Chapter 3 Equities

Question 1

Which two things are need to form a company?

Answer 1

Memorandum of Association
Articles of Association

Question 2

What are the two types of companies?

Answer 2

Private companies - LTD (Can have only one shareholder)
Public Companies - PLC (Minimum of two shareholders)

Question 3

What percentage is required for a special resolution?

Answer 3

75%

Question 4

Describe an Ordinary Share

Answer 4

This type of share carries the full risk and reward of investing in a company.

Question 5

Name three ‘normal’ elements of preference shares:

Answer 5

Non-Voting
Pay a fixed dividend
Rank ahead of ordinary shares in terms of being paid if the company is wound up

Question 6

What is the primary market?

Answer 6

Raising capital through issuing shares for the first time.

Question 7

What is the secondary market?

Answer 7

Buying and selling of listed (quoted) shares on exchanges (OTC)

Question 8

Define bid and offer.

Answer 8

Bid: Price the market is willing to buy a share
Offer: Price where market is willing to sell a share

Question 9

True or False : The bid is always lower than the offer.

Answer 9

True

Question 10

True or False : The tighter the spread the more liquid the stock.

Answer 10

True

Question 11

A weak market is known as a what market?

Answer 11

Bear

Question 12

A strong market is known as a what market?

Answer 12

Bull

Question 13

How is dividend yield calculated?

Answer 13

Dividend divided by market cap x100

Question 14

In what scenario are shareholders offered the chance to greater increase their shares? (UK Law)

Answer 14

A rights issue.

Question 15

What are the three types of corporate action?

Answer 15

Mandatory (mandated by company, meaning no shareholder intervention e.g. dividends)
Mandatory with options (e.g. a rights issue)
Voluntary (requires the shareholder to make a decision, e.g. takeover bid)

Question 16

What are the three options when a rights issue occurs?

Answer 16

Take up the rights
Sell the rights to another investor
Do nothing

Question 17

What is a bonus issue?

Answer 17

A business giving every shareholder an extra share for each pair they own. E.g. £30 owning 2 shares, means £30 now owns 3 shares.

Question 18

What is a dividend cut-off?

Answer 18

Essentially the cut-off date for when a dividend can actually be claimed once a stock has been bought. Stock price dips in accordance with this at times.

Question 19

What does M&A stand for?

Answer 19

Mergers and Acquisition.

Question 20

What four things can a business do when it is seeking a listing for its shares?

Answer 20

Become listed or quoted
Floated on the stock market
Go Public
Make an IPO (Initial public offering)

Question 21

What are the advantages of listing?

Answer 21

Raising capital, along with offering a way out for shareholders.
Takeovers, listed companies can use shares as payment to acquire the shares of other companies as part of a takeover or merger.
Status, helps market business to customers, suppliers and employees.
Employees, stock options are a key way of incentivising staff to stay at the business.

Question 22

What are the disadvantages of listing?

Answer 22

Regulation, listed companies have to govern themselves in a more open way.
Takeovers, listed companies are at risk of being taken over.
Short-termism, shareholders of listed companies focus on short-term goals.

Question 23

Which two things are required to be listen on the LSE?

Answer 23

The company must be a PLC
The company must have a market cap of over £30M.

Question 24

Name 3 stock market indices (indexes)

Answer 24

NASDAQ Composite
S&P 500
Dow Jones (DJIA)
FTSE 100
CAC 40
Xextra DAX
Nikkei 225