Equity Investments

Résumé

Equity Investments covers how stock markets are organized and how equity securities are analyzed and valued. Market organization and structure describe the functions of the financial system, types of assets and intermediaries, long and short positions, leveraged positions and margin, and order types. Security market indexes are constructed using price, equal, or market-capitalization weighting, each with rebalancing and reconstitution implications, and serve as benchmarks and the basis for index funds. Market efficiency examines the weak, semi-strong, and strong forms of the efficient market hypothesis, market anomalies, and behavioral finance implications for active management. The overview of equity securities distinguishes common and preferred shares, voting and ownership rights, and public versus private equity, along with the role of equity in financing and the relationship between cost of equity and required return. Company and industry analysis applies frameworks such as Porter's five forces, industry life cycles, and competitive positioning to understand business prospects. Equity valuation uses three families of models: present value models, most notably the dividend discount model and free cash flow models; multiplier (relative value) models such as price-to-earnings, price-to-book, and enterprise value multiples; and asset-based valuation. The constant-growth (Gordon) model and multistage models capture different growth patterns, while justified multiples link price to fundamentals like growth and required return. Analysts select models based on data availability, the firm's characteristics, and the purpose of the valuation.