4. Equities

Question 1

What is a future?

Answer 1

A future is an agreement between a buyer and a seller

Question 2

What a the two main types of shares?

Answer 2

Ordinary shares

Preference shares

Question 3

What is the difference between ordinary shares and common shares?

Answer 3

Common shares have no nominal value

Question 4

Name some characteristics of preference shares

Answer 4

1. Non-voting (except in special circumstances, such as when dividends have not been paid)
2. Pay a fixed dividend each year
3. Rank ahead of ordinary shares in terms of being paid back if the company is wound up

Question 5

Are preference shares more or less risky than ordinary shares?

Answer 5

Less risky and due to this, are also potentially less profitable.

Question 6

What is a hybrid security?

Answer 6

A security which has the characteristics of both debt and equity (e.g. Preference stock)

Question 7

Name 3 types of preference shares.

Answer 7

1. Participating preference shares
2. Redeemable preference shares
3. Convertible preference shares

Question 8

Up to what percentage can a company’s voting share capital be converted into depository receipts?

Answer 8

20%

Question 9

What are warrants?

Answer 9

Warrants are negotiable securities issued by companies which confer a right on the holder to buy a certain number of the company’s ordinary shares at a set price on or before a predetermined date.

Question 10

What are the two benefits of share ownership?

Answer 10

1. Dividends
2. Overall capital growth

Together known as total return

Question 11

What are the three types of corporate action?

Answer 11

1. Mandatory - one mandated by the company, not requiring and intervention from the shareholders or bond holders themselves.
2. Mandatory with options
3. Voluntary corporate action - an action that requires the shareholder to make a decision, e.g a takeover bid

Question 12

What is the role of a buyer in a future?

Answer 12

The buyer agrees to pay a pre-specified amount for the delivery of a particular quantity of an asset at a future date.

Question 13

What is the role of a seller in a future?

Answer 13

The seller agrees to deliver the asset at the future date, in exchange for the pre-specified amount of money which is based on the price they agree between them.

Question 14

What are the two distinct features of a future contract?

Answer 14

1. It is exchange traded - eg on the derivatives exchanges like NYSE Liffe or ICE Futures Europe, an energy derivatives market.
2. It is dealt on standardised terms - the exchange specifies the quality of the underlying asset, the quantity underlying each contract, the future date and the delivery location - only the price is open to negotiation.

Question 15

What does ‘long’ mean in futures terminology?

Answer 15

It is the term used for the position taken by the buyer of the future. The person who is ‘long’ of the contract is committed to buying the underlying asset at the pre-agreed price on the specified future date.

Question 16

What does ‘short’ mean in futures terminology?

Answer 16

The position taken by the seller of the future. The seller is committed to delivering the underlying asset in exchange for the pre-agreed price on the specified future date