Equity Investments Flashcards
Nature of equities and other financial assets
- External long-term finance for companies
- Investment opportunity for investors/ savers
What is equity?
Equity= Ownership= Ordinary Shares
What is a company?
It is a legal entity that is separate and distinct from its owners.
The directors manage the company on behalf of the shareholders.
What are ordinary shares?
They are shares issued by a company, and is held by investors and shareholder.
Holders of ordinary shares are entitled to one vote per share and don’t have an predetermined dividend amounts.
The Nominal Value (Par Value)
The nominal value of the share is whatever those setting up the company decide.
A share is normally issued at higher than its par value, at a premium.
Share Premium
It is the excess proceeds.
Issue price minus the nominal value.
What are the shareholder’s rights?
Owners of company.
Control is limited to an entitlement vote.
Attend and vote at the annual general meeting.
Receive:
-annual report
-dividends if declared and approved
-share of residual assets on winding up
Who are the directors?
Key part of Corporate Governance.
Management acts a agent for shareholders.
Appointed for fixed terms.
What are preference shares?
Offer series of fixed payments to investors.
Company can choose not to pay a preferred dividend.:
-An ordinary dividend cannot be paid, if the preference dividend isn’t
-If preference share isn’t paid, they gain voting rights.
What is the order of settlement in the event of liquidation?
- Secured creditors: debenture holders and banks.
- Unsecured creditors: suppliers.
- Preference shareholders
- Ordinary shareholders
Risk and return on equity
Ordinary shareholders bear the residual risk. Thus, greater risk means greater returns for ordinary shareholders.
The return required by the shareholder is the cost of equity.
The cost of equity is higher than the cost of preference share and the cost of debt.
Measuring Equity Returns
Returns compromise of:
- cash income: dividends for shares.
- capital gain: change in market price during a period.
Dividend Yield
D1/P0
Dividend Per Share
Total dividends paid/ number of ordinary shares
Price Earnings Ratio
Market price of shares/ earnings per share
