2a Equities Flashcards
Why does a company issue shares?
To raise capital
Who manages a company?
The board of directors
Share capital - what is this?
Number of shares * nominal value of those shares
What is the nominal value of shares?
Fixed legal value of shares
What is authorised share capital vs issued share capital?
The maximum amount of share capital that can be raised by company.
Whereas issued share capital is how much has actually been issued.
Calculation of market capitalisation
No. shares in issue * share price
What is the free float?
Looks at not just the number of shares not in issue but the actual availability of stock for public investment.
Excl holdings by directors or pension funds - basically excludes anything not held to investing public)
What are the 3 characteristics of ordinary shares?
- Confer rights to vote or appoint a proxy
- Receive dividends, subject to preference SHs claims
- Receive balance of assets left after all other payouts in the event of a winding up
List 3 special types of ordinary shares
A and B shares - have rights attached to them
Redeemable shares - these shares issued on terms that the company will/may buy back in future
Partly paid shares - full par value hasn’t been paid by their holders - issuing firm has to make a ‘call’ collecting the remaining amount
Ordinary vs preferred shares: priority?
Ord 2nd
pref 1st
Ordinary vs preferred shares: dividends?
ord - variable (based on profits)
pref - fixed (against nom value of share)
Both discretionary
Ordinary vs preferred shares: voting rights?
ord - yes
pref - no but can be activated
When can pref shares activate their voting rights?
if firm doesn’t pay dividends for a long period of time
Ordinary vs preferred shares: special features?
ord - A/B shares, redeemable, partly paid
pref - cumulative, participating, convertible, redeemable
What is normal type of preferred share?
Normal pref share is cumulative share - if directors don’t pay you divi this year, it will roll onto next year
What is a participating feature for preferred share?
Means a variable dividend
Participate in further divi’s issued by the company
What does convertible feature mean in terms of pref shares?
Option to convert to a ord shares at the option of the investor
Adv of to company of equity
Raise capital
Servicing varies w performance
Discretionary payments
No redemption
Disadv to company of equity?
Sacrifice of control - some SHs are activists
Reputation - scrutinising company
Could affect payout - might be expected to be high
Adv of equity to investor?
Return linked to performance
Potential gain as well as income
Ownership rights
Disadv of equity to investors?
They have a low ranking -this is called risk capital - last to be paid out
Potential volatility caused by unrelated factors.
Premium ?
Excess of issue price over nom value
Nom value
The legal face value on the share
Market value
Second hand price of a share
Issue price
Price at which a share is initially sold by the company
ADR - what is this?
Certificate that represents equity in an overseas company
Creation process of ADR’s? Assuming British plc and American investor
- PLC issues sterling shares to a UK branch of an American bank
- Bank pays PLC in sterling for shares.
- Bank keeps sterling shares in a safe place by acting as a depository
- Bank then issues ADRs, denominated in dollars to dollar investors
Features of DRs?
One DR may represent several underlying securities - usually one DR may represent 100 shares in x plc.
Anonymous document
It is a bearor document
A lot have voting rights an other similar benefits of shares
No central registry/bearer document - how does this effect divi payment of DRs?
Bank doesn’t know who to pay.
Up to investor to claim divi from bank.
Benefit of DRs?
Way to get involved with other country plc without actively getting involved in FX mkt
ADRs - denominated in what, issued where, traded where?
Denominated in dollars
Issued in US
Traded worldwide
GDRs - denominated in what, issued where, traded where?
Denom usually either dollars or euros
Issued outside US
Traded worldwide
Adv + disadv of DR for company
+ve - can raise capital internationally
-ve - lack of transparency on beneficial ownership
Adv + disadv of DR for investor
Access to overseas companies in domestic currency/mkt
FX risk added to mkt risk
Benefits may differ depending on the terms of the DR
Warrants - definition
Right to subscribe for new shares from a company at a fixed price on a future date
Not part of ordinary share capital of company
Issuance of warrants - how is this done?
Typically issued as a sweetener with other investments (eg corp debt)
Detachable or non-detachable form
What is a conversion premium
Warrant price + exercise price - current share price
Who is the warrant issued by?
an organisation, not the company itself
