Equity markets Flashcards
role of a primary market
Facilitates IPOs
only new shares are bought in primary market
role of secondary market
existing shares are traded through a stock exchange.
-NO NEW FUNDS are raised by issuing company
in primary market what is the role of underwriters
to buy any unsold shares for a fee
secondary market daily operations are?
• Centralised, continuous, organised, auction market Computerised systems - not OTC like FX markets
what role does info play?
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.
regulatory role
- Aim to operate an open & efficient market.
- aim to keep investors fully informed of company news
NZ Markets Disciplinary panel role
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
features of ordinary shareholders
• Shareholders have voting rights at general meetings &
rights to vote on important issues
• Shareholders may transfer voting rights to a proxy
features of a IPO
• 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
features of rights issue
- 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
features of a (share) placement
• 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
features of dividend Reinvestment Schemes
• 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
features of preference shares
• 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
what is a cumulative preference share?
If the fixed dividends are not paid in one period they are carried forward until paid
what is a redeemable preference share?
entitle the holder to redeem the share on a predetermined date for a cash payment
what is a convertible preference share?
may be converted to ordinary shares at a future date and at a specified price
what is a participating preference share?
holders will receive a higher dividend if ordinary shareholders receive a dividend above a specified amount
what is a convertible note?
• 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
in relation to a convertible note, what happens if share price changes
- 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
what is a share option
• Provide the right but not the obligation to purchase
ordinary shares, at a stated price, at a future date
what is a equity warrant
• 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
what is a bull market
a market in which share prices are rising, encouraging buying
what is a bear market
a market in which prices are falling, encouraging selling
when compaines raise new equity finance after listing it is called?
seasoned equity offering
the 6 indicators of company performance
- Capital Structure
- Liquidity
- Debt Servicing
- Profitability
- Share Price
- Risk
features of capital structure
• Proportion of finance (capital) obtained through debt or
equity
features of liquidity
• The ability of a company to meet its short-term financial
obligation
• Common measure is current ratio
features of debt servicing
• How effectively the company can meet its debt-related
(i.e. interest) obligations:
features of profitability
Earnings per share (EPS): measures the earnings that
are attributable to each ordinary share after abnormal
items
features of systematic risk
– 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
features of non-systematic risk
– 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
