Chapter 3: Equities Flashcards
To form a company which two forms are needed?
Memorandum of association and articles of association
What’s the memorandum of association?
Confirms the subscribers intention to form a company. It is signed by all initial shareholders.
What’s the article of association?
Details the relationship between the company and its owners. Written rules basically. Agreed by shareholders, includes rights etc.
What’s a private company?
One shareholder. Limited liability.
What is a public limited company?
Minimum of 2 shareholders.
What is an AGM
Annual general meeting - shareholders given opportunity to question director about strats and ops. Must be held within 6 months of the financial year end. Vote on matters such as appointment and removal of directors, and payment of the final dividend.
What does the companies act provide shareholders with?
Right to attend, speak and vote at the AGM or to appoint a proxy
What’s an Ordinary resolution?
A small issue etc that requires a small vote
What’s a special resolution?
Requires at least 75% in votes
What’s an EGM?
Extraordinary general meeting - other meetings for very important issues
What’s an ordinary share?
Carry full risk and reward of investing in a company. If it does well = ordinary shareholders do well.
Who are ordinary shareholders?
Share in the profits of the company by receiving dividends - paid half yearly or quarterly. They ratify the proposed dividend displayed by directors.
What happens to ordinary shareholders if company does badly?
They suffer. If company becomes ‘wound up’ they are paid last.
Ordinary shares can also be referred to as…?
… Partly paid or contributing shares - means that only part of their nominal value has been paid up.
What are preference shares?
A hybrid security with elements of both debt and equity. Pref shares have seniority over ordinary shareholders in respect of earnings.
Normally preference shares:
- are non voting
- pay a fixed dividend
- rank ahead of ordinary shares
Can be cumulative, non-cumulative and/or participating.
Can be convertible (option to convert into ordinary shares) or redeemable (have a date to redeem)
Cumulative, non cumulative and participating
Cumulative - sufficient profits occur, shareholders will have arrears of dividend paid in the subsequent year.
Non - lost subsequent years
Participating - entitle holder to a basic dividend, participate in bumper profits
What is a dividend?
The return that an investor gets for providing the risk capital for a business. Paid out from profits.
Why companies have a higher than average dividend yield:
- company is mature and has healthy levels of cash, but has limited growth potential
- company has a low share price or is expected to be unsuccessful
Why companies have low dividend yields:
- share price is high
- large proportion of profit is ploughed back into business
What is capital gains?
When share prices increase over time. Shares need to be sold to realise any capital gains, or they’re unrealised.
What are rights issues?
A method to raise capital. Existing shareholders subscriber for new shares.
What is right to vote?
Shareholders have the right to vote on matters presented to them at company meetings. Normally one share = one vote, can be done in person or use a proxy.
Where are shares held?
Stockbrokers or investment manager nominee accounts - used solely for holding shares and other investments.
What is market risk?
Risk that share prices in general might fall. Investors could face a loss of capital.
