4) Equities Flashcards
What are some ways in which start-ups raise capital?
- buying equity
- selling equity
- both
Why may an investor spend more for the same shares compared to the founders?
- the investors may be willing to pay more because they are buying their idea and something that has already been established
- if an investor thinks that the idea is worthwhile then an investor will pay more per share (equity) - therefore recognising the value of that idea
What is an initial public offering?
It is the first time that shares are offered to the public
- a general offer made widely available by offering the shares to an unconnected third party
why do start up companies require money to set up?
- even though the founders may be willing to give up their time with no cost,
- the company will still incur costs like renting the office space, bills, cost of equipment and advertising etc.
what does it mean for a comapny to become listed?
- where the issuing company’s shares are traded on a stock exchange - giving those that have bought the shares the ability to sell them at a later date
- being ‘listed’ is when the shares start being traded
what are the potential sources of return from shares for investors?
- capital gain - share increasing in value
- dividends - a regular income
what are dividends?
- regular ongoing income that is received by a shareholder - either every quarter or half year (by well-known companies)
- this amount is not fixed and is instead determined by the management - dependent on profitability and expectation
what is the dividend yield?
- dividends are usually written as a percentage of the share price - the dividend yield
- a bigger dividend yield is favoured over a small one because it shows that a greater proportion of the share price is being paid to investors = a better way of generating income
what is capital gain?
- a share increasing in value, meaning that they can sell their shares for a profit
how is the value of a share seen by investors?
- the stock exchanges provide the information about the prices at which shares are currently trading
what is the key right of equity holders?
- they have the right to attend and vote at company meetings/assemblies
- these meetings - which often happen once a year - are an opportunity to find out how the company is performing and to make decisions on what should happen
why do these company meetings take place?
-the decisions taken by the shareholders (owners) are influenced by the information given to them about the company by the management (execs) and vice versa
- the execs provide an update about the company’s performance and plans
- the owners can then make decisions on matters, such as salary of the chief exec
- ALL these decisions are voted on and are generally agreed when the majority vote in favour
what are the risks involved in owning shares?
- if a company does not do well or makes no profit, they will not be in a position to pay any dividends and those shareholders are unlikely to be able to sell their shares to make any capital gains (capital losses)
- if a company collapses into bankruptcy, shareholders get nothing
- equity is at the end of the queue for profits: in the event of collapse,, lenders get their money first and shareholders will only get anything if remaining
if a company falls into bankruptcy, what will happen to unpaid debts?
- they will remain unpaid because shareholders are legally separate from the company, therefore if a company collapses, some debts will remain unpaid but the shares will no longer have worth
- shareholders must only pay for the shares that they have taken
