Chapter 15: Equity Markets Flashcards
1
Q
Ordinary Share
A
share in the ownership of a company
2
Q
Investment and risk characteristics of equities
A
- Security depends on profitability of the company
- Provide a long-term real yield
- 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
3
Q
Quoted shares
A
Listed on a stock exchange and make up the majority of available equity investment.
4
Q
Investment characteristics of quoted shares
A
- more marketable
- more secure
- easier to value
than non-quoted shares.
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
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
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.
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.
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
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.