Equity Markets: Fundamentals

Equity Markets
Fundamentals
corporatefinanceinstitute.com
Equity Markets
S&P 500 Index

3500
3000
Index Value
2500
2000
1500
1000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
March 1, 2010 - February 26, 2020
Corporate Finance Institute®

Course Objectives
Risk and Return Types of Equity Markets, Exchanges &

Indexes
Types of Funds Order Mechanics Valuation & Trading

Techniques
Investment Styles & Strategies Summary

Risk and Return
Session Objectives
Understand different asset Learn the relationship Identify how beta affects the
classes and examples within between risk and return, using returns of equities
each CAPM as an example

Asset Classes
Cash & Cash
Equivalents
• Cash
• Cash equivalents
• Money market funds

Alternative Fixed Income
Investments
• Debt securities
• Real estate
Asset Classes • Public or private debt
• Currencies
• Preferred stock
• Commodities
• Corporate bonds
• Futures and derivatives
Equities • Government bonds
• Public or private equity
• Micro, small, medium,

large, mega cap stocks

Risk and Return
Risk and return are highly correlated, and more risk results in higher volatility.
Risk of Investment Return on Investment
• Volatility of returns • The value of the gain or loss on

• Systematic risk (market) an investment
• Unsystematic risk (asset- • Measured on an absolute or

specific) relative basis
• Can be mitigated

Risk and Return – Graph
This chart illustrates the generalized relationship between risk and return for different securities.
Small Cap Equities

Return %
Large Cap Equities
Option Contracts
Corporate Bonds
Medium Cap Equities
Note: this graph does not

Mega Cap Equities represent an accurate scale (it’s
Risk Free
intended to illustrate the risk/return
Rate profile conceptually).
Risk free rate is normally taken as the yield on a long-term government bond. Risk (market)
It is called Risk free rate because, in developed countries and most developing countries, the
risk of government default is zero and the principal invested is safe
Weekly Return
0%
5%
-15%
-10%
-5%
10%
15%
Feb-17
Mar-17
Apr-17

May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Risk and Return – Example
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Jan-19
February 27, 2017 - February 24, 2020
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
S&P 500
Walmart
Jan-20
Marathon Oil
Capital Asset Pricing Model (CAPM)
The CAPM demonstrates the relationship between the expected return and risk of an investment.
Ra is the expected return of an asset,

calculated by using the risk free rate, the
beta of the asset, and the return of the
market.
Ra = Rf + βa * (Rm – Rf)
Expected Return Risk Free Beta of Return of Risk Free

of Asset Rate Asset Market Rate

Capital Asset Pricing Model (CAPM) – Example
Calculate the expected return of the following asset:
Risk Free Rate 2%
Beta of Asset 1.75
Return of Market 7%

Capital Asset Pricing Model (CAPM) – Example
Calculate the expected return of the following asset:
Expected Return
of Asset
2% 1.75 7% 2%
Expected Return
of Asset
10.75%

Beta
The beta (ꞵ) of an asset reflects the volatility of the security relative to a market benchmark.
What is Beta? Types of Beta Examples of Beta

• The correlation of an asset’s return profile • Levered (equity) beta: accounts for the • ꞵ > 1: more volatile than the market
relative to the market’s returns debt component of the company (i.e. (example: high-risk technology company)
capital structure) • ꞵ = 1: correlated with the market (example:
• Beta encompasses systematic (market)
risk and therefore cannot be reduced • Unlevered (asset) beta: assumes a neutral an index fund)
through diversification capital structure (i.e. the company without • ꞵ = 0: uncorrelated to the market (example:
debt) a $20 US bill)
• ꞵ > 0 < 1: less volatile than the market
(example: electric utility company)
• ꞵ < 0: negatively correlated with the market
(example: gold)

Beta vs. Market
This chart showcases how stocks with varying betas perform relative to the market.
Index Return vs. Beta Stocks

4% Index
β = .5
β=2
2%
Weekly Return
0%
-2%
-4%
-6%
Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19
January 14, 2019 - January 13, 2020

Obtaining Beta – Graph
Beta can be understood as the slope (gradient) of the line of best fit.
x x
x x
x x
x
x x
- x
+ Market (% change)
x
x x x
x
x
x
Beta = slope of the line
-
Share (% change)
Obtaining Beta in Excel
When comparing the return of a company with the market, the slope of the trendline is the beta.

Obtaining Beta – Refinitiv
Note: While Raw Beta is derived from historical data, Adjusted Beta is an estimate of the security’s future beta.

Types of Equity
Session Objectives
Identify the different types Learn about the capital stack Learn the key differences
and characteristics of equities and its constituents between public and private
equity

Definition of Equity
Ownership
• Ownership stake of a company (companies may pursue equity

financing to raise money)
• Common and preferred stock (equity investment in a company)
• Real estate properties (home equity)
• Based on market value of equity (market capitalization) or book
value of equity (accounting)

Capital Stack
Debt
Equity

Capital Stack
Senior debt
Subordinated debt
Hybrid
Equity

Capital Stack – Hybrid
Senior debt
Subordinated debt
Convertibles
Hybrid Convertible securities (option to convert debt into equity)
Equity

Capital Stack – Equity
Senior debt
Subordinated debt
Hybrid
Shareholder loans Higher liquidation position; no dividend but pays interest
Equity
Preferred shares Higher liquidation and higher dividend priority (vs. Common)
Common shares Last liquidation position and last dividend position

Common Stock
What is Common Stock? Features of Common Stock Examples
• Reflects equity ownership of a • Participate in company’s profits • Apple Inc. (NASDAQ: AAPL)
company (through dividends and capital gains) • Walmart Inc. (NYSE: WMT)
• Also referred to as common share, • Voting rights (for corporate policies • Tesla Inc. (NASDAQ: TSLA)
voting share, ordinary share and electing board of directors)
• Alphabet Inc. (NASDAQ: GOOGL)
• Higher risk relative to preferred stock • May have multiple share classes
or bonds (example: voting vs. non-voting)

Common Stock – Example
Market Cap is stock price

multiplied by the
outstanding number of
shares
Dividend Yield is the annual

dividend per share divided
by the stock price

Preferred Stock
What is Preferred Stock? Features of Preferred Stock Types of Preferred Stock
• Reflects equity ownership of a • Priority claim of assets (in a • Convertible: option to convert to
company liquidation event) and dividends, common shares
• Also referred to as preference share relative to common shareholders • Cumulative: unpaid dividends are
or preferred share • Typically no voting rights added to the next dividend
• Higher risk relative to bonds • Fixed dividend payments • Participating: additional
participation in the upside
• Callable: shares may be
repurchased by the company

Preferred Stock – Example
Morgan Stanley
Common Stock Preferred Stock
• Ticker: MS • Ticker: MS.PRG

• Exchange: NYSE • Exchange: NYSE
• Price: $46.48 • Shares Offered: 20,000,000
• Market Cap: $74.33B • Dividend Yield: 6.625%
• Dividend Yield: 3.01% • Liquidation Preference: $25,000
• Depositary Share Redemption Price: $25
• Depositary Shares: 1/1,000th ownership interest in a
Series G Preferred Share
Comparison
Note: information is accurate as of
March 2, 2020 • Less risk than common stock
• Higher dividend yield
• Lower total return (no capital gains)
Hybrid Securities
Hybrid securities combine different financial instruments into one security.
Returns Most Common Examples
• Fixed income payment • Usually combines • Convertible bonds

• Variable income equity and debt (convertible notes)
payment features into one • Convertible preferred
security shares

Hybrid Securities – Tesla, Inc.
• If Tesla’s stock increases by 25%, investors can convert to common shares Upside potential
• If Tesla’s stock didn’t increase by 25%, the investors hold the notes Downside protection

Public vs. Private Equity
Public Equity Private Equity

Public vs. Private Equity
Public Equity Private Equity
Features Types Features Types

• Listed on public • Public company shares • Not listed on public • Private equity
exchanges • Real Estate Investment exchanges • Venture capital
• Liquid (high volume) Trusts (REITs) • No active secondary • Distressed capital
• Detailed financial reports • Exchange traded funds market
• Private real estate
• Active secondary market (ETFs) • Typically illiquid
• Mutual funds
• Greater liquidity and stocks can be easily traded on the exchange • Illiquid investment resulting in difficulty in exiting investments

Markets, Exchanges &
Indexes
Session Objectives
Learn about primary and Understand the difference Determine if a stock or

secondary markets and between industries and industry is cyclical or
exchanges and indexes sectors with examples defensive
Examine the relationship

between volume and liquidity

Primary vs. Secondary Markets
Primary Market Secondary Market
• New issues are first sold in the primary • Investors trade securities which were
market after underwriting (bonds) or an originally released in the primary market
IPO (stocks) • The formal stock exchanges (such as
• Following an IPO, companies may offer NYSE, NASDAQ, etc.)
follow-on or seasoned equity offerings • The secondary market can be further
broken down into the auction market
and dealer market
• The trading of the securities between investors

• Creating new securities
• Vast majority of trading volume

Stock Exchanges
Markets used by individuals and firms to

purchase and sell securities which are listed on
that exchange
Highly liquid and involve digital trading of

securities
Exchanges require companies to achieve

certain metrics prior to being listed
New York Stock Exchange (NYSE) Requirements
• 400 shareholders or more • $40M in market capitalization
• At least 1.1 million shares publicly listed

Stock Exchanges
• Largest stock exchange in the world by market cap • One of the fastest growing stock exchanges in Asia
• Technology focused
• Largest stock exchange in continental Europe by market cap
• Largest stock exchange in Asia by market cap • One of the oldest stock exchanges in the world
Note: information is accurate as of

• Not completely open to foreign investors • Derivatives, options and futures March 2, 2020

Auction vs. Dealer Market
Auction Dealer
• NYSE • NASDAQ
• Auction-style (highest bid • The dealers act as

matches lowest ask) intermediaries
• Order driven • Each security has several
market makers
• Quote driven

Over-The-Counter (OTC)
Over-The-Counter (OTC) includes securities which are not traded on public stock exchanges.
Why OTC? Benefits Disadvantages Examples
• Securities which don’t • Access to unlisted • Less liquidity (due to low • Best Market (OTCQX)
meet listing requirements securities volume) • Venture Market
for other exchanges • Fewer regulations • Less public information (OTCQB)
• Highly volatile (beneficial • Pink Open Market
for traders)

Indexes
A stock index is composed of selective stocks, used to measure the performance of the chosen companies as
an aggregate.
01 02 03
Price-Weighted Index Capitalization-Weighted Index Equal-Weighted Index
Weighted by share price Weighted by market Weighted equally by

• High share price = high capitalization investment
weight • High market cap = high weight • Same capital invested into
• Example: Dow Jones • Example: S&P 500 each company
Industrial Average (DJIA) • Example: Equal Weight
ETFs
• Requires frequent
rebalancing

Equity Categories
Sectors &
Industries
Individual Size
• Financials
vs. Fund
• Materials • Small cap
• Individual • Gaming • Mid cap
• Funds (ETFs, • Large cap
Mutual) • Mega cap
Categories
of Equity
Security
Investor Type
Cyclicality • Common
• Growth
• Preferred
• Value • Cyclical • Convertible/
• Income • Defensive Hybrid
(non-cyclical)

Market Capitalization • Highest market cap size • Lowest market cap size
• Highest liquidity/volume of • Lowest liquidity/volume
Nano Cap
shares traded of shares traded
• $50M & lower
• Lots of equity research • Not much equity
Market Capitalization coverage • Ex. iFresh Inc. research coverage
• The equity value of a firm (publicly traded shares) Mega Cap Micro Cap
• Used as an approximation of size (no debt included) • $50M - $300M
• $200B & higher
• Ex. Apple Inc. • Ex. Aware, Inc.
Formula
• Market Cap = Shares Outstanding * Price per Share Market Cap
• Market cap usually fluctuates daily
Large Cap Small Cap
*B = Billion USD
• $10B - $200B *M = Million USD • $300M - $2B
Different Sizes • Ex. General • Ex. RE/MAX

Electric Holdings, Inc.
• The market cap thresholds for each size vary, and
there are no firm guidelines (just estimates) Medium Cap
• $2B - $10B
• These change with population, inflation, and total
market value • Ex. Macy’s, Note: information is accurate as of
March 2, 2020
Inc.

Sectors
Sectors (created by S&P and MSCI) sort companies by business activity.
Consumer Consumer
Financials Utilities
Discretionary Staples
Energy Health Care Industrials Technology
Telecom Materials Real Estate

S&P 500 Sector Breakdown – Refinitiv
• Capital markets professionals typically focus on one or a few sectors

• Usually compare companies and securities with competitors in the same sector

Industries
Industries are sub-categories of sectors (multiple industries may be in the same sector).
Information Consumer Communication

Technology Health Care Financials Services
Discretionary
• Software • Biotechnology • Banking • Wireless

• Automobiles
• IT Services • Pharmaceuticals • Capital Markets Telecommunication
• Hotels, Restaurants &
• Communications • Health Care • Insurance • Entertainment
Leisure
Equipment Technology • Media
• Household Durables
Industrials Consumer Energy Real

Utilities
Staples Estate
• Aerospace & • Food Products • Energy Equipment & • Electric Utilities • Equity Real Estate
Defense • Household Products Services • Gas Utilities Investment Trusts
• Airlines • Tobacco • Oil, Gas & Consumable • Water Utilities • Real Estate
• Machinery Fuels Management &
Development
• Chemicals
Materials • Metals & Mining
• Paper & Forest Products
S&P 500 Industry Breakdown – Refinitiv

Cyclical vs. Defensive Industries
Cyclical Defensive (Non-Cyclical)
• Fluctuate with the business cycle • Remains relatively stable during

(high correlation) changes in the business cycle (less
• Example: Airlines correlation)
• This industry does well when • Example: Utilities

consumers have ample disposable • Consumers use electricity, water,
income (during economic booms) and/or gas all year round and usually
• During an economic downturn, won’t radically change their usage
consumers purchase less flights, depending on the economy
take less vacations, and spend • Usually offer consistent dividends
cautiously and stable cash flows

Cyclical vs. Defensive Industries – Example
Cyclical vs. Defensive Market

Cyclical
Defensive
6.0%
4.0%
% Change
2.0%
0.0%
-2.0%
-4.0%
-6.0%
Month
Key Takeaways:
• In September, the market falls 4%, the cyclical industry falls 5.6% and the defensive industry falls 1.6%.
• In December, the market rises 4.2%, the cyclical industry rises 5.9% and the defensive industry rises 1.7%.
• It’s clear that the cyclical industry fluctuates much more with the market, whereas the defensive industry has less
volatility (shown by a flatter line) which fluctuates much less relative to the market.

Cyclical vs. Defensive Industries – Refinitiv Example
• This graph compares the MSCI USA

Cyclical Index (in orange), the MSCI
USA Defensive Index (in purple), and
the S&P 500 (in green) during the
financial crisis
• Between March 4 and March 11, 2020,

S&P 500 dropped by 12.51%, its worst
month since October 2008
• During this time, the cyclical index

experienced a much more drastic
relative price change compared to the
defensive index

Volume and Liquidity
Volume Liquidity
About High vs. Low About High vs. Low

• Amount of shares or total • High volume implies • Liquidity lets you buy or • High liquidity lets you
value of shares traded higher liquidity since the sell a security quickly exchange securities fast
within a time period securities are being without moving its price • Low liquidity takes
• News releases and other exchanged more • A long time horizon is longer to exchange
events may increase frequently required for large securities and may affect
volume traded • Low volume implies low investors to buy or sell the price
liquidity for the opposite and may result in losses
reason due to price movement

Volume & Liquidity – Refinitiv Example
Market Illiquidity
• The chart here exemplifies the problem
with illiquid companies (using ticker
SQBG as an example)
• The price changes radically, sometimes

fluctuating up to 7% in 30 minutes
Other Low Liquidity Examples:
• Private companies, art pieces, securities

with low trading volume

Volume & Liquidity – Refinitiv Example
Market Liquidity
• Here is a chart of ticker AAPL which has
much more liquidity than the previous
example
• The price doesn’t fluctuate drastically

since the high liquidity reduces price
movements
Other High Liquidity Examples:
• Cash, Term Deposits, and Government

Bonds

Types of Funds
Session Objectives
Identify the benefits and Compare mutual funds and Understand the difference
drawbacks of pooled funds exchange-traded funds between active and passive
investing
Learn about open-ended and Learn about the fee structure

closed-ended funds for various securities and funds

Types of Funds – Overview
Pooled Funds
Exchange Traded Funds

Mutual Funds
(ETFs)
Open-End Closed-End

Pooled Funds
A pooled fund is a portfolio which consists of money from many different investors.
What Are Pooled Funds Benefits Disadvantages
• Money is pooled together and managed • Pooled funds are managed by • Annual fees and expenses
by professionals professionals • Since the fund is being controlled solely
• The fund managers then buy and sell • The funds consists of many positions to by fund managers, an investor lacks
securities within the fund ensure investment diversification control in choosing investments and
Examples: • Pooled funds generally have high strategies
• Mutual Funds liquidity, ensuring ease in buying or • Pooled funds aren’t guaranteed to
• Exchange-Traded Funds selling a share of the fund achieve a positive return, and may return
• Hedge Funds less than the major market indexes
• Pension Funds

Mutual Funds
Mutual funds, managed by professionals, pool money from investors and invest in securities on behalf of the
investors.
Types of Mutual Funds Benefits Disadvantages
• Money market funds (cash & eq.) • The mutual fund portfolio is managed by • A management expense ratio (MER) is
• Fixed income funds professionals taken off the total fund return to pay the
• The fund consists of many positions to managers
• Equity funds (stocks)
ensure investment diversification • Since the fund is being controlled solely
• Balanced funds (equities & fixed income)
• A position in a mutual fund may be sold by portfolio managers, an investor lacks
• Index funds (track market index) control in choosing investments and
or purchased daily (but not intraday)
• Specialty funds (niche – ex. Energy) strategies
• Mutual funds aren’t guaranteed to
achieve a positive return, and may return
less than the major market indexes

Mutual Funds – How They Work
Investors
Distributed to investor Pool money
together
Don’t trade on a
Returns Fund Manager
stock exchange
Increase in Invests in
value securities
Securities

Exchange-Traded Funds (ETFs)
Exchange-traded funds hold a variety of securities, similar to a portfolio, and are traded on exchanges.
Types of ETFs
• Index ETFs (ex. track S&P 500)

• Leveraged ETFs Vanguard All-Equity ETF Portfolio (TSX: VEQT)
• Commodity ETFs (ex. gold) • Focuses on equity investments
• Industry ETFs (ex. automobiles)

• Currency ETFs (ex. Euro)
• Bond ETFs (ex. corporate bonds)
• Style ETFs (ex. small cap companies)
• Inverse ETFs (ex. shorting a stock) iShares Core S&P Small-Cap ETF (NYSEARCA: IJR)
• Focuses on small cap companies within the S&P 500

Exchange-Traded Funds (ETFs) – Benefits & Disadvantages
Benefits Disadvantages
• Gain exposure to different strategies, • Certain ETFs aren’t well-diversified (ex.

markets, and industries an ETF focused solely on gold)
• The fund consists of many positions to • Since the fund is being controlled solely
ensure investment diversification by portfolio managers, an investor
• Typically ETFs are purchased and sold lacks control in choosing investments
quick due to high liquidity and strategies
• Low fees and commissions • ETFs aren’t guaranteed to achieve a

positive return, and may return less
than the major market indexes

Index Funds
An index fund is an ETF or mutual fund which invests in a group of securities, focused on tracking a specific
market index.
Types of Index Funds
• Market index Vanguard S&P 500 Index ETF
• International • Focuses on tracking the S&P 500 index
• Sector
• Broad market
• Bonds
• Dividend-focused
iShares Russell 2000 ETF
• Leveraged • Focuses on tracking the Russell 2000 index

Index Funds – Tracking Error
Index ETF vs. S&P 500

• Here is a chart of an index ETF vs. the S&P
500
• The chart does not include the fees

associated with owning an index ETF,
resulting in a lower return
Tracking Error
• The difference between the index ETF and

the respective market index
• One way this happens is due to the allocation

of the market index (the index ETF can’t
rebalance daily)
Disadvantages
• Limited to investments within a certain index
• Never outperforms the index it’s tracking (aside

from tracking error)

Active vs. Passive Funds
Active Funds Passive Funds (Index Funds)
• A portfolio manager has discretion over the investment allocation • A fund which is not actively trying to outperform an index or
and is trying to beat an index or benchmark. benchmark.
Benefits Disadvantages Benefits Disadvantages
• Ability to beat the market • Higher fees (MERs) • Low fees • Won’t outperform the
• Not limited to certain • May underperform the • Won’t underperform that market
investments market market • No change in strategy
• Investment losses can • Clean exposure to a
be sold to offset capital market or asset class
gains tax

Open-Ended vs. Closed-Ended Funds
Characteristic Open-Ended Fund Closed-Ended Fund
Fund Structure Unlimited share purchases and share Fixed number of shares from an IPO
redemptions from fund manager
Fund Price Net asset value per share Premium or discount to net asset value
per share
Pricing Priced daily (end of day) Priced continually (trades on an

exchange)
Liquidity With cash requirements to account for Little to no cash requirements

future share redemptions
Management Actively/passively managed Actively managed
Fees Management fees Management fees

Fees
The fees for various securities and funds differ greatly; this table showcases typical industry standards.

Types of Funds – Summary
Mutual Fund Mutual Fund Exchange Traded Funds

Open-End Closed-End (ETFs)
Once per day at market Intraday Intraday

Pricing close
Active/Passive Active Mostly Passive

Management
Mutual Fund Order Stock Exchange Stock Exchange

Method of Purchasing System (secondary market)
Medium Medium High

Transparency
No Yes (secondary) Yes

Short Sales
No Yes (secondary) Yes

Limit/Stop Orders

Order Mechanics
Session Objectives
Learn about the different Understand the difference Determine how bid and ask
types of market orders between settlement date and dictates the market price
settlement period

Orders – Individual Equities
Market Order (Buy or Sell) Example: Jenny wants to purchase a share of company A
which is currently trading at $15.50. She puts in a market
• Executes the order at the market price order to purchase 1,000 shares and is filled at $15.63 (the
• Most common & simple type of order lowest ask/offer price).
Example: Alex wants to buy shares of company B for

Limit Order (Buy or Sell) $20.50 but it is currently trading at $21.34. He places a
limit order at $20.50. If the stock of company B drops to
• Executes the order at a predetermined price (buy
$20.50 while his order is good, it will be purchased for
orders set below market price, sell orders above)
$20.50 (or less).
Example: John owns shares of company C which is

Stop Order (Buy or Sell) trading at $15.31. He is worried about the stock, so he
places a stop-loss order at $10.00. If company C reports
• Executed as a market order when the security price
bad news overnight and the stock opens at $8.28 the next
falls below the stop price or when the price rises in
morning. John’s shares will be sold as a market order.
case of short selling

Orders – Individual Equities
Example: Bobby wants to buy shares of company D which

Good Through (Day or Set Date)
is trading at $4.50. He puts in a limit order to buy at $4.45
• An order with a specified time deadline which is good through a five day period. The stock is
• A good ‘til canceled order is a limit order which trading at $4.45 on the third day and the order is filled.
ends when it is filled or canceled
Example: Michelle wants to buy 1,000 shares of company

Fill or Kill E for $6.75. The stock is currently trading at $6.82. She
puts in a fill or kill order for 1,000 shares at $6.75 and the
• The market order must be filled completely in an
order is canceled shortly after (since it was not filled
instant otherwise it is canceled
immediately at the desired price).
Example: Cassandra wants to sell 7,000 shares of

All or None (vs. Partial Fill)
company F for $3.30. The stock is currently trading at
• Like a Fill or Kill order except the trader can specify $3.20. She doesn’t use “all or none” for her order to sell
the amount of time 7,000 shares within 4 days. In 3 days there is a bid for
3,000 share at $3.30 and her order is partially filled for
3,000 shares at $3.30.

Orders – Mutual Funds
Mutual funds are purchased through the fund, or a broker which offers them.
Details
• Some funds have capital requirements
• Important to conduct due diligence (i.e. allocation,
historical performance, management expense Example: Samantha wants to invest $500 into bank Z’s
ratio) mutual funds while the current day’s NAV is $50. At the
end of the day, bank Z’s mutual fund NAV is calculated as
$48. Her investment is completed the following day and
she receives 10.4 shares. If the bank doesn’t offer
Trading Mutual Funds fractional mutual fund shares, she will receive 10 shares
• Mutual fund share value remains constant during and have $20 left over.
the day
• The price is set at the net asset value (NAV),
usually within two hours of market close
• Orders are completed once the current day’s NAV
is decided

Settlement
Settlement Period
Trade Date Settlement Date
• The trade is initiated • The buyer and seller

to buy or sell a complete the transaction
security (cash is exchanged)
• The buyer is the registered
owner of the security

Settlement
Settlement Date Settlement Period
• The trade is finalized, and the buyer • The time range between the trade
and seller must exchange their date and the settlement date
payment and assets • The buyer and seller complete the
• Stocks: typically 2 business days transaction
after trade date (T+2) • Final day of the settlement period is
• Mutual funds: typically 1 or 2 when the buyer is the registered
business days after trade date (T+1 owner of the security
or T+2) • They buyer doesn’t need to have the
• ETFs: typically 2 business days after cash in their account until the
trade date (T+2) settlement date

Pricing (Bid/Ask)
Bid Ask
Spread
• The highest price paid by the buyer • The lowest price sold by the seller
• Sellers can view this and determine Spread = Ask - Bid • Buyers can see this and decide how
how much to sell the security for much to buy the security for
• Other buyers can decide what to pay • Other sellers can determine what
for the security they should sell the security for

Pricing (Bid/Ask)
Order Book Example

Buy Orders (Bids) Sell Orders (Asks)
Amount Price Amount Price
100 $8.00 200 $8.05
50 $7.99 1,000 $8.12
2,000 $7.97 300 $8.15
400 $7.90 70,000 $8.16
Clarification:
• The spread for this security = $8.05 (Ask) - $8.00 (Bid) = $0.05.
• If an investor submits a buy order of 100 shares for $8.06 each, 100 shares will be purchased for $8.05
(current sell order).
• If an investor places a sell order of 100 shares at $8.01, the order will be placed at the top of the sell orders
section but will not be filled.
Pricing (Bid/Ask) – Refinitiv
• AAPL US encompasses the

trading of all information of
AAPL on all US exchanges
• Example: AAPL UW is the ticker
AAPL being traded on the
NASDAQ
• For AAPL US, the bid is
$147.85 and the ask is $147.86
• This means the spread is $0.01
($147.86 - $147.85)

Valuation & Trading
Techniques
Session Objectives
Learn about fundamental and Differentiate between relative Apply technical analysis
technical analysis and intrinsic valuation tools to analyze security
methodologies trading patterns

Fundamental vs. Technical Analysis
Fundamental Analysis Technical Analysis
• Valued based on the company’s • Valued based on historical price data

financial performance, the firm’s • Looks at trends, price levels, market
competition, its strategy, management sentiment, and technical indicators
team, and economic forces
• Assumes that patterns for securities are
• Assumes that it’s possible to find indicative of future movements due to
undervalued companies which herd mentality and market sentiment
eventually rise to fair value
• Requires understanding of company • Focuses more on quantitative factors (not as

financial statements relevant to a company’s financials)

Fundamental Valuation Methods
Fundamental analysis focuses on deriving a security’s intrinsic value based on financial information.
Relative Methods Intrinsic Methods
About Methods About Methods

• A company is valued relative • Comparable company • A company is valued based • Discounted Cash Flow (DCF)
to other similar firms (size, analysis on its underlying business analysis
operations, industry, assets, • Precedent transaction and expectations for the • Dividend Discount Model
etc.) analysis future
• Gordon Growth Model
• Assumes that the market is • Relies on assumptions
• H-Model
valuing businesses generated by the analyst
appropriately • Residual Income Model

Relative Valuation Methods
Relative Methods
Comparable Company Analysis Precedent Transaction Analysis
• Assesses metrics and multiples of similar firms to • Prior relevant M&A transactions are analyzed to
derive an appropriate value for the firm being assess an appropriate value of a business
analyzed
• Different multiples are more relevant for certain • Timely and relevant past M&A deals may be
industries or businesses (ex. a retail firm may be difficult to locate, and they usually include a
focused on revenue multiples) takeover premium
• Some more popular multiples used include:

• EV/EBIT • P/E (Price/Earnings)
• EV/EBITDA • P/BV (Price/Book Value)
• EV/Revenu • P/Cash Flow
e
Relative – Comparable Company Analysis
Market Data Financial Data (FY+1) Valuation (FY+1)
Market EV/Sale
Price Shares Net Debt EV Sales EBITDA Earnings EV/EBITDA P/E
Cap s
Company name ($/share) (M) ($M) ($M) ($M) ($M) ($M) X X X
Micro Partners $9.45 100 $945 $125 $1,070 $268 $76 $47 4.0x 14.1x 20.1x
Junior Enterprises $5.68 1,250 $7,100 $2,00 $9,100 $4,136 $778 $412 2.2x 11.7x 17.2x
Miniature Company $18.11 50 $906 $25 $931 $443 $96 $56 2.1x 9.7x 16.3x
Average Limited $12.27 630 $7,730 $350 $8,080 $1,949 $528 $294 4.1x 15.3x 26.3x
Behemoth Industries $9.03 1,500 $13,545 $0 $13,545 $6,622 $795 $423 2.0x 17.0x 32.0x
Average 2.9x 13.6x 22.4x
Median 2.2x 14.1x 20.1x

Relative – Precedent Transactions
Valuation
Transaction Value
Date Target Buyers EV/Sales EV/EBITDA EV/EBIT
($M)
01/24/2017 Current Ltd 2,350 Average Limited 1.9x 9.4x 11.2x
04/19/2016 Recent lnc 6,500 Behemoth Group 1.4x 8.0x 12.6x
04/19/2014 Past Co 2,150 Other Group 1.3x 8.7x 12.1x
11/07/2014 Historical LLP 450 Junior Enterprises 2.3x 11.1x 13.6x

11/01/2012 Old Group 325 Miniature Company 5.1x 18.8x 21.5x
11/07/2011 Dated Enterprises 150 Micro Partners 2.1x 9.3x 13.2x
Average 2.3x 10.9x 14.0x
Median 2.0x 9.4x 12.9x

Intrinsic Valuation – DCF Analysis
• If Intrinsic Value < Current Share Price = Overvalued (sell)

• If Intrinsic Value > Current Share Price = Undervalued (buy)
• Not comparing with other companies in the industry

• More focused on the free cash flow generation of the firm
• This type of analysis requires strong understanding of

accounting and company financial statements

Valuation Exercise
Current Share
Price
Current P/E
Ratio
17.91
Chart from TradingView

Intrinsic Valuation Comparison
P/E Ratio Stock Price
Comparable Company Analysis 22.4x P/E
DCF Analysis $42.71 / share
COMPANY TO VALUE 17.91x P/E $33.46 / share
Investment Decision Undervalued (Buy) Undervalued (Buy)

Technical Analysis – Relative Strength Index (RSI)
Technical analysis assesses investment opportunities through trend analysis and stock performance patterns.
Relative Strength Index (RSI) Overbought

If the RSI is above 70, it would imply the security
• The RSI measures the momentum of price is overbought
movements of a security. It is measured on a
scale of 0 – 100.
• This technical indicator can help illustrate viable Oversold

entry and selling points. • If the RSI is below 30, it would imply the
security is oversold
• Although calculating the RSI requires extensive
technical calculations, a simple version of the
formula is:

Technical Analysis – RSI Refinitiv
• The highlighted section at the bottom

showcases the RSI indicator with a
lower and upper band of 30 and 70
respectively
• AAPL is overbought in March and April

2019, oversold in May/June 2019 and
then overbought in periods throughout
October 2019 to January 2020
• It’s important to use RSI with other

indicators as AAPL has been trending
upwards even though the stock is
overbought according to the RSI

Technical Analysis – Charting Patterns
Traders analyze stock charts to determine patterns which may indicate future price trends.
Continuation Patterns Reversal Patterns
About Examples About Examples
• A pattern which • Pennants • A reversal in the • Double Tops

pauses a current • Flags current trend of the • Double Bottoms
trend before security
• Wedges • Head and Shoulders
continuing • Example: an uptrend
• Triangles
• Example: an uptrend turning into a
turning flat • Cup and Handles downtrend

Price ($ USD)
125
175
225
275
325
Feb-17

Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Apple Inc.
Sep-18
Oct-18
Nov-18
Ascending Triangle Example
Dec-18
Technical Analysis – Continuation Pattern Example
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
Jan-20
Price ($ USD)
1000
1200
1400
1600
1800
2000
2200
800
Feb-17

Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Technical Analysis – Reversal Pattern Example
Amazon.com, Inc.
Double Top Example
Oct-18
Nov-18
Dec-18
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
Jan-20
Technical Analysis – Moving Averages
Moving Average (MA)
About Simple Moving Average
SMA = Simple Moving Average

• A lagging (based on prior prices) indicator which uses
A = Average price in each period
averages to reduce the variation of short-term price n = Number of periods
movements, and indicate trends
• Comparing moving averages of different time periods Weighted Moving Average

can indicate a change in trend. i.e. The 50-day MA
crossing the 200-day MA • Applies more weight to recent price
movements (simple moving average places
• Simple and weighted moving averages are two of the
equal weight)
most common types; exponential moving average is
WMA = Weighted
also used sometimes but not covered in this course Moving Average
P = Price in each period
n = Number of periods

Technical Analysis – Simple Moving Average
• The stock price of this company fluctuates notably in this chart

• The 5-day moving average smooths out the data, so the highs and lows are less prominent
• The 8-day moving average is an even flatter line, smoothing out the data even further
Price vs. Moving Average Stock Prices

MA (5 Day)
MA (8 Day)
$7
Stock Price in USD ($)
$6
$5
$4
$3
$2
$1
$-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Time (Days)

Golden Cross and Death Cross (50/200 MA)
S&P 500
Golden Cross
Death Cross
Golden Cross
Chart from TradingView

Valuation – Analyst Ratings
• Research analysts at various firms produce

ratings for the securities they cover
• As shown in the analyst recommendations,

these opinions vary greatly
• Equity research analysts typically focus on

fundamental analysis (comps and DCF) but
may also incorporate technical analysis as well

Investment Styles &
Strategies
Session Objectives
Compare different investment Understand the goals of each Learn how to evaluate
styles and strategies investment strategy securities based on the
investment strategy used
Learn how to measure Compare beta and alpha

performance using different
metrics

Investment Strategies Overview
Short Term Long Term
Quantitative Technical Fundamental
Multi-Factor Models Reversal Patterns Growth Value
Algorithms Continuation Patterns GAR

P
Capital Preservation
Income
Capital Gain

Short-Term Investment Strategies
About Benefits Disadvantages Examples
• Short term investment • Take advantage of market • Market timing can work • Technical trading
strategies are usually held fluctuations against you • Charting
for anywhere between one • Get market timing right • Higher risk if trading
day and one year
• Quick benefit • May miss the higher returns
of longer term investments

Trading Strategy
S&P 500 Index

3400
3300
3200
Index Value
3100
3000
2900
2800
2700
Feb-19
Jul-19
Jan-20
Sep-19
Oct-19
May-19
Jun-19
Apr-19
Dec-19
Mar-19
Nov-19
Aug-19

Shorting Strategy
Benefits Disadvantages Example
• Investors make money if the • Investors loses money if the • If an investor believes a
security falls in value (with security appreciates certain industry/sector or
little upfront cost) (unlimited potential loss) company will underperform,
• Ability to profit in a bear • The short sellers must they will short the stock and
market supply the stock lender with hope to rebuy it at a lower
the stock’s dividend price
• May be used to hedge a
current investment payments

Shorting Strategy
Investors borrow shares at a certain price with the obligation to give back the shares in the future.
How Does It Work? Investor Sell 10 shares
Example: Investor wants to short Stock A Get $100
• The investor borrows the stock from someone who owns it Buy 10 shares
• The investor then sells the stock in the market for cash
• The investor closes the short position by purchasing the stock Pay $50 Market
back from the market and giving the shares back to the Borrow
original owner Return
10 shares
10 shares
Stock Lender

Shorting Strategy
Investor Sell 10 shares

Investor Payoff
Get $100
+ $100 when selling the shares Buy 10 shares
- $50 when buy the shares back

Pay $50 Market
= $50 profit Borrow
Return
10 shares
10 shares
+ $100 when selling the shares

Stock Lender
- $200 when buy the shares back
= $100 loss

Long-Term Investment Strategies
About Benefits Disadvantages Examples

• Long term investments are • Beneficial for investors who • Long term commitment • Stocks
usually held for one year or have money they won’t need • Long-term bonds
more to forever until a much later date • Less liquidity
• Mutual funds and ETFs
• Longer time horizons generally
• Real estate
have higher returns

Buy and Hold Strategy
About Benefits Disadvantages Example

• Investors go “long” on • Passive once invested in the • The security may fall in price • Buying shares of Amazon
investments (such as stocks securities (unless and holding for ten years
or ETFs), anticipating higher rebalancing)
• Opportunity cost (may be
future stock prices • Less capital gains taxes able to achieve better returns
elsewhere)
• Unlimited upside potential

Buy and Hold Strategy
S&P 500 Index

3400
3300
3200
Index Value
3100
3000
2900
2800
2700
Feb-19
Jul-19
Jan-20
Sep-19
Oct-19
May-19
Jun-19
Apr-19
Dec-19
Mar-19
Nov-19
Aug-19

Long and Short Strategy (Market Neutral)
The long and short strategy combines a long investment with a short investment.
Long Short
Investment Long & Short
Investment
Relevant
Benefits Disadvantages Example
Strategies
Pair Trade: • Betting on company- • Miss out on full upside • Long Coke short Pepsi
• Long investment and specific performance of just betting on one
short position within • Doesn’t rely on a bull or direction
the same sector bear market • Get both bets wrong
Market-Neutral: • Can be used to hedge
• Equal investments in risk
long and short
positions

Value, Growth, Income, Preservation, Absolute Return
Goal Focus (General Guidelines) Methods of Assessing Examples
• Intrinsic Valuation
Invest in stocks which are
• Low Price/Book Value Ratio Methods • Kraft Heinz
undervalued (trading at a
• Low P/E Ratio • DCF Analysis • Molson Coors
Value Stocks discount)
• Comps Analysis
Invest in growing companies or • Trending Industry • Find hot sectors • Amazon

sectors • Trending Stock • Revenue multiple • Alibaba
Growth Stocks
• AT&T
Invest in securities which offer • High dividend yield
• Consistent high dividend • General Mills
high yields for consistent income • Blue chip stocks
Income Strategy • High yield bonds
• Safe, low risk investments • Berkshire Hathaway

Preserve capital and avoid
• Diversify geographies • Low risk (reputable firm, • Johnson & Johnson
losses (reducing return for lower
• Options strategies for safe security) • Put options
Capital Preservation risk)
downside protection
• Risk management
• Sharpe ratio (risk-
• Focus on absolute returns (not • Vanguard Alternative
Achieve positive returns and limit adjusted performance)
relative to a market) Strategies Fund
losses • Low portfolio standard
Absolute Return • Invest in a variety of securities (VASFX) ETF
deviation
and instruments

Performance: Alpha, Sharpe Ratio, Information Ratio
Alpha Sharpe Ratio Information Ratio
• Measures performance of • Measures risk-adjusted • Measures performance of

an asset relative to a return an asset relative to a
benchmark and compares
benchmark • Compares returns relative it with the volatility of
to volatility returns
Legend Legend Legend

• Rp = Portfolio return • Rp = Portfolio return • Rp = Portfolio return
• Rm = Market return • Rf = Risk Free Rate • Rb = Benchmark return
• σp = Standard deviation of • Tracking Error = Standard
excess portfolio return deviation of Rp - Rb

Summary
Equity Markets
S&P 500 Index

3500
3000
Index Value
2500
2000
1500
1000
Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19
March 1, 2010 - February 26, 2020

Course Summary
Recognize different asset Understand the relationship Identify the different types
classes and components of between risk and return and characteristics of equities
each
Learn about markets, Compare different types of Determine how different

exchanges, industries and funds and investment market orders affect
sectors strategies transactions
Learn fundamental valuation

and technical analysis

Capital Markets & Securities
Analyst (CMSA)

Equity Markets: Fundamentals

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Equity Markets

S&P 500 Index

March 1, 2010 - February 26, 2020

Corporate Finance Institute®

Risk and Return Types of Equity Markets, Exchanges &

Types of Funds Order Mechanics Valuation & Trading

Investment Styles & Strategies Summary

Corporate Finance Institute®

Corporate Finance Institute®

• Money market funds

• Public or private equity

• Micro, small, medium,

Corporate Finance Institute®

Risk of Investment Return on Investment

• Volatility of returns • The value of the gain or loss on

• Unsystematic risk (asset- • Measured on an absolute or

Corporate Finance Institute®

Small Cap Equities

Large Cap Equities

Medium Cap Equities

Note: this graph does not

Corporate Finance Institute®

Ra is the expected return of an asset,

Expected Return Risk Free Beta of Return of Risk Free

Corporate Finance Institute®

Calculate the expected return of the following asset:

Risk Free Rate 2%

Beta of Asset 1.75

Corporate Finance Institute®

Calculate the expected return of the following asset:

Corporate Finance Institute®

What is Beta? Types of Beta Examples of Beta

Corporate Finance Institute®

Index Return vs. Beta Stocks

January 14, 2019 - January 13, 2020

Beta = slope of the line

Corporate Finance Institute®

Corporate Finance Institute®

Corporate Finance Institute®

• Ownership stake of a company (companies may pursue equity

Corporate Finance Institute®

Corporate Finance Institute®

Corporate Finance Institute®

Corporate Finance Institute®

Shareholder loans Higher liquidation position; no dividend but pays interest

Common shares Last liquidation position and last dividend position

Corporate Finance Institute®

What is Common Stock? Features of Common Stock Examples

Corporate Finance Institute®

Market Cap is stock price

Dividend Yield is the annual

Corporate Finance Institute®

What is Preferred Stock? Features of Preferred Stock Types of Preferred Stock

Corporate Finance Institute®

Common Stock Preferred Stock

• Ticker: MS • Ticker: MS.PRG

Hybrid securities combine different financial instruments into one security.

Returns Most Common Examples

• Fixed income payment • Usually combines • Convertible bonds