Equity Securities Flashcards
Equity securities represent ownership claims on a company’s net assets.
What is statutory voting?
Each share represents one vote.
What is cumulative voting?
Allows shareholders to direct their total voting rights to specific candidates, as opposed to having to allocate their voting rights evenly among all candidates.
What are preference shares / preferred stock?
Shares that rank above common shares with respect to the payment of dividends and the distribution of the company’s net assets upon liquidation.
What are dividends on cumulative preference shares?
If the company decides not to pay a dividend in one or more periods, the unpaid dividends accrue and must be paid in full before dividends on common shares can be paid.
What are participating preference shares?
They entitle shareholders to receive the standard preferred dividend plus the opportunity to receive an additional dividend if the company’s profits exceed a pre-specified level.
What are private equity securities?
Equity securities that are issued primarily to institutional investors via non-public offerings, such as private placements. Because they are not listed on public exchanges, there is no active secondary market for these securities. Therefore, the private equity securities do not have “market determined” quoted prices, are highly illiquid and require negotiations between investors in order to be traded.
What are three primary types of private equity investments?
Venture capital
Leveraged buyouts
Private investment in public equity (PIPE)
What is venture capital?
Investments that provide “seed” or start-up capital, early-stage financing, or mezzanine financing to companies that are in the early stages of development and require additional capital for expansion. Venture capitalists range from family and friends to wealthy individuals and private equity funds.
What is a leveraged buyout (LBO)?
It occurs when a group of investors uses a large amount of debt to purchase all of the outstanding common shares of a publicly traded company. In case these investors exist of the company’s existing management, we call it a management buyout (MBO). The company is taken private here. Goal here is to restructure the acquired company and take it public again.
What is PIPE?
Private investment in public equity
This type of investment is generally sought by a public company that is in need of additional capital quickly and is willing to sell a sizeable ownership position to a private investor.
What is a barrier to global investing that many countries still impose?
Foreign restrictions
What are three reasons for foreign restrictions?
- Limit the amount of control that foreign investors can exert on domestic companies.
- Give domestic investors the opportunity to own shares in the foreign companies that are conducting business in their country.
- Reduce volatility of capital flows into and out of domestic equity markets.
Studies have shown that reducing restrictions on foreign ownership has improved equity market performance over the long term.
How do emerging markets benefit from increasing globalization in financing?
No more capital constraints or lack of liquidity
What is direct investing?
Buy and sell securities directly in foreign markets. However, this means that all transactions - including the purchase and sale of shares, dividend payments, and capital gains - are in the company’s domestic currency. Also, investors must be familiar with trading, clearing and settlement regulations and procedures of that market.
What is a Depository Receipt?
A security that trades like an ordinary share on a local exchange and represents an economic interest in a foreign company. It allows the publicly listed shares of a foreign company to be traded on an exchange outside its domestic market. A depository receipt is created when the equity shares of a foreign company are deposited in a bank in the country on whose exchange the shares will trade.
What is a sponsored versus unsponsored DR?
A sponsored DR is when the foreign company whose shares are held by the depository has a direct involvement in the issuance of the receipts. In an unsponsored DR, the underlying foreign company has no involvement with the issuance of the receipts. Instead, the depository purchases the foreign company’s shares in its domestic market and then issues the receipts through brokerage firms in the depository’s local market. Depository bank retains voting rights!
What are two types of Depository Receipts?
Global depository receipt
American depository receipt
What is a global depository receipt (GDR)?
It is issued outside of the company’s home country and outside of the United States. The depository bank that issues GDRs is generally located in the countries on whose exchanges the shares are traded. Key advantage is that they are not subject to the foreign ownership and capital flow restrictions that may be imposed.
What is an American Depository Receipt (ADR)?
US dollar-denominated securities that trade like a common share on US exchanges. They enable foreign companies to raise capital from US investors.
What are four types of ADRs?
Level 1 Sponsored ADRs trade in the OTC market and do not require full registration with SEC.
Level 2 & Level 3 Sponsored ADRs allow companies to raise capital and make acquisitions using these securities. However, the issuing companies must fulfill all SEC requirements.
SEC Rule 144A / Regulation S Depository Receipt does not require SEC registration. Instead, foreign companies are able to raise capital by privately placing these depository receipts with qualified institutional investors.
What is a Global Registered Share?
Common share that is traded on different stock exchanges around the world in different currencies. More flexibility than DRs.
What is a Basket of Listed Depository Receipts (BLDR)?
An exchange-traded fund that represents a portfolio of depository receipts.
