Determining the business model is the first step in our industry and company analysis framework because it summarises important drivers of an issuer’s financial results and position, focuses the analyst on what requires further investigation, and should begin setting the analyst’s expectations for the issuer. Information sources that analysts use to answer these questions include…
Analysts value and make investment recommendations on issuers’ equity securities using scenarios of future earnings, cash flows, and financial position. These future scenarios are structured in the form of financial statements and are known as financial statement models. While a financial statement model is quantitative, it is not a mathematics problem to solve with a…
Companies issue equity securities on primary markets to raise capital and increase liquidity. This additional liquidity also provides the corporation an additional “currency” (its equity), which it can use to make acquisitions and provide stock option-based incentives to employees. The primary goal of raising capital is to finance the company’s revenue-generating activities in order to…
Return Characteristics of Equity Securities There are two main sources of equity securities’ total return: price change (or capital gain) and dividend income. The price change represents the difference between the purchase price (Pt–1) and the sale price (Pt) of a share at the end of time t – 1 and t, respectively. For investors who purchase depository…
Direct Investing Investors can use a variety of methods to invest in the equity of companies outside of their local market. Depository Receipts A depository receipt (DP) is a security that trades likeanordinary share on a local exchange and represents an economic interestin a foreign company. It allows the publicly listed shares of a foreign…
Private equity securities are issued primarily to instituational investor via non-public offerings, such asprivate placements. There are three primary types of private equity investments: venture capital, leveraged buyouts, and private investment in public equity (or PIPE). Venture capital investments provide “seed” or start-up capital,early-stage financing, or mezzanine financing to companies that are in the early…
Companies finance their operations by issuing either debt or equity securities. A key difference between these securities is that debt is a liability of the issuing company, whereas equity is not. This means that when a company issues debt, it is contractually obligated to repay the amount it borrows (i.e., the principal or face value…
The study of equity securities is important for many reasons. Equity Securitiesin Global Financial Markets
Behavioural financeexamines investor behaviour to understand how people make decisions, individually and collectively. Behavioural finance does not assume that people consider all available information in decision-making and act rationally by maximising utility within budget constraints and updating expectations consistent with Bayes’ formula. The resulting behaviours may affect what is observed in the financial markets. Loss…
A number of additional anomalies has been documented in the financial markets, including the existence of Closed-End Investment Fund Discounts A closed-end investment fund issues a fixed number of shares at inception and does not sell any additional shares after the initial offering. Therefore, the fund capitalisation is fixed unless a secondary public offering is…