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Equity Securities - Coggle Diagram

- - - - 2.Voting Rights-Ordinary shareholders can vote in the Annual General Meeting for executives who sit on the Board of Directors. A shareholder who own 51% of all voting shares effectively controls the management of the company.
      - 3.Residual Claim-Given the pecking order of payments, creditors and other obligations must be paid first. Ordinary shareholders are then entitled to any residual (left-over) cash flow from normal business operations or in the event of company liquidation
        
        The residual claim characteristic greatly affects the cash flows received by ordinary share investors. Unlike creditors who must be paid their contracted return (coupon or yield), or the company will be in default, shareholders accept a risk of residual claim.
        
        As we have discussed before, investors benefit from Income and Capital gain.
        
        The income paid for holding shares is called Dividends.
        
        Investors can also make a capital gain by trading shares.
        
        Due to residual claim risk, company management will not mandate a fixed dividend policy for shareholders. The implication is that management does not have to pay ordinary shareholders a fixed dividend or any dividend; because it is uncertain whether there will be sufficient residual cash flow to commit to a dividend payment.
      - 1. Limited Liability- the most a shareholder can lose is their investment in the firm. So if the company incurs losses that exceed total equity, further loss cannot be claimed against the private wealth of shareholders.
    - - 2.Business earnings are good and there is ample residual cash flow. : Rather than pay a dividend, residual cash flow is reinvested by purchasing productive assets that will increase future earnings growth.
      - 3.Business earnings are currently good but uncertain in the future: Management is unwilling to commit to a fixed, high dividend payment now given the uncertainty of sustaining it into the future. (Dividends provide a signalling effect)
      - 1.Business earnings are poor and uncertain : There is little or no residual cash flow available to shareholders after paying all creditors, liabilities and obligations.
      - Large, established (Blue chip) companies tend to aim for stable, progressive dividend payments while young, growth companies tend not to pay dividends but rather reinvest residual cash flow to maximise growth in future earnings. The style of dividend payments is called the company’s dividend policy.
  - - - 2.NO Voting Rights-Preference shareholders do not have any voting rights.
      - 3.Residual claim before Ordinary Shares in the event of liquidation-Preference shareholders are paid before ordinary shareholders during liquidation.
      - 1. Fixed dividend paid before Ordinary shares--Preference shareholders do not bear the risk of residual claim and like creditors, receive a fixed return before ordinary shareholders.
- - - - The difference between P/E Ratio
        
        The higher the P/E ratio, the more expensive the share.
        
        The Lower the P/E ratio, the cheaper the share.
      - Reason-但是，我们并不能通过PE的高地来去判断是否买一只股票
        
        Shares which have a low P/E ratio (e.g. BHP) are value stocks. They tend to have steady earnings and are therefore, better value.
        
        Does not mean that we should invest in BHP over Apple, we need to decide how important growth is to us.
        
        Shares which have a high P/E ratio (e.g. Apple) are growth stocks. Their P/E ratio is higher because they have more growth potential.
  - - - 𝑃𝑉=𝐷_1/(𝑟−𝑔)
    - - Total Risk=Systematic risk + Unsystematic risk
        
        Systematic Risks: Risks which are common to all shares in the market. Therefore, we can measure systematic risk by looking at the relationship between a share's price movements and the market's movements.
        
        Systematic risk cannot be reduced by diversification.
        
        Systematic risk is uncertainty which comes from factors that affect the entire share market. For example,inflation,interest rates and taxes affect all companies and would be systematic risk factors.
        
        Unsystematic Risk factors are those which do not affect all companies but a subset of the market.For example, the iron ore price would have an important impact on BHP's share price but would not affect COLE's share price.
- - - - 𝛽 is a measure of systematic risk
      - 𝑅_𝑚 is the expected return of the market (can be proxied using ASX200 or All Ordinaries return)
      - 𝑟_𝑓 is the risk free rate (can be estimated by government debt securities such as Treasury bonds and bills)
      - Note that we often call the quantity (𝑅𝑚−𝑟𝑓) the excess return of the market, where excess refers to “on top of the risk-free rate”.
  - - - B> 1, the share has the greater systematic risk than the market
      - B< 1, the share has the less systematic than the market
      - B = 1, the share has the same systematic risk as the market