Reading 39: Overview of Equity Securities Flashcards
What is a basket of listed depository receipts?
This is an exchange-traded fund (ETF) that represents a portfolio of depository receipts. Like all other ETFs, it trades throughout the day and can be bought, sold, or sold short just like an individual share.
Identify the characteristics of preference shares.
They do not give holders the right to participate in the operating performance of the company, and they do not carry voting rights unless explicitly allowed for at issuance.
They receive dividends before ordinary shareholders.
In case of liquidation, they have a higher priority in claims on the company’s net assets than common shares.
They can be perpetual, can pay dividends indefinitely, and can be callable or putable.
Name the categories of preference shares.
Cumulative
Noncumulative
Participating
Nonparticipating
Convertible
Identify the implications of direct investing.
All transactions are in the company’s, not the investor’s domestic currency. Therefore, investors are also exposed to exchange rate risk.
Investors must be familiar with the trading, clearing, and settlement regulations and procedures of the foreign market.
Investing directly may lead to less transparency and increased volatility.
Explain depository receipts.
A depository receipt (DR) is a security that trades like an ordinary share on a local exchange and represents an economic interest in a foreign company. It is created when a foreign company deposits its shares with a bank (the depository) in the country on whose exchange the shares will trade. The bank then issues a specific number of receipts representing the deposited shares based on a pre-determined ratio.
Give the characteristics of private equity markets.
There is no active secondary market for them, as they are not listed on public exchanges.
Therefore, they do not have market-determined quoted prices.
They are highly illiquid, and require negotiations between investors in order to be traded.
The issuing companies are not required by regulatory authorities to publish financial statements and other important information regarding the company, which makes it difficult to determine fair values.
Explain a venture capital fund.
This is a private equity investment fund that invests in companies that are still in the early stages of development and require additional capital for expansion. These investments are usually made through limited partnerships, where managing partners actively participate in the management of the investee. They require a horizon of several years, as the securities are not traded publicly. Eventual exit is a very important consideration in such investments, and available exit routes include buyouts and IPOs.
Describe global registered shares.
A GRS is an ordinary share that is quoted and traded in different currencies on different stock exchanges around the world. GRSs offer more flexibility than DRs as the shares represent actual ownership in the issuing company, they can be traded anywhere, and currency conversions are not required to trade them.
Identify the advantages of private companies.
The longer investment horizons allow investors to focus on long-term value creation and to address any underlying operational issues facing the company. Private equity firms are increasingly issuing convertible preference shares to attract investors with their greater total return potential.
Certain costs that public companies must bear, such as those incurred to meet regulatory and stock exchange filing requirements, are avoided by private companies.
