Equity markets

Question 1

role of a primary market

Answer 1

Facilitates IPOs

only new shares are bought in primary market

Question 2

role of secondary market

Answer 2

existing shares are traded through a stock exchange.

-NO NEW FUNDS are raised by issuing company

Question 3

in primary market what is the role of underwriters

Answer 3

to buy any unsold shares for a fee

Question 4

secondary market daily operations are?

Answer 4

• Centralised, continuous, organised, auction market Computerised systems - not OTC like FX markets

Question 5

what role does info play?

Answer 5

efficiency of the share market relates to how quickly price of share changes to new information that is publicly available.
- semi and annual reports are required to be released.

Question 6

regulatory role

Answer 6

• Aim to operate an open & efficient market.

- aim to keep investors fully informed of company news

Question 7

NZ Markets Disciplinary panel role

Answer 7

look at listing requirements, & unusual trades. i.e.
price of company unexpectedly increases, Panel can ask
company for a report, to see if something is amiss, e.g.
insider trading

Question 8

features of ordinary shareholders

Answer 8

• Shareholders have voting rights at general meetings &
rights to vote on important issues
• Shareholders may transfer voting rights to a proxy

Question 9

features of a IPO

Answer 9

• Major source of equity funding
• Authorised Capital: maximum number of shares authorised under Constitution
• Paid-up Capital: number of shares actually issued
• Shares may be sold ‘fully-paid’ or ‘partly-paid’
• ‘Partly-paid’ shareholders have contractual obligation to
pay remaining amount (the call) to company

Question 10

features of rights issue

Answer 10

• Issue of ordinary shares to existing shareholders
  – Issued pro-rata (e.g. 1:5 means 1 new share for
  every 5 currently held by existing shareholders
  – Two types
  • Renounceable: shareholder may sell their ‘right’
  • Unrenounceable: may not be sold
  • usually made at a discount to current price

Question 11

features of a (share) placement

Answer 11

• Traditionally, has been additional new ordinary shares issued
directly to selected investors (institutions)
• Not required to register a prospectus
• Minimum subscription-different countries different rules
• Allows smaller discount & shorter time frame than rights issue

Question 12

features of dividend Reinvestment Schemes

Answer 12

• Shareholders have option to reinvest (convert)
dividends into additional ordinary shares
• Generally issued at a discount to market price
• No brokerage or stamp duty payable
• In growth periods it allows companies to pay dividends
& pass on tax credits, while increasing equity

Question 13

features of preference shares

Answer 13

• hybrid securities (i.e. both debt & equity
characteristics) but usually no voting rights
• Have features such as cumulative, convertible, participating,
redeemable
• Fixed dividend rates - set on issue date- preference shares
have set maturity
• Rank ahead of ordinary shareholders for dividend payment

Question 14

what is a cumulative preference share?

Answer 14

If the fixed dividends are not paid in one period they are carried forward until paid

Question 15

what is a redeemable preference share?

Answer 15

entitle the holder to redeem the share on a predetermined date for a cash payment

Question 16

what is a convertible preference share?

Answer 16

may be converted to ordinary shares at a future date and at a specified price

Question 17

what is a participating preference share?

Answer 17

holders will receive a higher dividend if ordinary shareholders receive a dividend above a specified amount

Question 18

what is a convertible note?

Answer 18

• Convertible notes are a hybrid instrument— initially begins
as a debt instrument issued for a fixed term
• Gives potential investors right to convert note into ordinary
shares at specified future date at determinable price

Question 19

in relation to a convertible note, what happens if share price changes

Answer 19

• If share price falls, holder may not exercise conversion option, & take the notes cash value
• if share price increases there is a gain to be made so note will be converted to ordinary share

Question 20

what is a share option

Answer 20

• Provide the right but not the obligation to purchase

ordinary shares, at a stated price, at a future date

Question 21

what is a equity warrant

Answer 21

• Gives holder option to convert warrant into ordinary shares at
a determinable price over a given period
• Warrants may be detachable from bond & traded separately

Question 22

what is a bull market

Answer 22

a market in which share prices are rising, encouraging buying

Question 23

what is a bear market

Answer 23

a market in which prices are falling, encouraging selling

Question 24

when compaines raise new equity finance after listing it is called?

Answer 24

seasoned equity offering

Question 25

the 6 indicators of company performance

Answer 25

1. Capital Structure
2. Liquidity
3. Debt Servicing
4. Profitability
5. Share Price
6. Risk

Question 26

features of capital structure

Answer 26

• Proportion of finance (capital) obtained through debt or

equity

Question 27

features of liquidity

Answer 27

• The ability of a company to meet its short-term financial
obligation
• Common measure is current ratio

Question 28

features of debt servicing

Answer 28

• How effectively the company can meet its debt-related

(i.e. interest) obligations:

Question 29

features of profitability

Answer 29

Earnings per share (EPS): measures the earnings that
are attributable to each ordinary share after abnormal
items

Question 30

features of systematic risk

Answer 30

– arises from factors affecting whole market
– e.g. state of domestic economy & world economy
– Can be measured by beta
– Average share that matches market has beta of one

Question 31

features of non-systematic risk

Answer 31

– arises from firm-specific factors
– example: management competence, labour
productivity, financial & operational risks
• Non-systematic risk can be eliminated by forming a well-diversified portfolio