Investments: Principles of Portfolio and Equity Analysis

CHAPTER 8

OVERVIEW OF EQUITY SECURITIES

Ryan C. Fuhrmann, CFA

Westfield, IN, U.S.A.

Asjeet S. Lamba, CFA

Bulleen, Australia

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

• Discuss the importance and relative performance of equity securities in global financial markets.
• Discuss the characteristics of various types of equity securities.
• Distinguish between public and private equity securities.
• Discuss the differences in voting rights and other ownership characteristics among various equity classes.
• Discuss the methods for investing in nondomestic equity securities.
• Compare and contrast the risk and return characteristics of various types of equity securities.
• Explain the role of equity securities in the financing of a company’s assets and creating company value.
• Distinguish between the market value and book value of equity securities.
• Compare and contrast a company’s cost of equity, its (accounting) return on equity, and investors’ required rates of return.

1. INTRODUCTION

Equity securities represent ownership claims on a company’s net assets. As an asset class, equity plays a fundamental role in investment analysis and portfolio management because it represents a significant portion of many individual and institutional investment portfolios.

The study of equity securities is important for many reasons. First, the decision on how much of a client’s portfolio to allocate to equities affects the risk and return characteristics of the entire ...