Risk and Return of Equity Securities
The type of security and its features affect its risk/return profile. Therefore, as an investor’s risk increases, its expected return should also increase to compensate. Equity Return Characteristics There are two main sources of total return for equity securities –…
Role of Equity Securities
Companies issue equity securities in the primary markets to raise capital and increase liquidity. Having public shares also gives the company another currency to make acquisitions with or incentivize employees. Raising capital aims to maximize shareholder wealth, which may be…
Market Value vs. Book Value of Equity Securities
The book value of a company’s equity reflects the historical operating and financing decisions of its management. The market value of the company’s equity reflects these decisions as well as investors’ collective assessment and expectations about the company’s future cash…
Industry Analysis
Effective industry analysis helps to provide a framework for company analysis. Uses of Industry Analysis Understanding a company’s business and business environment: a critical step in stock valuation and credit analysis Identifying active equity investment opportunities: helps active investors with…
Industry Classification Systems
Industry classification attempts to place companies into groups based on commonalities. There are three major approaches to industry classification. Current Industry Classification Systems Commercial Industry Classification Systems Global Industry Classification Standard: developed by Standard & Poor’s and MSCI Barra. Each…
Factors that Affect Sensitivity to Business Cycles
Sensitivity Factors A cyclical company is likely to experience wider-than-average fluctuations in demand, high demand in economic expansion, and low demand in economic contraction. It may be subject to greater-than-average profit variability related to high operating leverage. Non-cyclical companies produce…
Elements Covered in a Thorough Industry Analysis
Thorough industry analysis will often split the industry into strategic groups (groups sharing distinct business models or catering to specific market segments in an industry). The analysis will likely involve identifying the industry’s life-cycle, usually placing the industry somewhere along…
Company’s Cost of Equity
Required rates of return describe the reward investors expect from taking on a given level of risk. Cost of Equity The cost of equity is the minimum return a company must offer to attract investors and keep its share price…
Dividends, Stock Splits, and Share Repurchases
According to the dividend discount model (DDM), the value of an investment should be equal to the present value of the expected future benefits. For common shares, these benefits come in the form of dividends and the expected capital gain…