Chapter 15: Equity Markets Flashcards

1
Q

Ordinary Share

A

share in the ownership of a company

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2
Q

Investment and risk characteristics of equities

A
  • Security depends on profitability of the company
  • Provide a long-term real yield as companies grow in line with inflation, dividends tend to grow in line with GDP
  • Higher expected returns than government bonds
    over the long term
  • Income and capital values can be volatile
  • Equities can generally be held in perpetuity
  • Dealing expenses are linked to marketability
  • Marketability depends on the size of the company
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3
Q

Quoted shares

A

Listed on a stock exchange and make up the majority of available equity investment.

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4
Q

Investment characteristics of quoted shares

A
  • more marketable
  • more secure
  • easier to value than non-quoted shares.
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5
Q

Why are shares grouped by industry sectors

A
  • practical for analysts to specialise in one area

- share prices of companies in the same sector tend to be correlated

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6
Q

It is practical for analysts to specialise in one area of industry because

A
  • Factors affecting one company within an industry are likely to be relevant to other companies in the same industry
  • Information for companies in the same industry will come from a common source and be presented similarly.
  • No one analyst can expect to be an expert in all areas, so specialisation is appropriate.
  • The grouping of equities according to some common factor gives structure to the decision-making process. Assists in portfolio classification & management
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7
Q

Shares of companies in the same sector are correlated because… (3)

A
  • Use the same resources, have similar input costs
  • supply to the same market, similarly affected by demand
  • Similar financial structures, ie influenced by changes in interest rates.
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8
Q

Preference share

A
A particular class of share that generally ranks ahead of ordinary shares.
Normally entitled to a specified rate of dividend, and, unlike ordinary shareholders, not to residual profits.
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9
Q

Typical features of preference shares

A
  • dividend on a preference share is usually a fixed percentage of the par value and is always paid before any distribution to ordinary shareholders.
  • dividend on preference shares is normally treated in the same way as ordinary shares for tax purposes
  • Dividend rate is quoted net of tax
  • Dividends don’t have to be paid if profits are insufficient
  • Generally cumulative
  • Mostly no final redemption date
  • Normally don’t carry voting rights
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10
Q

Cumulative property of preference shares

A

If a dividend is unpaid, the arrears must be paid off before any payment is made to ordinary shareholders.

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11
Q

Payout Ratio

A

Dividends per share/Earnings per share

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12
Q

Reasons for buying back shares

A
  • Excess cash that cannot be used profitably and is
    returned to shareholders
  • Excess cash may only earn deposit rate of interest,
    thus improves earning per share for remaining shares
  • May be more tax-efficient than dividends
  • Company may wish to change capital structure from
    equity financing to debt financing
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