chapter 4 equities

Question 1

what is an initial public offering?

Answer 1

• commonly referred to as an IPO
• when a company first makes its shares available to the public
• when the company becomes listed on the stock exchange

Question 2

what are the two potential sources of return from shares?

Answer 2

dividends and capital gain

Question 3

what are dividends?

Answer 3

the regular ongoing income that a shareholder may receive

Question 4

how is the amount of dividend determined?

Answer 4

• the amount of dividend paid is not fixed
• it is determined by the management of the company and driven by mainly two things, profitability and expectation

Question 5

what are the two ways dividends are usually expressed?

Answer 5

• in absolute terms
• a percentage of the share price

Question 6

what is the dividend yield?

Answer 6

most recent dividend expressed as a percentage of the current share price

Question 7

what is the relationship between dividend yield and the amount of share price paid to the investors?

Answer 7

a bigger dividend yield means a greater proportion of the share price is being paid to the investors

Question 8

what is capital gain?

Answer 8

an increase in the market value of a security ie. the value of the asset is greater than the price it was bought for

Question 9

what are the two ways shares can potentially provide returns to the investor?

Answer 9

• paying regular dividends
• increasing in value to deliver a capital gain

Question 10

what is the key right that owning shares provides?

Answer 10

the right to attend and vote at company meetings

Question 11

what are company meetings or assemblies?

Answer 11

• meetings to which all the shareholders are invited
• generally required to be held at least annually
• provide the opportunity for the owners of the company (the shareholders) to vote on significant matters

Question 12

what is bankruptcy?

Answer 12

the situation where an individual, company or other organisation is unable to pay its debts

Question 13

what does is meant by ‘equity is at the bottom of the food chain’?

Answer 13

• in the event of collapse it will be the lenders that get their money first
• only if anything is left will the shareholders get anything at all

Question 14

what are the risks faced by shareholders?

Answer 14

• that the company’s level of profits (or losses) means it is unable to pay dividends
• that the value of shares falls, potentially to zero if the company collapses into bankruptcy

Question 15

how often do well-established listed companies usually pay dividends?

Answer 15

every quarter or half-year

Question 16

what is normally the reason for a company’s founding shareholders to allow the company to issue more shares to other investors?

Answer 16

to raise long-term finance (to raise capital for the company)