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Equity & Stocks

Ownership and Control

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Equity Summary

Equity can be very simply described as ownership and control of a business enterprise. You purchase equity either from a firm or from another shareholder. If you own equity you own a percentage of a company. If you own a large enough segment of the company, you gain the ability to exercise some degree of control over the firm. Firms selling equity acquire money for financing operations and expansions. Investors selling equity trade the ability to own and control segments of a firm for cash they can invest in other firms, other investment instruments, or spend freely.

Equity

Major Economic Analysis

Economic Summaries
Statistical Currency Projections
Large Speculator Sentiment
Technical Signals Lists

American Equity Markets

Economic Performance Index
US Dollar Projections
Market Sentiment Tracking
Sector Strength Tracking
Consensus Estimate Rankings
Fundamental Firm Analysis

Equity Types & Risks

While there are three general ways to classify equity you are considering purchasing, there are two specific common types of shares issued by firms, and two specific instruments that assist share transactions. The two typical equity types are Common Equity, and Preferred Equity.  Note that the word “shares” can be used interchangeably with equity. Common shares are the most basic equity type, and rely mostly on share appreciation for returns, but you may also receive dividends. Preferred shares rely almost solely on dividends to earn returns for you. The biggest differences are control and voting rights.

Common Equity

Common Equity

Common shares represent ownership and voting rights within a firm. In essence, these shares represent control of a firm. The control and profits of a firm are divided amongst shareholders in proportion to a number of shares they own. The more shareholders a firm has, the greater the division of profit and control.

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Preferred Equities

Preferred Equities

Common shares are not the only type of Equity, simply the most ordinary. The other type of equity is known as “Preferred Equity”. Preferred Equity functions similarly to debt. If you own Preferred Equity, you pay the firm for the ownership of the share and receive regular dividend payments. This continues even if the value of dividends exceeds your purchase price, until you sell or relinquish the preferred shares. These dividend payments will be paid to you quarterly or annually, depending on the dates set by the firm for payment.

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Depository Receipts

Depository Receipts

Depository receipts represent domestic ownership of foreign shares. If a foreign firm wishes to sell common or preferred shares to a market without actually complying with exchange regulations in that nation, they issue depository receipts within that nation. These receipts allow investors in that market to own preferred or common shares through the depository receipt. You can purchase foreign shares without converting currencies or dealing with foreign exchange regulations. These shares are not necessarily issued on a 1 to 1 ratio. The depository receipt can represent any quantity of shares. A single receipt can be a quarter of a share, 1 share, 50 shares, or any other quantity.

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Equity Risks

Equity Risks

There are a wide variety of potential risks that can occur within the Equity Markets, some derived from the market, others from firms, government, or economics. You should be aware of all of these. These risks are Share Specific Risk, Share Liquidity Risk, Market Risk, Inflation Risk, Credit Liquidity Risk, Political Risk, and Currency Risk. These risks are separate from the risk of share depreciation, which is constantly encountered throughout the trading day.

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Risk Return Measures

Risk Return Measures

There are measurements of risk and return for equity shares. These measurements typically have an interchangeable benchmark. There are two common measurements used to rate return and risk relative to a standard. These measurements are Alpha and Beta.

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Equity Returns

Equity can earn a profit for its owners, a return, in three specific ways. The most commonly known is share appreciation. This occurs simply when you purchase a share, watch its value increase in price, and then sell the share for profit. Your return is the total profit gained in percentage terms.

Share Appreciation

Share Appreciation

Equity purchases attempt to earn profit from share appreciation and dividends.  You can orient your investing by sorting the equities into equity categories that meet a specific objective.  The Growth and Value Equity category attempts to earn return primarily from share appreciation. The income equity category attempts to earn return from dividends. You can analyze firms you purchase to determine which fits your objective for investment based on their sorted category.

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Short Selling

Short Selling

Short selling is a trading process which attempts to profit from share depreciation. Typically you earn profit from share appreciation, which involves buying share at a low price, holding the share until it reaches a substantially higher price, and then selling the share. Short sales operate in reverse. Short Sellers borrow shares from their broker and sell the shares at a high price. Short sellers watch the value of shares decrease, then buy the shares at a lower price and return them to the broker. The difference between the high sale and the lower buy equal the short seller’s profit, before any fees or commissions paid.

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Dividends

Dividends

Equity purchases attempt to earn profit from share appreciation and dividends.  You can orient your investing by sorting the equities into specific equity categories that meet a specific objective.  The Growth and Value Equity category attempts to earn return primarily from share appreciation. The income equity category attempts to earn return from dividends.  You can then analyze the firms you purchase to determine which fits your objective for investment based on their sorted category.

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Equity Price & Value

There are several ways to measure firm value. Since shares are each pieces of a firm’s total value, these also apply to share values. Some of the more frequent ways to attain firm values are Market Value, Capitalization Value, Book Value, and Intrinsic Value.

Market Value & Capitalization

Market Value & Capitalization

The value of a firm’s equity is subject to extreme change based on the chosen valuation process. There are three methods typically used for share value estimates. The first is Capitalization, the second is Book Value, and the third is Intrinsic Value. A firm’s capitalization refers to the total value of all shares for sale on the market. It’s important to note these shares are released shares, or share’s outstanding. Shares owned by the firm which have not been released, or treasury shares, do not qualify in capitalization measurements.

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Book Value

Book Value

The value of a firm’s equity is subject to extreme change based on the chosen valuation process. There are three methods typically used for share value estimates. The first is Capitalization, the second is Book Value, and the third is Intrinsic Value. The “Book Value” approach to valuing equities measures assets versus liabilities, then divides them by shares outstanding. To determine book value, the equation is very simple.

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Intrinsic Value

Intrinsic Value

The value of a firm’s equity is subject to extreme change based on your chosen valuation process. There are three share pricing estimates. The first is Capitalization, the second is Book Value, and the third is Intrinsic Value. The Intrinsic value is more complicated than the other valuation models. A shares intrinsic value is the present value of future cash flows which could be earned from the equity. There are multiple ways to value a firm’s intrinsic value, and each employs future cash flow estimations differently. The key word there is estimations. It is impossible to always accurately guess the future results of a firm. Good and bad things will both happen unexpectedly and impact the actual growth rates.

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Dividend Discount Model Basics

Dividend Discount Model Basics

Dividend Discount models forecast and discount dividends to estimate the value of shares for sale in the marketplace. While Discounted Cash Flow valuations use Free Cash Flow, which could be safely removed from the business for investors, dividends actually are removed for investor profits. Recognizing this, dividend discount models rely on future dividend projections discounted to the present to estimate current value. This process is not problem free.

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Constant Growth Dividend Discount Model

Constant Growth Dividend Discount Model

The constant growth dividend discount method assumes both a fixed growth rate for Dividends and a fixed growth rate for firms. The simplest form of the constant growth Dividend Discount Model is the Gordon Growth Model, named after Myron J. Gordon. This formula calculates value from dividends which continue infinitely into the future. The basic formula for the Constant Growth Rate dividend is fairly simple.

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Multistage Growth Dividend Discount Model

Multistage Growth Dividend Discount Model

Multiple Stage Dividend Discount Models better reflect reality than models assuming a constant growth rate and dividend policy into perpetuity. The benefit is fairly obvious: Firms change with time and assuming a constant growth rate and dividend policy ignores that reality. A multiple stage model where you can change and modify growth rates and dividend payouts can be adjusted to your firm. You can pick any growth rates and dividend policies you need to value the shares based on dividend payout.

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Discounted Free Cash Flow Model

Discounted Free Cash Flow Model

The primary method of evaluating a firm’s intrinsic value is the present valuation of future free cash flow to the company. Free cash flow can actually be removed from the business for the profit of shareholders without effecting company operations. It is derived as the actual value of investment.

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Equity Splits

Equity Splits

If a firm thinks that the price of a single share is priced too high it may split its shares. During a share split each share outstanding is doubled or greater. This does not occur by releasing more shares from treasury or unreleased pools of shares. Shares outstanding are simply multiplied for each share.

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Equity and Stock Market Price Charts

Equity and Stock Market Price Charts

There is a multitude of newspapers and trackers which release daily or up to date charts of current share prices. If you understand how to read them, these charts are great sources of key information to help evaluate purchase timing of stocks you are following.

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Equity Categorizations

Equities can also be categorized by their purpose. In general, shares deliver returns in two ways: share appreciation and dividends. They can be split into 3 different share categories based on these two return types. Growth and Value shares are based on targeting future share appreciation. Income shares are based on targeting dividend returns.

Growth Stocks or Growth Equities

Growth Stocks or Growth Equities

Growth Equities are shares of firms which are growing rapidly in value. These shares are typically oriented towards rapid capital appreciation, and shareholders invest in these stocks for their growth potential. In exchange for the potential growth provided, the firms usually take on higher amounts of risk. Growth Equities are often small to mid-capitalization firms.

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Value Equities

Value Equities

Value Equities deliver returns through capital appreciation, similarly to growth shares. Unlike growth, Value equity should be purchased at low prices relative to anticipated return. When you are seeking value you only purchase shares if their market prices are below intrinsic values, moving closer to market price if larger returns are anticipated.

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Income Equities

Income Equities

Income Equities, unlike growth or value, are not expected to deliver returns via capital appreciation. These shares deliver dividends for their returns. When you are investing in Income Equities you will prefer to receive dividends annually.

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Equity Markets

Equity Markets are driven by multiple categorizations and several motivations. Investors use the markets to acquire returns, protect their capital, and outpace inflation. Firms use the market to acquire new funding and capital. You use it to earn a future return and increase your net worth.

Gearing

Gearing

Equity is a part of firm gearing. Firms utilize the private or public market to acquire capital for their business, and equity is one of the two major sources of capital. By issuing (selling) equity to the markets the firm can raise money for commercial investments. Each firm has a market value, referred to as the capitalization. The market value is divided by the amount of shares released. The more equity a company releases, the lower stock already owned by shareholders is valued.

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Issuing Equity

Issuing Equity

There are three categories of firm ownership, privately owned, publicly owned, and nationalized. Privately owned firms are owned by a single investor, a group of investors or a parent firm. These shares are not traded on market exchanges and are not subjected to exchange regulations and requirements. If sold, they are sold from shareholder to shareholder in private deals. Publicly owned firms are sold on share exchanges, and can openly be purchased and sold by any desiring potential shareholder. These firms are subject to exchange requirements, public trading regulations, and public firm information disclosure laws. Nationalized firms are owned by the governments of their domestic markets. Nationalized firm’s shares usually cannot be publicly traded, but governments may allow limited investment and control rights within the firm.

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Geographic Market

Geographic Market

There are two specific geographical categories for investment, which are related to the location of the potential shareholder. These categories are the domestic market, and the foreign market. The domestic market is the market in which you reside; the foreign market is the market outside of your nation or region.

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Economic Market

Economic Market

There are typically two economic categories utilized by classifiers. The first is referred to as the “Developed Markets” and the second is named the “Emerging Markets”. The nations within each category are placed according to economic development.

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Broker Service Structures

Broker Service Structures

Investment Brokers exist under 2 kinds of service structures. The services provided are the only primary difference, but severity of charges associated with each one also change. Typically, these brokers charge commissions per trade. The first kind of service structure is known as a “Full Service Broker”. A full service broker provides extensive service selections.A “Discount Broker” is the second type of brokerage service set.

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Trading Market Systems

Trading Market Systems

Financial exchanges typically operate on one of three trading systems. These systems are the Dealer Market, the Electronic Communication Market, and the Specialist Market. Over time, the markets have become less human operated and more electronic, which reduced spreads and costs. The remaining spreads and costs usually profit the exchanges running the trading systems.

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Clearing & Settlement

Clearing & Settlement

Clearing and settlement ensures that brokers and exchanges execute trades according to terms until completion. The process is generally required by a government agency who regulates securities trading. The clearing and settlement process works throughout the procedure of a share trading transaction. A financial transaction for shares and equities occur in a certain order.

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Equity Strategy

Equity investment strategy pivots on three key pillars. The first is fundamental analysis with share valuation, the second is market exposure, and the third is the identification of catalyst events that will cause increases or decreases in price. All of these should be based on the well-founded analysis of the firm, industry, and market situation surrounding the investment. You should buy undervalued shares and short sell overvalued shares, especially if events affecting price occur. If you are considering any strategy, you must properly analyze and value the firms in question-based analysis on strict and consistent guidelines.

Transaction Orders

Transaction Orders

Financial transactions on equity exchanges can occur in several differing ways depending on the transaction order used. Transaction orders fall under several major categories. Each type of transaction order modifies the transaction’s conditional execution in different ways. The major categories of transaction orders are Market Orders, Limit Orders, Stop-Action Orders, and Completion Orders. Transaction orders generally fit within these four categories.

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Long Equity

Long Equity

The goal of long equity strategies is to earn profit from either price appreciation or dividends. Both of these earnings can come from income, growth, or value shares, but you should select shares depending on which fit your portfolio’s orientation towards risk, return, and liquidity needs. The strategy for long equities changes specifically on the share type being selected. You should have a general idea what you are seeking in each investment.

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Margin Purchases

Margin Purchases

A margin purchase is a share transaction that is supported by a loan. In this trade process, you borrow money to purchase shares. Your credit must qualify you for the loan. These trades cannot be purely financed since all equity margin investors must post 25% of the equity trade’s value or greater (in the USA).  The rest is borrowed from the broker. The amount paid in equals the initial margin. The broker will then loan the money at a set rate, and add a service charge. Any securities purchased with the loaned money are used as collateral for the loans.

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Short Equity

Short Equity

Short sales fit into your toolbox as a multi-pronged trade strategy. Shorts allow you to earn returns from falling investments and overvalued securities. Short Sellers borrow shares from their broker and sell the shares at a high price. Short sellers watch the value of shares decrease, then buy the shares at a lower price and return them to the broker. The difference between the high sale and the lower buy equal the short seller’s profit, before any fees or commissions paid.

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Market Exposure

Market Exposure

The combination of long and short positions in a portfolio create the portfolio’s “market exposure”. Market Exposure can be Net Long, Net Short, or Neutral. It represents whether you believe the market will be positive in the future or negative in the future, or your bias to if the market. This bias should be based on market conditions and analysis.

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Equity Pairs Trading

Equity Pairs Trading

A pair trade involves both long and short strategies, both executed together. Pair trades are relative to each other, long on a firm with an optimistic outlook, negative on another firm with a pessimistic outlook. Exposure levels do play into the trade. If you think that the short trade’s price will depreciate more than the price appreciation on the long side, more money should be placed into the short side trade. If you think the long trade will price appreciate more than the short side’s depreciation, you should place more money into the long side. The bias here is towards the two specific firms involved in the trade. The bias is not explicitly supposed to be based on the market, but it can be if you anticipate major market movements upwards or downwards.

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Equity

International Economic Analysis:

  • Major Currency Economic Summaries
  • Performance of Major Imports and Exports
  • Mandates of Central Banks versus Expectations
  • Performance Indexes of Major Economies
  • Economically Correlated Currency Projections
  • Large Funds Currency Sentiment Readings
  • List of Technical Indicators to Look For
  • Occasional: Foregin Exchange Technicals Markups

Equity

American Markets Analysis:

  • Summaries of American Economic Structure
  • Performance of Major
  • Imports/Exports
  • Federal Reserve Mandate versus Expectations
  • Performance Indexes of U.S Economy
  • Economically Correlated U.S Dollar Projections
  • Large Trading Fund Index Sentiment Readings
  • Market Wide Earnings Versus Valuations
  • Fundamental Ranking of U.S Business Sectors
  • Best and Worst Future Consensus Estimates
  • Occasional: Firm Fundamental Strength Report
  • List of Technicals to Look for While Trading

Equity

Brokerages, Insurance Firms,
Financial & Trading Software.

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