Equity Markets and Stock Instruments › Summary

This chapter covered the basic concepts of equity markets used in quantitative finance:

Stocks represent corporate ownership, with voting rights determined by share class, dividends subject to declaration and applicable restrictions, and residual claims after senior obligations. Electronic venues commonly use limit order books, but matching priority depends on venue rules; price-time priority is the simplified convention used in this chapter’s model.

Order types range from simple market and limit orders to complex conditional instructions. The bid-ask spread captures the cost of liquidity and varies with trading volume, volatility, and information asymmetry. Understanding these mechanics is essential for implementing any trading strategy.

Equity returns derive from two sources: capital appreciation and dividend income. Total return combines both components and is the appropriate measure for evaluating investment performance. Growth investing emphasizes expected business expansion and capital appreciation. Value investing emphasizes price relative to fundamentals; a value stock need not pay a dividend, and neither label guarantees a return.

Key metrics including market capitalization, P/E ratio, earnings yield, and price-to-book provide standardized ways to characterize and compare stocks. These metrics form building blocks for factor models and quantitative screens that we develop in subsequent chapters.

With this foundation in equity market mechanics, you are prepared to explore how prices evolve through time series analysis, how to construct optimal portfolios, and how to model the relationship between risk and expected returns.