Issuing Equities Flashcards
1
Q
What is the primary market? (5)
A
- Where securities are sold for the first time
- Companies use the primary market as a means of raising new long term apical (equity and debt)
- T+1 in the UK
- Primary offers - where a company issues shares for the first time (IPO)
- Secondary offers - where the company already has issued shares but chooses to issue more through dilutive issue where the company creates new shares to issue - often called a seasoned offer. Or through a non-dilutive issue where the company director release some of their own, already issued equity to the public
2
Q
What is the secondary market? (4)
A
- Where existing securities are traded and does not raise new capital
- Exists to support the primary market
- Provides subscribers to shares in the primary market with a place to sell them on again and also acts as a benchmark for primary market pricing
- LSE fulfils the role of both primary and secondary markets
3
Q
What is an offer for subscription and who uses it? (3)
A
- Involves a company issuing shares directly to the general public (general marketing activity)
- The company needs to produce a prospectus to give the investors a good individuating of the company and its prospects
- Offers for subscription are typically used by larger issuers who are likely to have the resources and the knowledge to manage the issue themselves
4
Q
What is an offer for sale? (6)
A
- A general marketing activity
- An issuing house will buy up new shares from the issuing company before reselling them to the investing community. This guarantees the issuing company to sell all of its shares
- The role of issuing houses is generally fulfilled by investment banks
- Fair price needs to be established - could be based on a similar companies security already trading on the market. Offer is then made to the public with purchases stating number of shares they wish to buy at the fixed price. In the event of over subscription, allocations are dealt with on a pro rate basis
- Offer to sale is not restricted to the issue of new securities
- Can also be used for a large shareholding being sold into the market e.g. govt privatisations
5
Q
What is an offer for sale by tender? (4)
A
- Issuing house invites investors to bid for company’s shares
- Investors bid and issuing house selects applications with highest bids (there will be a min acceptable bid)
- once all binds are received, acceptable price is determined
- Successful applicants will pay a common strike price
6
Q
What is accelerated book building? (2)
A
- When investment firms canvas existing clients about their interest in a company’s shares
- The firm then builds a book of interested parties - typically done over a short period of time - days or even overnight
7
Q
What is placing? (3)
A
- Similar to an offer for sale - uses an issuing house to market the issuing companies shares
- Issuing house in this instance does not offer to resell the shares to the investing community at large - shares are only offered to selected investors such as asset managers and HNWI
- Selective marketing
8
Q
What is an intermediaries offer? (1)
A
- Involves making a placing through several brokers which widens the investor base
9
Q
What is equity crowdfunding? (3)
A
- Often used by startups that are not quoted on a secondary market
- Attract equity investment directly from the public
- Investor acquires an ownership stake in the company
10
Q
What is Introducing? (4)
A
- Not a marketing operation
- When a company become listed on an exchange without issuing new share capital
- As new shares are not issued, the preparation of a prospectus is not necessary. Instead the company’s will prepare Listing Particulars
- Process can be undertaken by a company that is already quoted on an overseas exchange and is seeking to expand shareholder base
11
Q
What is a rights issue? (6)
A
- An invitations for shareholders to buy new shares in proportion to their existing holding of shares
- Form of secondary issuance on the primary markets
- These rights are attached to ordinary shares
- Described as a ration between new and existing shares
- Pro rate basis = if an investor takes up all the shares offered, there will be no dilution of ownership - anti-dilution issues
- Rights are offered at a discount to the existing price of the shares
12
Q
What is the theoretical ex rights price? (2)
A
- Because shares are issued at a discount, the effect of a rights issue will dilute share price
- Theoretical ex rights price is the expected price of shares after rights issue has taken place
13
Q
What is the theoretical nil paid price? (2)
A
- A shareholderwho doesn’t want to take up their rights - might sell their rights ‘nil paid’ - sell their discounted shares to someone else
- The nil paid price is the price an investor would theoretically receive/pay for the right to subscribe to a discounted share in a rights issue
14
Q
What is scrip issue? (7)
A
- Issues new shares to existing shareholders
- AKA bonus issue or capitalisation issue
- New shares are issued to shareholders in proportion to their existing holding, like a rights issue. However a scrip is given free of charge - company doesn’t raise new capital and there is no change in the net assets or shareholder funds
- Effect of scrip is to dilute the existing market price of a share / reduce illiquidity in the market place
- Reduces the price and increases shares held by investors
- Can also be used as a substitute to pay dividends
- Price of a share after a scrip issue is called ex-scrip price
15
Q
What is a stock split? (2)
A
- Where shares in issue are split into a greater number - each with a smaller nominal value £1 split into 2 50p shares
- Opposite of a stock split is share consolidation where existing shares are consolidated into a smaller number, each with a higher nominal
16
Q
What is underwriting? (4)
A
- Guaranteeing a minimum level of proceeds from a share issue
- The cost of the guarantee is a fee, payable to the underwriter (normally an investment bank)
- If demand is insufficient to generate the minimum proceeds, the underwriter agrees to take up any shortfall, paying cash for the unwanted stock
- Underwriting is used in all situations where shares issues are generating proceeds
17
Q
What is a share buyback? (3)
A
- Not a method of issue
- The purchase by the issuing company of its own shares - reduces share supply but also assets by distributing cash
- Generally positively received as price typically rises
18
Q
What are the reasons for share buy backs? (5)
A
- Signal to shareholders that the company is undervalued - so company purchases its own shares
- An alternative to dividends
- To deploy surplus cash held by the company that cannot be profitably used elsewhere
- To rationalise the capital structure to include more debt and less equity - company believes it can sustain a higher debt-equity ratio
- To increase the value of the stock and valuations of the firms
