Chapter 4 Flashcards
is made up of a combination of borrowing and the money invested by its owners
capital of a company
the long term borrowing, or debt, of a company is usually referred to as
bonds
are the equity capital of a company, hence the reason they are referred to as equities
shares
shares may comprise
ordinary shares
preference shares
shares can be issued in either
registered
bearer form
holding shares in this involves the investor having their name recorded on the share register and sometimes being issued with a share certificate to reflect the persons ownership
registered form
the alternative to holding shares in registered form is to hold
bearer shares
equity capital may be known as
ordinary shares
ordinary stock
common stock
shareholders share in the profits of the company by receiving
dividends
are hybrid security with elements of both debt and equity
preference shares
have legal priority over ordinary shares in respect of earnings and in the event of bankruptcy, in respect of assets
preference shares
also tends to have a credit ratings and ranks above equities in the capital structure
preferred stock
preference shares are
non-voting
pay a fixed dividend each year
rank ahead of ordinary shares
preference shares may be
cumulative
non-cumulative
participating
convertible
redeemable
carry an option to convert into the ordinary shares of the company at set intervals and on preset terms
convertible preference shares
it has a date at which they may be redeemed
redeemable shares
the benefits of owning shares
dividends
capital gains
pre-emptive rights:right to subscribe for new shares
right to vote
is the return that an investor gets for providing the risk capital for a business
dividend
companies pay dividends out of their profits and these are
post-tax profits
can be made on shares if their prices increase over time
capital gains
is one method by which a company can raise additional capital, complying with pre-emptive rights
rights issue
the votes are cast in one of two ways
the individual shareholder can attend the company meeting and vote
voting by proxy
the individual shareholder can appoint someone else to vote on his behalf
voting by proxy
Risk of owning shares
price risk and market risk
liquidity risk
issuer risk
foreign exchange risk
is the risk that share prices in general might fall
price risk
is the risk that shares may be difficult to sell at a reasonable price
liquidity risk
this is the risk that the issuer collapses and the ordinary shares become worthless
issuer risk
this is the risk that currency price movements will have a negative effect on the value of an investment
Foreign exchange risk
the 3 corporate actions
mandatory corporate action
mandatory corporate action with options
voluntary corporate action
is one mandated by the company, not requiring any intervention from the shareholders or bondholders
mandatory corporate action
is an action that has some sort of default option that will occur if the shareholder does not intervene
mandatory corporate action with options
is an action that requires the shareholder to make a decision
voluntary corporate action
give examples in each corporate action
payment of a dividend
rights issue
takeover bid
types of corporate action
securities ratios
rights issues
open offers
bonus issues
stock splits and reverse stock splits
dividends
takeovers and mergers
can be defines as an offer of new shares to existing shareholders, pro rata to their initial holdings,
right issue
is made to existing shareholders and gives the holders the opportunity to subscribe for additional shares in the company of for other securities
open offer
bonus issue is also known as
scrip or capitalization issue
is a corporate action when the company gives existing shareholders extra shares without them having to subscribe any further funds
bonus issue
is the opposite of a split:shares are combined or consolidated
reverse split or consolidation
are an example of a mandatory corporate action and represent the part of a compqnys profit that is passed to its shareholders
dividends
takeover may be
friendly or hostile
is a similar transaction when the two companies are of similar size and agree to merge their interest
merger
must hold annual general meetings at which shareholders are given the opportunity to question the directors about the company strategy and operations
public companies
when a company decides to seek a listings for its shares, the process is described in a number of ways
becoming listed or quoted
floating on the stock market
going public
making an initial public offering
refers to the marketing of new shares in a company to investors for the first time
primary market
once they have acquired shares, the investors may at some point wish to dispose of some os all their shares and will generally do this through a stock exchange
sexondary market
exist to raise capital and enable surplus funds to be matched with investment opportunities
primary markets
allow the primary market to function efficiently by facilitating two way trade in issued securities
secondary markets
is an organized marketplace for issuing and trading securities by members of that exchange
stock exchange
originally designed to enable US investors to hold overseas shares without the high dealing costs and settlement delays associated with overseas ewuity transactions
american depositary receipts ADR
is a dollar denominated and issued in bearer form, with a depositary bank as the registered shareholder
ADR
makes arrangements for issues such as the payment of dividends, also denominated in US dollars and voting via a proxy at shareholder meetings
depositary bank
depository receipts
ADR
Indian depository receipts
Philippine depository receipts
is an organized marketplace for the issuing and trading of securities by members of that exchange
stock exchange
trading categorized as
quote-driven
order driven
employ market makers to provide continuous two way ot bid anf offer prices during the trading day
quote driven
example of quote driveb
NASDAQ
is one that employs either in electronic order book
order driven
useful tool for investors, as they provide a realistic benchmark against which the performance of a portfolio can be judged
stock market indices
stock market indices have four uses
to act as a market barometer
to assist in performance measurement
to act as the basis for index tracker funds
to support portfolio management research
is the final phase of the trading process
settlement
are used to achieve this by a process known as book entry transfer which involves charging electronic records of ownership rather than issuing new share certificates
electronic system
if dividends cannot paid in a particular year, perhaps because the company has insufficient profits, this share would get no dividend
ordinary preference share
However, if this is the share then the dividend entitlement accumulates
cumulative preference shares
is this is the share the dividend from the first year would be lost
non cumulative
the first dividend being declared by the directors and paid approximately halfway through the year
interim dividend
the second dividend is paid after approval by shareholders at the companys annual general meeting
final dividend for the year
shares are bought and sold with the right to receive the next declared dividend uo to the date when the declaration is actually made
cum dividend
if the shares are purchase in this dividend, the purchase will receive the declared dividend
cum dividend
for the period between declaration and the dividend payment date, the shares go
ex dividend
buying of shares when they are this dividend are not entitled to the declared dividend
ex dividend
