Capital Structure and Valuation Quiz

Capital Structure

• Types of Capital:
  • Senior Debt: Highest repayment priority, lower interest rates, less restrictive debt covenants.
  • Subordinated Debt: Lower claim on assets, higher interest payments.
  • Mezzanine Debt: Combines equity and debt features, higher interest rates, lenders can convert debt to equity.
  • Hybrid Financing: Blends equity and debt features, bought and sold on exchanges, can have fixed or floating returns.
  • Convertible Debt: Most common hybrid financing, bonds can be converted to equity.
  • Convertible Equity: Hybrid financing, preferred shares/equity can be converted to common equity.
  • Preferred Equity: Offers fixed dividends (debt) and future earnings potential (equity), but no voting rights.
  • Common Equity: Most junior form of capital, highest risk, highest return potential.

Importance of Valuation

• Understanding valuation frameworks is crucial for informed investment decisions.
• These frameworks help accurately assess a company's financial health and potential value.
• Investors can use frameworks to make more informed decisions based on a company's financial position and future prospects.

Equities

• Equities represent ownership in a company.
• Investors can potentially benefit from capital appreciation or dividends.
• These investments are subject to market volatility, influenced by factors like economic conditions, industry trends, and company performance.

Commodities

• Commodities encompass tangible assets like energy, metals, and agricultural products.
• They offer portfolio diversification.
• Prices are influenced by supply and demand dynamics, geopolitical factors, weather conditions, and technological advancements.

Futures Trading

• Futures contracts allow speculation on price movements and risk management.

Derivatives

• Derivatives are financial instruments that enable investors to manage risk exposure and customize investment strategies.
• Examples include:
  • Options: Contracts giving the buyer the right (not obligation) to buy or sell an underlying asset at a specific price.
  • Swaps: Agreements to exchange cash flows between two parties.
  • Futures: Agreements to buy or sell an underlying asset at a specific price on a specific date in the future.

FX (Foreign Exchange)

• The forex market is the largest and most liquid financial market globally, operating 24/5.
• FX trading involves buying one currency and selling another, with exchange rates impacted by economic indicators and geopolitical events.
• FX derivatives help mitigate currency risk related to international transactions.

Hybrid Securities

• Hybrid securities combine elements of debt and equity.
• They appeal to investors seeking a balance between income generation and growth potential.
• Some may have call provisions or the ability to convert into shares.

Managed Investment Schemes

• Mutual Funds: Pool money from investors to purchase an assortment of stocks, bonds, or other securities.

Trends in Trading

• A bullish trend is defined by a series of higher highs and higher lows.
• A bearish trend is defined by a series of lower lows and lower highs.
• A trading range occurs when a stock is stuck between a previous high and previous low, bouncing between these levels.
• Trend lines help determine levels of support and resistance, allowing for trade strategies based on potential future movement.
• When analyzing an equity, consider the trend of the individual equity, the market, and the industry in which the equity resides.

Equity (Sentiment Analysis)

• Understanding and gauging market sentiment is crucial for short-term trading decisions.
• Use different indicators to measure market emotion to gauge where the market may be headed:
  • VIX Level: Market fear gauge.
  • Put/Call Ratio: Can indicate bullish or bearish skew for a stock or instrument.
  • Options Traded Volume (puts/calls): Short-term investor sentiment can be inferred by current option activity.
  • Open Interest (puts/calls): Long-term sentiment can be inferred by total option activity.

Equity (Economic Events)

• Key economic events provide insight into the health of the economy and can influence market direction:
  • Labor Market:
    • Initial Unemployment Claims (weekly)
    • Unemployment Report (monthly)
    • Non-farm Payroll (monthly)
    • Household Survey (monthly)
    • ADP Employment Change
    • Challenger Job Cuts
  • Consumer Confidence:
    • Consumer Confidence Report (monthly)
    • Michigan Sentiment (monthly)
  • Overall Economic Growth:
    • GDP (Quarterly report with monthly updates)
    • Leading Economic Indicators (monthly)
  • Pace of Inflation:
    • CPI (consumer price index) (monthly)
    • Core CPI (excludes food and energy) (monthly)
    • PPI (producer price index) (monthly)
    • Core PPI (excludes food and energy) (monthly)
    • PCE (Personal Consumption Expenditures) Core Inflation (monthly)
  • Supply and Manufacturing:
    • ISM (Institute for Supply Management) (monthly)
    • Chicago PMI
    • NY Empire Manufacturing Survey (monthly)
    • Philadelphia Fed Survey
    • Industrial Production and Capacity Utilization (monthly)
  • Spending and Housing:
    • Personal Income and Spending (monthly)
    • Truck and Auto Sales (monthly)
    • ISM Services (monthly)
    • Retail Sales
    • Housing Starts and Building Permits

Primary and Secondary Markets

• Primary Market: Where securities are first sold to raise capital (e.g., IPO).
• Secondary Market: Where investors trade existing securities on exchanges, providing liquidity, diversification, and price discovery opportunities.

Importance of Investments

• Understanding investments, their types, risk and return, and factors to consider helps individuals make informed decisions to achieve their financial goals.