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CISI Introduction to Securities and Investments 2025 > Chapter 3 - Equities > Flashcards

Chapter 3 - Equities Flashcards

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SIE Exam flashcards
1
Q

What two documents are required for registering a company in the UK with Companies House

A
  1. Memorandum of Association
  2. Articles of Association (Internal Rules)
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2
Q

What is the difference between a private and public company?

A

Private Company:
1. Can have just one shareholder
2. Have Ltd in the name

Public Company:
1. Has a minimum of 2 shareholders
2. Has PLC in the name; PLCs are permitted to issue shares to the public.

All listed companies are plcs, but not all plcs are listed.

‘Limited’, whether as in ‘ltd’ or ‘plc’, means that the liability of shareholders for the debts of the company
is limited to the amount that they agreed to pay to the company on initial subscription.

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3
Q

Within what period do public companies need to hold AGMs?

A

Within 6 Months of the finanical year-end

Companies also have the right to call general meetings throughout the year for other important issues e.g. takeovers, capital rasing,

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4
Q

What rights does a shareholder get in an AGM?

A
  1. To attend the meeting
  2. To vote
  3. To speak
  4. To appoint a proxy to vote (but not speak)

A >50% majority is needed for any resolution to be passed

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5
Q

What is a special resolution in an AGM?

A

It is a matter of major importance and needs at least 75% approval for it to be passed (unlike an ordinary resolution which is only >50%)

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6
Q

What are the 2 key features of Ordinary Shares?

A
  1. Carry the full risk and reward of the company. They share profits of the company through dividends
    2.. Can vote and put forward on company resolutions at meetings.

Some ordinary shares may be referred to as partly paid or contributing shares where they have not been fully paid.

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7
Q

What are the 4 key features of Preference Shares

A
  1. They have elements of both equity and debt
  2. They have legal priority (known as seniority) over ordinary shares.
  3. They are non-voting (except in certain special circumstances)
  4. Pay fixed dividend - Depending on type of preference share

Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.

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8
Q

What are the three types of Preference Shares?

A
  1. Cumulative
  2. Non-Cumulative
  3. Participating
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9
Q

What is the key feature of a Non-Cumulative Preference Share?

in relation to dividends

A

If dividends cannot be paid in a particular year, perhaps because the company has insufficient profits, preference shareholders would receive no dividend.

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10
Q

What is the key feature of a Cumulative Preference Shares

in relation to dividends

A

The dividend entitlement accumulates if not paid during a particular year that the share was owned.
Assuming sufficient profits, the cumulative preference shareholders will have the arrears of dividend paid in the subsequent year

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11
Q

What are the 3 key features of a Participating Preference Shares?

in relation to dividends

A
  1. Participating preference shares entitle the holder to a basic dividend.
  2. Directors can award a bigger dividend in a year when the profits exceed a certain level (also known as bumper profits)
  3. Preference shares may also be convertible or redeemable.
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12
Q

What is a Convertible Participating Preference Share?

A

A preference share that carries the additonal option to convert it to an ordinary share when the comapny allows it.

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13
Q

What is a Redeemable Participating Preference Share?

A

A preference share that carries the additonal option of having their nominal value of the shares paid back to the preference shareholder and the shares cancelled.

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14
Q

What are the benefits of owning shares?

A
  1. Dividends
  2. Capital Gains
  3. Shareholder Benefits
  4. Shareholder Rights
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15
Q

What is a naked/uncovered dividend

A

When a company pays out dividends totaled more than the profits per annum.

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16
Q

How do investors compare dividends between companies

A

Using dividend yields, denoted as a percentage.

(Dividend (£1m)/Market capitalisation)x100

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17
Q

What are 2 reasons a dividend yield may be higher than average?

A
  1. The company is mature and is able to genereate healthy levels of cash but has limited growth potential
  2. The company has a low share price and the high dividend yield makes it more attractive.
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18
Q

What are 2 reasons a dividend yield may be lower than average?

A
  1. The share price is high.
  2. A large protion of the profits are to be funnelled back into the buisness (rather than be paid as divideds)

Doing (2.) can further raise share prices.

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19
Q

What is the term used to descibe the profit/losses on an unsold share

A

Unrealised Gain/Loss

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20
Q

What is Unrealised Gain/Loss

A

The profit/losses on an unsold share

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21
Q

What are the risks of owning shares?

A
  1. Market and Price Risk (Share price might fall)
  2. Liquidity Risk (Low volume, shares may be difficult to sell if nobody is buying)
  3. Issuer Risk (Company collpases/goes bankrupt and shares are worth 0)
  4. FX Risk (Indirect or Direct: Currencies fluctuating in price if shares are denominated in foreign currency)

Smaller companies are more at liquidity risk.

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22
Q

What are the two UK shareholders rights?

A

Right to Subscribe for New Shares (Rights Issues)
By which a company can raise additional capital, with existing
shareholders having the right to subscribe for new shares first before offering it to the public.

Right to Vote
E.g. At an AGM. 1 Share = 1 Vote normally.

If a company were able to issue new shares to anyone, then existing shareholders could lose control of
the company, or at least see their share of ownership diluted. As a result, under UK legislation, existing
shareholders in UK companies are given pre-emptive rights to subscribe for new shares. (Mr. “A” owns 20% of the company, he is offered 20% of the new shares).

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23
Q

What is a nominee company?

A

nominee companies – these companies are used solely for holding and administering shares and other investments

It does not trade, and so is described as ‘bankruptcy
remote’ as the chances of it going into liquidation are low. It is the nominee’s name that appears on the
record of ownership of the shares and so, if the shareholder wishes to vote, they will need to arrange for
the operator of the nominee account to vote on their behalf.

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24
Q

What are the three types of European corporate actions and what one does the US not have?

A
  1. Mandatory
  2. Mandatory with Options (e.g. Rights Issue)
  3. Voluntary

The US does not have (2.)

  1. A mandatory corporate action is one mandated by the company, not requiring any intervention
    from the shareholders or bondholders
  2. A mandatory corporate action with options is an action that has some sort of default option that
    will occur if the shareholder does not intervene
  3. A voluntary corporate action is an action that requires the shareholder to make a decision
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25
Q

How would you denote a for example, a bonus issue, wherby it gives shares that for every 4 you own, you will get 1 in addition in Europe and Asia?

Security Ratio

A

1:4 (Rights Issue)

This is the standard approach used in European and Asian markets and can be simply remembered by always expressing the
terms as the investor will receive ‘X new shares for each Y existing shares’.

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26
Q

How would you denote a for example, a bonus issue, wherby it gives shares that for every 4 you own, you will get 1 in addition in the US?

A

5:4 (Rights Issue)

The approach differs in the US. Here, the first number in the securities ratio indicates the final holding
after the event; the second number is the original number of shares held

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27
Q

What is Bonus Issue Corporate Action?

Also known as Scrip or Capitalisation Issue

A
  1. Where a company gives “free” shares to exisiting shareholders.
  2. it is a mandatory corportate action
  3. Increases liquidity
  4. Keeps the share price low (attractive for investors)
  5. Does not raise extra cash.

The company is simply increasing the number of shares held by each shareholder, and ‘capitalises’ earnings by transfer to shareholders’ funds.
It is especially attractive for investors on brokerages that do not use fractional share trading

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28
Q

What are each of the 3 key features of a stock split and also a reverse stock split?

reverse stock split is also reffered to as consolidation of shares

A

Stock Split (Similar to Bonus Issue.)
1. Does not raise extra cash.
2. Splits up existing shares in to more but the same collectively the same value. 1 share at £1 has been changed to 5 shares at £0.20 for the investor.
3. Mandatory Corporate Action

Reverse Stock Split:
1. Does not raise extra cash.
2. Combines existing shares in to less but the same collectively the same value. 5 shares at £1.00 has been changed to 1 shares at £5.00 for the investor.
3. Mandatory Corporate Action

Reverse stock splits are used to increase the price of the share whereasstock split is used to decrease it.
These are considered mandatory.

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29
Q

What are the 3 key features of dividends?

A
  1. Mandatory Corporate Action (sometimes with options)
  2. Profits of the company are passed to the shareholders as either cash or share amounts (where the option comes in).
  3. Has a Declaration Date, Ex-Date (xd), Date of record (2 days after xd) and a Pay date

The date of record is 2 business days after ex-date due to Europe and the US having a settlement time of 2 business days, denoted as T+2.
US is looking to reduce this to T+1.
Also note holidays will affect the business days. NASDAQ will not close for a UK holiday, although LSE will.

Date of record is also known as: record date, register date. books closed date.

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30
Q

What are the two types of Takeovers?

A

Hostile
A hostile takeover occurs when one corporation, the acquiring corporation, attempts to take over another corporation, the target corporation, without the agreement of the target corporation’s board of directors and directly appealing to the shareholders.

Friendly
A friendly takeover occurs when one corporation acquires another with both boards of directors approving the transaction. Most takeovers are friendly,

A successful takeover (gained control) is considered to be one where the predator company acheives over 50% of the share holdings in the target company.

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31
Q

What is a Merger?

A
  1. When two companies (of similar size) combine to become a larger entity and both the board of directors are in agreement.
  2. The company who takes over the rights and responsibilities over the other company is known as the surviving company

The largest merger was Vodafone AirTouch plc trying to aquier Mannesmann AG.

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32
Q

What does it mean for a company to become listed?

Also known as becoming quoted, making an initial public offering (IPO)

A

They become publicaly traded.

its further known as floating on the stock market or going public.

33
Q

What are 4 advantages and 3 disadvantages of being a publicly traded company (i.e Listed)?

A

Advantages
1. *Captial * - Provides ways to raise captial easily.
2. Participating in Takeovers/Mergers - Using shares as payment to aquire shares of the target company
3. Status - Makes a company more marketable to customers, supliers, potential employees
4. Employee Incentives - Can provide stock options for pay of employees. Can improve retention.

Disadvantages
1. Regulation - More transparant, timely and higher standards of regulation.
2.* Suceptible to being Takenover.*
3.* Short-termism* - Shareholders often pressue the company to reach short-term goals, rather than be more patient

34
Q

What is the difference between a company that is full listed and only listed in the UK?

A

Full Listed - Listed on the LSE
Listed - Listed on the Alternative Investment Market (AIM)

Being listed on the LSE has alot more requirements than being listed on AIM

35
Q

What are the key requirements for being listed on the LSE?

London stock exchange

A
  1. Must be a PLC
  2. Must have a minimum market cap of £30 million
  3. At least 10% of the company owned/offered by the public (excl. the companies directors, their associates and any major shareholder (over 5%))
  4. Can demonstrate it has the cash to survive 12 months.
  5. Are able to maintain their continuing obligation of being listed (i.e sharing price sensitive information).

For a premium listing on LSE, it needs to be trading for 3 years with 75% of its business supported by histroic revenue.

36
Q

What are the key requirements for being listed on AIM

Alternative Investment Markets

A
  1. Needed to appoint a nominated advisor (NOMAD) and a nominated broker
  2. Are able to maintain their continuing obligation of being listed (i.e sharing price sensitive information)

In comparason to being full listed, being listed on AIM requres:
1. No min market cap
2. No trading history
3. No min % held by the public

37
Q

What is the difference between the primary and secondary market?

A
  1. The primary market is where companies will first list their shares to investors for the first time. They exist to raise capital and enable surplus funds to be matched with investment opportunities.
  2. The secondary market is where an investor wishes to sell or buy existing shares through a stock exchange.

Trading on a stock exchnage is known as dealing on the secondary market.

38
Q

What are the 3 Main types of Stock Market Indicies?

(singular of indicies is index)

A
  1. Tracker Products (ETFs - Exchange Traded Funds, S&P 500, FTSE 100, )
  2. Benchmarks (MSCI ACWI)
  3. Basis’ For Deriviative Contracts (FTSE Futures, FTSE Options)

Stock market indicies will usually only contain the highest market cap companies in each predifined sector(s) (e.g. tech companies, all companies in uk, worlwide companies etc).

39
Q

What are the three main ways stock indicies are calculated and what is the most favoured?

A
  1. Price-weighted
  2. Equal Weighted
  3. Realtive Market Cap (most favoured)

Realtive Market Cap Indicies include - NASDAQ, FTSE 100, S&P500, CAC 40 (France), Xerta DAC (Germany), SSE and CSI 300 (China), Hang Seng (Hong Kong)

40
Q

What are 3 disadvantages to a price-weighted stock index?

A
  1. Provides a narrow view of the overall market
  2. No account is taken of the relative size of a company
  3. The price of one stock can disproportionally affect all other stocks contained. (due to being a product of (2.))

DJIA - Dow Jones Industrial Average (US) and Nikkei 225 (Japan) are price weighted indicies.

41
Q

What country is the S&P 500 index listed in?

A

US

Standard and Poors 500 - Relative Market Cap Index

42
Q

What country is the DJIA index listed in?

A

US

Dow Jones Industrial Average - Price-weighted Index

43
Q

What country is the NASDAQ index listed in?

A

US

NASDAQ Composite - Relative Market Cap Index

44
Q

What country is the FTSE 100 listed in?

A

UK

Footsie 100 - Relative Market Cap Index

45
Q

What country is the CAC 40 index listed in?

A

France

Relative Market Cap Index - Based on the top 40 stocks on Euronext Paris

46
Q

What country is Xetra DAX index listed in?

A

Germany

Relative Market Cap Index - Based on top 30 traded stocks on the Frankfurt Stock Exchange

47
Q

What country is the SSE index listed in?

A

China

Shanghai Stock Exchange - Relative Market Cap Index based on China’s NASDAQ style sci-tech innovation board

48
Q

What country is the CSI 300 index listed in?

A

China

Shanghai Shenzhen CSI 300 - Relative Market Cap Index based on the Shanghai and Shenzhen stock exchanges.

49
Q

What country is the Hang Seng index listed in?

A

Hong Kong

Relative Market Cap Index - Based on largest companies on the hong kong exchange.

50
Q

What country is the Nikkei 225 index listed in?

A

Japan

Relative Market Cap Index - based on the Tokyo stock exchange.

51
Q

What is over-the-counter trades?

A

Trading that is happening off an exchange. (also known as off-exchange trading)

Being traded on an exhcange is known as On-Exchange trading

52
Q

Stock market trading is conducted through trading systems, what are the two catagories?

not ov

A
  1. Quote-Driven
  2. Order-Driven
53
Q

What are the 2 key features of a Quote Driven System?

A
  1. Market Makers provide two-way continuous trading (bid and offer) in particular securities throughout the trading day, regardless of market conditions.
  2. Market Makers earn money through price spread.

The NASDAQ and the LSE’s Stock Exchange Automated Quotation (SEAQ) trading
systems are two examples of quote-driven equity trading systems.

54
Q

What are the 4 key features of an order driven system?

A
  1. Uses an electronic order book
  2. Buyers and Sellers are matched in strict chronological order by price and the quantity of shares being traded.
  3. No market makers are needed.
  4. For immediate execution, queues are created based on price and then time.

Most stock exchanges operate order-driven systems. LSE Stock Exchange Electronic Trading Service (SETS) is an example of this

55
Q

What is the role of a Retail Service Provider (RSP)?

A

They are more commonly known as Market Makers (usually investment banks or brokerage houses). They compete to provide the best quotes to a retail investors for securities and more, prompted by an online broker’s RFQ.

Your online broker sends whats called an request for a quote (RFQ) to a nework of RSPs and compares them all to get you the best one.

56
Q

What is a Multi-Lateral Trading System?

sometime reffered to as alternative trading systems

A

MTFs are non-exchange trading venues which bring together buyers and sellers of securities.

Subscribers can post orders into the system and these will be communicated (typically, electronically
via an electronic communication network (ECN)) for other subscribers to view. Matched orders will then
proceed to execution

57
Q

What is a Systematic Internaliser?

A
  1. An alternative trading system where a firm executes a client trade against its own account.
  2. Instead of sending orders to a stock exchange, it can match them with other
    orders on its own book.

This means it is able to compete directly with stock exchanges and automated
dealing systems, but it has to make such dealings transparent.

58
Q

What is holding shares in the bearer form and what is a disadvantage of it

A

It is an alternative to holding shares in registered form, when the person who holds the shares (the bearer) owns it through a physical a certificate.

A disadvantage to this is that if you lose or destroy the certificate, you could lose your shares indefinitely.

As a result, holding bearer shares is relatively rare, especially in the UK. In addition, bearer shares are regarded unfavourably by the regulatory authorities owing to the opportunities they offer for money laundering. Consequently, they are usually** immobilised** in depositories such as Euroclear, or by their local country registries.

59
Q

What does it mean for a company to hold shares in the registered form?

A

This is simply a record of all current shareholders in that company, and how many shares they each hold. The share register is kept by the company registrar who might employee a third party to maintain it.

An electronic register is also kept by CREST so that trades can be settled electronically.

60
Q

What is Certificated settlement

A

A combination of both bearer and registered forms for holding shares, whereby you would send your certificate to the company registrar with details of the new owner and they would update their registrar and issue a new certificate.

Settlement of these and bearer forms takes about 10 days from trade date (T+10)

This is considered and old way due to it being inefficient. We are now paperless and automated known as being dematerialised (or uncertificated, through a system called CREST.

61
Q

What is Clearing

In relation to trading.

A

Clearing is the process through which the obligations held by buyer and seller to a trade are defined and
legally formalised. In simple terms, this procedure establishes what each of the counterparties expects
to receive when the trade is settled. It also defines the obligations each must fulfil, in terms of delivering
securities or funds, for the trade to settle successfully.

62
Q

What are the 6 steps of the clearing process

A
  1. Recording key trade data
  2. Formalising legal obligations
  3. Matching and confirming trade details
  4. Agreeing procedures for settling the transaction
  5. Calculating settlement obligations and sending out instruction to brokers, custodians and CSDs
  6. Managing Margin and making margin calls

CSD - Central Secuirites Deposit
Margin relates to collateral paid to the clearing agent by counterparties to guarantee their positions against default up to settlement.)

63
Q

What is it called when a trade is settled directly between counterparties?

A

Bilateral Settlement

64
Q

What is Bilateral Settlement?

A

When a trade is settled directly between counterparties.

65
Q

What does a Central Counter Party (CCP) do?

A

They act as a mediator between both counterparties during a trade as both parties only talk to the CCP.

This process keeps the counterparties anonymous and is known as Novation.
CCP’s also allow for easier monitoring and regulation.

66
Q

What is Novation?

A

When the buyer and seller trade anonymously through the use of a Central Counter Party (CCP)

67
Q

What is trade settlement

A

Settlement is the process through which legal title (ie, ownership) of a security is transferred from
seller to buyer in exchange for the equivalent value in cash.

Ideally, these two transfers should occur simultaneously, known as delivery versus payment (DvP).

68
Q

What are the 8 key features of CREST

A
  1. Holdings are uncertificated (i.e. share certificates are not required)
  2. Real-time matching of trades
  3. Settlement takes place in mulitple currencies (USD, GBP, EUR)
  4. Electronic transfer of title.
  5. Generates guaranteed obligations to pay cash outside of CREST
  6. Covers the settlement of many investment products (shares, bond, registered securities)
  7. Corportate actions are proceeds incl. Dividends and Rights Issues.
  8. Allows trading of bearer form shares (certificates)
69
Q

What are the 4 stages of CREST Settlement

A
  1. Trade Matching
  2. Stock Settlement
  3. Cash Settlement
  4. Register Update

2,3,4 happen simultaneously.

70
Q

What are the constitutional documents of a company more commonly known as?

Exam Question

A

Memorandum of Association
Articles of Association

71
Q

When a shareholder appoints someone to vote on their behalf at a company meeting, what is
this referred to as?

Exam Question

A

Proxy Voting

72
Q

What are the features of a cumulative preference share?

Exam Question

A
73
Q

Why might a company have a higher than average dividend yield?

Exam Question

A
  1. The company is mature and has healthy cash generation with limited growth
  2. Has low share price for e.g. being realatively unsuccessful.
74
Q

What options are available to an investor in a rights issue?

Exam Question

A
  1. Take up the rights
  2. Sell the rights
  3. Do nothing
75
Q

Under what type of corporate action would an investor receive additional shares without
making any payment?

Exam Question

A
76
Q

Which body is responsible for approving the listing of companies on the London Stock
Exchange?

Exam Question

A

A division within the FCA, called UKLA

(soon to be phased out to be just FCA)

77
Q

What is the function of a stock market index?

Exam Question

A
  1. Create Benchmarks
  2. Be a basis for derivatives
  3. Create Tracker Products
78
Q

The CAC 40 index relates to which market?

Exam Question

A

France

Represents the 40 most significant stocks among the 100 largest market caps on Euronext Paris

79
Q

What is the key characteristic of an order-driven trading system?

Exam Quesiton

A

An order-driven market is one that employs either an electronic order book, such as the LSE’s
Stock Exchange Electronic Trading Service (SETS), or an auction process, such as that on the NYSE
floor, to match buyers with sellers

CISI Introduction to Securities and Investments 2025 (12 decks)

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