Learning Objectives:

  • Understand the fundamentals of equity securities and stock markets 

  • Apply equity valuation techniques, including DCF, dividend discount models, and market multiples 

  • Analyse stock markets and their functioning 

4.1 Equity Fundamentals

Equities represent ownership shares in a company. The University of Warsaw syllabus covers “Equity instruments market” with detailed coverage of “Types and features of equity instruments,” “Joint-stock company, General Meeting of Shareholders,” and “Shareholder rights and obligations” .

Common Stock: Ownership with voting rights and a residual claim on earnings. Common stockholders have the right to elect directors and vote on corporate matters .

Preferred Stock: A class of stock with priority claim on dividends but typically no voting rights. Preferred dividends are often fixed and cumulative.

Depositary Receipts (ADRs/GDRs): Certificates representing shares in a foreign company, traded on local exchanges. The University of Warsaw syllabus includes “Depositary receipts” as a topic .

Investment Fund Units: The University of Warsaw syllabus includes “Shares in investment funds” and “Index units” as equity-related instruments .

4.2 Equity Valuation

The University of York module covers “Valuation of financial securities” as a learning outcome . The University of Coimbra syllabus includes “Discounting cash flow models” and “Market Multiples” . The ACCA Business Valuations technical article provides a comprehensive treatment of valuation methods, including free cash flow models and price-earnings ratio analysis .

Discounted Cash Flow (DCF) Models: The NYU Stern lecture on Valuation approaches identifies three main approaches: “Discounted cashflow valuation” which “relates the value of an asset to the present value of expected future cashflows on that asset” .

  • Equity Valuation: Discounting expected cash flows to equity (dividends or free cash flow to equity) at the cost of equity .

  • Firm Valuation: Discounting expected cash flows to the firm (FCFF) at the weighted average cost of capital (WACC) .

  • First Law of Valuation: “Never mix and match cash flows and discount rates” .

Dividend Discount Model (DDM): The value of a stock is the present value of expected future dividends. The NYU Stern materials note that “The dividend discount model is a specialized case of equity valuation” .

Gordon Growth Model: A version of the DDM assuming constant dividend growth.

Price Multiples (Relative Valuation): Relative valuation “estimates the value of an asset by looking at the pricing of ‘comparable’ assets relative to a common variable like earnings, cashflows, book value or sales” . The ACCA article discusses “bootstrapping – applying the price earnings ratio of the buyer to the combined expected earnings of the two entities” . Common multiples include P/E, P/B, P/S, and EV/EBITDA .

Free Cash Flow Valuation: The ACCA technical article provides a detailed worked example of “free cash flow (FCF) – present value of the combined companies FCF using the relevant discount rate” . The Yale School of Management materials also extensively cover free cash flow valuation with detailed examples .

4.3 Stock Market Functioning

The University of Coimbra syllabus covers “The formation of stock exchange prices” . The University of Warsaw syllabus covers “Trading in securities” including the secondary market, “Trading systems,” “Exchange orders,” “Stock exchange session,” and “Exchange trading procedure” .

Market Indices: Measures of market performance (e.g., S&P 500, FTSE 100, DAX).

Market Efficiency: The efficient market hypothesis suggests that prices reflect all available information. The University of York module includes “Market efficiency” as a core topic . The University of Coimbra syllabus includes “Efficiency of financial markets” . The University of Warsaw syllabus includes “Hypotheses of capital market efficiency” .

Trading Mechanisms: Order books, limit orders, market orders, and trading halts/circuit breakers .

Short Selling: The sale of securities not owned by the seller, with the expectation of buying them back at a lower price. The University of Warsaw syllabus includes “Short sale” as a topic .

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