Equity markets

Question 1

Ordinary Shares

Answer 1

• Long term financing; cannot withdraw investment from company unless found another investor to sell too
• Ordinary shareholders are owners of the company
• Share capital: claim all profits after paying all liabilities and preference share dividends
• Control rights - vote in annual general shareholder meetings
• Cash flow rights - dividends; proceeds from selling the acquirers; proceeds from liquidation
• Limited liability; liable only for the amount invested in the company, unlimited liability discourages investors

Question 2

Preference Shares

Answer 2

• Fixed dividend but not guaranteed
• Dividends paid before the dividends to ordinary shareholders
• Not equity share capital
• No control over the company

Question 3

Global Stock Markets

Answer 3

• Stock market is a market place where; companies raise capital, investors trade, stock market is an organised stock market ( not only debt securities, some derivative as well)
• Trend: globalising stock market; LSE merged with Borsa Italiana, NYSE merged with Euronext

Question 4

London Stock Exchange

Answer 4

Went from membership based to public in 2007

• Main market; established companies, large and medium sized
• Alternative Investment market; younger, small sized

Question 5

The secondary market

Answer 5

Quote drive market

• main trading system
• Old system - open outcry
• New system - electronic system: market makers input their quotes into the computer system

Order driven market

• Buyers input buying order into the computer trading system
• All orders pooled into a central computer system
• Transaction occurs when a buying price matches selling price; orders matched by the central trading system
• No bid-ask spread; low transaction costs, but possibly low liquidity compared to quote driven market

LSE operates the Stock Exchange Electronic trading System
- The order driven system for trading on the main market and AM ; for companies with good liquidity

Other systems include

• Stock exchange electronic trading service
• Stock exchange automated quotation system

Clearing and settlement 
Clearing 
- Confirm all parties agree on the number and price of shares traded 
- Check buyers have cash to deal 
- Check sellers have securities 
Settlement 
- Official transfer of ownership

Question 6

Primary market and raising capital

Answer 6

Going public
- Sell company shares to public investors
- Also called floating
- Initial public offering, taking a company public
Procedure
- Apply to UKLA- appoint financial advisers - prepare prospectus - decide on methods of issue - investors subscribe to the issue, shares issued and capital raised

Methods of issue

• Offer for sale
• Placing
• Intermediaries offer
• Reverse take over
• Book building

Question 7

Why is IPO underpriced?

Answer 7

Winners curse

• Informed investors only subscribe to good issues
• Uninformed investors successfully and easily get shares which indicates poor quality
• Under price the share to encourage public investor subscribe