Equity securities Flashcards
What are the characteristics of common shares?
- It confers a share of ownership of the company.
- They have a residual claim on the company’s net income and net assets.
- They share the operating performance of the company.
- They have voting rights for M&A. activities and the election of the board of directors.
What are the characteristics of preference shares?
- They do not confer voting rights.
- Dividends are received before common shareholders.
- Dividends are fixed and typically higher than common dividends.
- There is no obligation to have regular dividend distribution.
- In case of liquidation they are above common shareholders.
What are cumulative preference shares?
Unpaid dividends accrue over time and must be paid in full before dividends on common shares can be paid.
What are noncumulative preference shares?
Unpaid dividends for one or more periods are forfeited permanently.
What are participating preferred shares?
They are entitled to preferred dividends plus additional dividends if the company’s profits exceed a pre-specific level.
What are nonparticipating preference shares?
They are only entitled to a fixed preferred dividend and the par value of shares in the event of liquidation.
What are convertible preference shares?
- Allow investors to earn a higher dividend than if they had invested in the company’s common shares.
- They offer investors the opportunity to share the profits of the company.
- They allow investors to benefit from a rise in the price of common shares through the conversion period.
- Their price is less volatile than the underlying common shares because their dividend payments are known and more stable.
What are private equity securities?
- They are issued and traded in non-public equity markets.
- They are issued primarily to institutional investors in non-public offerings, including private placements.
- Highly liquid
- Issuers are not obliged to publish financial statements and certain disclosures.
What is venture capital?
They invest in companies that are still in the early stages of development and require additional capital for expansion.
What is a leverage buyout (LBO)?
It occurs when a group of investors uses det financing to purchase all of the outstanding common shares of a publicly traded company.
What are private investments in public equity (PIPEs)?
They invest in a public company that is in need of additional capital quickly in return for a significant ownership position.
What are the advantages of a private company?
- Long holding periods that allow private equity investors to address any underlying issues in the company and focus on long-term value creation.
- Management of public companies may feel pressured to focus on short-term performance targets.
- Avoid costs, including public filing requirements.
- Private equity firms are increasingly issuing convertible preference shares.
What are the advantages of public companies?
- Markets are much larger than private equity networks and provide more opportunities for companies to raise capital at a lower cost.
- Publicly traded companies are encouraged to be transparent, which may enhance action in shareholders’ interests.
What are the advantages of listing on an international exchange?
- It improves awareness of the company’s products and services.
- It enhances the liquidity of the company’s shares.
- It increases transparency due to additional market exposure and the need to satisfy more filing requirements.
What is direct investing?
It is to buy and sell securities directly in foreign markets.
What are the characteristics of direct investing?
- Transactions that are in the issuer’s domestic currency expose investors to foreign exchange risk.
- Investors must be familiar with the trading, clearing, and settlement regulations and procedures of the foreign market.
- It may lead to reduced transparency and increased volatility.
What are depository receipts (DR)?
They trade like ordinary shares on a local exchange representing an economic interest in a foreign company.
What is the creation process of deposit receipt?
- The foreign issuer deposits its shares at a bank in the country of the trading exchange.
- The bank issues a specific number of receipts representing the deposited shares based on a predetermined ratio.
What are sponsored DR?
- The foreign issuer has a direct involvement in the issuance of receipts.
- Investors share the same rights as owners of the company’s common shares.
What is unsponsored DR?
- Foreign issuer has no involvement in the issuance of receipts.
- The depository enjoys the same rights as owners of the company’s common shares.
What are global depository receipts (GDRs)?
- They are issued by the depository bank outside of the issuer’s home country and the US.
- They are not subject to foreign ownership and capital flow restrictions that may be imposed by the issuer’s home country, as they are sold outside of the home country.
What are American depository receipts (ADRs)?
- They are denominated in US dollars and trade like a common share on US exchanges.
- They are equivalent to a GDR that can be publicly traded in the US.
What are global registered shares (GRS)?
- They are ordinary shares quoted and traded in different currencies on different stock exchanges worldwide.
- They offer more flexibility than DRs as the shares represent actual ownership in the issuing company, can be traded anywhere, and currency conversions are not required to trade in them.
What is a basket of listed depositary receipts (BLDR)?
- It is an exchange-traded fund (ETF) that represents a portfolio of DRs.
- They trade throughout the day and can be bough, sold, or sold short.
- They may be purchased on margin and used in hedging and arbitrage strategies.
