Equities

Question 1

What are equities?

Answer 1

1) Shares in a company.
2) Stock.
3) Ownership of a company.

Question 2

How does ownership work?

Answer 2

1) If the founder sells half of the company (by issuing 50 shares and holding 50 themselves) then he owns 50% of the company.
2) Whatever the future value he will own 50% of this.
3) If the value of the company is worth 300 pounds then each share is worth 3 pounds. Each of the two shareholders has a value of 150 pounds.
4) If someone else invests 150 pounds then the company will be worth 150 pounds more (i.e have additional cash invested).
5) Each of the three investors will then own 150 pounds or one-third (150/450) of the company.

Question 3

What is an Initial Public Offering (IPO)?

Answer 3

1) This is the first tome a company offers shares to members of the public.
2) General offer to unconnected third parties.
3) A recent example was Alibaba.
4) It raises capital for further expansion and raises publicity.
5) Future shares are traded on a stock exchange.

Question 4

What are the potential returns from shares?

Answer 4

1) Investors are hoping for income in the form of dividends and capital gain (where the share price increases).
2) The dividend varies each year and is set by the management depending on the profits in a particular year.
3) Dividends expressed in a monetary amount (I.e. 30p per share) or as a dividend yield (I.e. 10%, 30p over 3 pounds).
4) if the dividend is paid twice a year then the dividend yield is the sum of the two dividends divided by the price.
5) Shareholders get a share of the gain and a share of any pain including share price falls.

Question 5

What are shareholder voting rights?

Answer 5

1) Owners of shares can attend and vote are company meetings.
2) Opportunity to find out from management how the company is performing.
3) Shareholders can vote on significant matters.

Question 6

What are the risks of owning shares?

Answer 6

1) Risk that the company doesn’t do well.
2) If profits are low it may not pay a dividend.
3) In an extreme case of bankruptcy then they lose their investment.
4) Equity are the last people to be paid when the company folds.