Equity Markets

Question 1

What is meant by limited liability?

Answer 1

Investors are only liable for the company’s debts up to the amount they invested

Question 2

What are ordinary shares?

Answer 2

A means of raising long term finance that give the shareholder voting rights and a claim to dividends

Question 3

What are preference shares?

Answer 3

offer fixed payments so the dividend remains constant

Question 4

What is the stock exchange?

Answer 4

The facility where stock brokers and traders can buy and sell securities

Question 5

What is a stock market?

Answer 5

Places where governments and industries can raise long term capital and investors can buy and sell financial instruments

Question 6

Why is a well run stock exchange important?

Answer 6

• helps avoid abuses, negligence and fraud

- assists the transfer of funds from one party to another

Question 7

What are the main roles of stock exchanges?

Answer 7

• supervision of trading
• authorisation of market participants
• create an environment where prices are formed efficiently
• regulation and admission of companies to the exchange
• announcement of information, data and prices

Question 8

Why do share buy-backs occur?

Answer 8

• the company may want to repurchase all tis shares and become a privately owned company
• partial share repurchase is used to boost a low share price
• gives the firm a way to return excess capital to shareholders

Question 9

What is short-selling?

Answer 9

The sale of a security that the seller has borrowed.
The trader sells to open the position and expects to buy it back later at a lower price and keep the difference as a gain. There is a high risk of a loss in short selling

Question 10

What is the clearing and settlement process?

Answer 10

• Broker reports the details to the exchange
• The exchange’s clearing house reconciles the reports of all brokers involved to ensure they agree on the price and number of shares
• settlement= the transfer of the shares and money

Question 11

What is a warrant?

Answer 11

Gives the holder the right to subscribe to a specified number of shares during a time period in the future

Question 12

What is floatation?

Answer 12

The process of a firm deciding to sell shares to the public (initial public offerings)

Question 13

What are stock splits?

Answer 13

dividing current shares into multiple shares to boost their liquidity. Can be done to increase investor interest or because the firm may believe the high price of individual shares is deterring investors