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Equity & Capital Markets – Part 3: Valuation, Preference Shares & Depository Receipts

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Equity & Capital Markets – Part 3: Valuation, Preference Shares & Depository Receipts

1. Valuation Techniques

Valuation helps determine whether a stock is underpriced or overpriced. Here are key approaches:

  • Fundamental Analysis: Focuses on financial statements, earnings, and growth prospects.
  • Technical Analysis: Uses historical price charts and patterns for trading signals.

Relative Valuation Methods:

  • Cash Flow Approach: Based on Discounted Cash Flow (DCF).
  • Earnings Method: Price to Earnings Ratio (P/E) and EPS analysis.
  • Balance Sheet Approach: Book Value, NAV per share.
  • Market Approach: Comparable company or transaction multiples.

Technical Indicators:

  • RSI (Relative Strength Index): Momentum oscillator – values above 70 indicate overbought, below 30 oversold.
  • Moving Averages: Smooths price data. Example: 50-day or 200-day MA.
  • Exponential Moving Average (EMA): Gives more weight to recent prices for faster trend spotting.

2. Preference Shares – Features & Types

Preference shares offer a fixed dividend and priority in liquidation over equity shares but usually have no voting rights.

Types of Preference Shares:

  • Cumulative: Unpaid dividends accumulate and must be paid later.
  • Non-Cumulative: Missed dividends are not carried forward.
  • Participating: Eligible for extra profits after common shareholders.
  • Non-Participating: Limited to fixed dividend only.
  • Convertible: Can be converted into equity shares after a certain period.
  • Non-Convertible: Cannot be converted into equity.
  • Redeemable: Company can buy them back after a fixed period.
  • Irredeemable: No maturity; rare in practice.

3. Depository Receipts

Depository Receipts allow investors to invest in foreign companies without dealing in foreign exchanges.

  • ADR (American Depository Receipt): Issued in the U.S. for non-U.S. companies, traded on NYSE or NASDAQ.
  • GDR (Global Depository Receipt): Issued globally, usually listed on European exchanges like the LSE or Luxembourg.

Types:

  • Sponsored: Issued with the cooperation of the foreign company. Carries investor rights like dividends and voting (if applicable).
  • Non-Sponsored: Issued without the company’s involvement. Managed by depository banks.

IDR – Indian Depository Receipt:

An instrument used by foreign companies to raise funds from Indian investors and list on Indian stock exchanges.

Conclusion

This completes our three-part blog series on Equity and Capital Markets. We’ve covered key foundational and intermediate concepts, and now touched on advanced elements like valuation and global instruments. Perfect for students, finance aspirants, and IB operations learners!

← Read Part 2: Intermediate Equity Concepts

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