 are currently listed. -When capital market companies become more established, they may move up to the Global Market or Global Select Market.

Staggered boards

-With these elections only a fraction of directorships (usually a third) are up for election at a particular time. -directors are placed into different classes with terms that expire at different times. -often called classified boards -one benefit of staggering is it provides "institutional memory"- continuity on the board of directors. (important for corporations with significant long-range plans and projects.

Bonds and stocks similarities:

-both provide long-term funding for the organization. -both are future funds that an investor must consider. -both have future periodic payments. -both can be purchased in a marketplace at a price "Today"

3 different cases to determining present value of a stock:

-dividend has a zero growth rate -the dividend grows at a constant rate -the dividends grow at a constant rate after some length of time.

Components of the required return:

-dividend yield -capital gains yield - R = dividend yield + capital gains yield

Bonds and stocks differences:

-from the firm's perspective a bond is a long-term debt and stock is equity. -from the firm's perspective: a bond gets paid off at the maturity date; stock continues indefinitely. -a bond has coupon payments and a lump-sum payment; stock has dividend payments forever. -coupon payments are fixed; stock dividends change or "Grow" over time.

3 separate markets of the NASDAQ

-the NASDAQ Global Select Market -the NASDAQ Global Market -the NASDAQ Capital Market

3 different types of license holders:

1. Designated Market Makers (DMM) 2. Floor Brokers 3. Supplmental liquidity providers (SLP)

two key differences between the NYSE and NASDAQ:

1. NASDAW is a computer network and has no physical location where trading takes place. 2. NASDAQ has a multiple marker maker system rather than a DMM system.

2 most important stock exchanges

1. NYSE (New York Stock Exchange) 2. NASDAQ

2 basic facts of staggering:

1. makes it more difficult for a minority to elect a director because there are fewer directors to be elected at one time. 2. makes takeover attempts less likely to be successful because it makes it more difficult to vote in a majority of new directors.

characteristics of dividends:

1. not a liability of the corporation 2. not a business expense. paid out of aftertax profits 3. dividends received by shareholders are taxable. corporations that own stock in other corporations are permitted to exclude 50% of the dividend amounts they relieve and are taxed on only the remaining 50%.

shareholders usually have the following rights:

1. the right to share proportionally in dividends paid. 2. the right to share proportionally in assets remaining after liabilities have been paid in a liquidation. 3. the right to vote on stockholder matters of great importance, such as a merger. Voting is usually done at the annual meeting or a special meeting. -sometimes have the right to share proportionally in any new stock sold.

Forward PE ratio

A PE ratio that is based on estimated future earnings.

Cumulative voting

A procedure in which a shareholder may cast all votes for one member of the board of directors. -permit minority participation -calculated as the number of shares (owned or controlled) multiplied by the number of directors to be elected. -directors are elected all at once.

Dividend Yield

A stock's expected cash dividend divided by its current price. (D1/P0) -Similar to current yield on a bond -first component of total return, r.

Electronic Communications Networks (ECNs)

A website that allows investors to trade directly with each other. -basically websites that allow investors to trade directly with one another.

2nd level of NASDAQ:

Allows users to view price quotes from all NASDAQ market makers. -this level allows access to inside quotes. -now available on the web, sometimes for a small fee.

Broker

An agent who arranges security transactions among investors. -brings buyers and sellers together but does not maintain an inventory. -facilitates trade for others -exp: real estate broker, does not maintain an inventory

Growing perpetuity

An asset with cash flows that grow at a

Supplemental liquidity providers (SLPs)

Investment firms that are active participants in stocks assigned to them. -Their job is to make a one-sided market (i.e., offering to either buy or sell). -They trade purely for their own accounts. (do not represent customers) -given a small rebate on their buys and sells, thereby encouraging them to be more aggressive. -do not operate on the floor of the stock exchange.

NYSE

Measured in the terms of total values of share, it is the largest stock exchange in the world. -has 1,366 exchange members -exchange members must purchase trading licenses, limited to 1,366. -it is a hybrid market -with electronic trading, orders to buy and orders to sell are submitted to the exchange. Orders are compared by a computer and whenever there is a match, the orders are executed with no human interaction. (most trades are done like this on the NYSE) -orders that are not electronic, the NYSE relies on its license holders. -Each stock on the NYSE is assigned to a single DMM -has an electronics platform called Arca, which accounts for a substantial percentage of all trading on the NYSE, particularly for smaller orders. -business of NYSE is to attract and process order flow. -not unusual for well over a billion shares to change hands in a single.

Dividend on the stock

Most recent quarterly dividend multiplied by 4.

Designated Market Makers (DMM)

NYSE members who act as dealers in particular stocks. -formerly known as specialists -Maintains a two-sided market, meaning that the DMM continually posts and updates bid and ask prices. -ensures that there is always a buyer or seller available, thereby promoting market liquidity. -operate on the floor of the stock exchange. -essentially functions as a referee.

Floor Brokers

NYSE members who execute customer buy and sell orders. -execute trade for customers, with an emphasis on getting the best price possible. -generally employees of large brokerage firms such as Meryl Lynch. -operate on the floor of the stock exchange -try to anticipate temporary price fluctuations and profit from them by buying low and selling high. -introduced in 1971, the NASDAQ market is a computer network of securities dealers and others that disseminates timely security price quotes to computer screens worldwide. -nasdaq dealers act as market makers for securities listed on the NASDAQ.

The NASDAQ Global Market:

Somewhat smaller in size, and NASDAQ lists about 810 of these.

Two-Stage Growth

Special case of non constant growth. -The idea that the dividend will grow at a rate of g1 for t years, and then grow at a rate of g2 thereafter. -first part of the expression is the PV of a growing annuity formula. -second part of the expression is the PV of the stock price once the second stage begins at time, t. -in the first stage g1 can be greater than R. -In the second stage, g2 must be less than R.

Preferred Stock

Stock with dividend priority over common sock, normally with a fixed dividend rate, sometimes without voting rights. -has preference over common stock in the payment of dividends and in the distribution of corporation assets in the event of liquidation. -form of equity from a legal and tax standpoint. -dividends are either cumulative or noncumulative -sometimes convertible into common stock -they are often callable -preferred stockholders get a stated value, and they do not receive interest on their dividends

Preemptive right

Stockholders sometimes have the right to share proportionally in any new stock sold. -means that a company that wishes to sell stock must first offer it to the existing stockholders before offering it to the general public.

EPS (Earnings Per Share)

TTM (Trailing twelve months)

Spread

The difference between the bid and ask price. -basic source of dealer profits.

Constant growth common stock:

The dividend for the company always grows at a steady rate. - D1= Do x (1 + g) -growth rate must be less than the discount rate

Capital gains yield

The dividend growth rate, or the rate at which the value of an investment grows. -second part of total return is the growth rate, g.

Order Flow

The flow of customer orders to buy and sell securities/stock.

Inside quotes

The highest bid quotes and the lowest ask quotes for a security.

Proxy

a grant of authority by a shareholder allowing another individual to vote his or her shares. -much of the voting in large corporations is done by a proxy. -Shareholders can come to the annual meeting and vote in person, or they can transfer their right to vote to another party.

Avg time for a trade on the NYSE Arca is:

less than 1 second

Preference

means only the holders of the preferred shares must receive a dividend (in the case of an ongoing firm) before holders of common shares are entitled to anything.

Electronic trading

orders to buy and orders to sell are submitted to the exchange. -Orders are compared by a computer and whenever there is a match, the orders are executed with no human interaction.

Dividends

payments by a corporation to shareholders, made in either cash or stock. -represent a return on the capital directly or indirectly contributed to the corporation by the shareholders. -payment of dividends is at the discretion of the board of directors.

Price of the stock today =

present value of all future dividends