Shares Flashcards
What is a share?
A share, or equity, represents a share in the assets and the profits that the company produces. Unlike in loans and bonds, where someone is a creditor of a company, a shareholder is the owner of the company.
What are share options?
Most industrial giants are run by boards of directors, who in turn appoint salaried managers to administer the day-to-day running of the company. Some managers will sit on the board, however generally managers rarely own a significant proportion of the company’s equity. In the past 25 years or so, share options have been issued which allow managers the option to buy shares at a set price. This aligns the interests of investors and managers since then both benefit from rising share prices.
What is an ordinary share?
This gives the owner the right to vote (although there are ordinary non-voting shares), the right to appoint and remove directors, and the right to receive dividends, if and when declared.
How often are dividends usually paid?
Most companies pay every sixth months although some now pay every quarter. The first appears with the half yearly results and is known as the interim dividend whereas the end year dividend is known as the final.
What are preference shares?
Different from ordinary shares in that they give the holder a first claim on dividends and on the company’s assets, if and when it is liquidated. The amount of divided on a preference share is fixed. Less risk but less reward than in ordinary shares and normally the voting rights are restricted.
There are many additional types of preference shares (e.g. cumulative, redeemable, participating, convertible).
As a group, preference shares resembled fixed rate bonds. However, unlike bonds companies that issue preference shares cannot offset the dividend against tax which made them unpopular during the bull market when it was cheaper to issue ordinary shares to a seemingly insatiable investing public.
What is an option?
Options grant the buyer the right to buy (a call option) or to sell (a put option) a set number of shares at a fixed price. The option buyer is not obliged to buy or sell. The seller of the option receives a non-returnable premium in return for granting the option.
What is a call option?
The right to buy shares
What is a put option?
The right to sell shares
What are contracts for difference?
These are agreements between two parties that one will pay the other the difference between the current price of a share and its value at some future date. The attraction in CFDs for speculators is that shares can be bought on margin without putting up a lot of capital. The margin can vary between roughly 2-20%.
In the UK CFDs are exempt from the 0.5% stamp duty charge so they are often used by hedge funds as a way of getting exposure to a share; it also protects the privacy of a hedge fund trying to build up a position.
What is buying shares on margin?
Buying on margin is borrowing money from a broker to purchase stock. You can think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you’d be able to normally. To trade on margin, you need a margin account.
What is spread betting?
A spread bet requires the gambler to bet whether a given number will be higher or lower than the specified range. In shares, this would involve betting a certain amount per point above a given share spread price. E.g. if the spread for a share is 168-173p, you might bet £100 for every point the share traded above this price (obviously losses work in the opposite way). Spread bets have defined periods but the bet can be closed before that date by making an equal gamble in the opposite direction. Profits are not subject to capital gains tax.
Where can companies list their shares?
The main market of the London Stock Exchange is designed for well-established companies. The Alternative Investment Market (AIM) is designed for younger companies and has fewer rules for qualification. Nowadays, it is quite possible for UK companies to list on overseas markets as well as, or instead of, London and indeed many overseas companies choose to list here rather than in their own country.
What is an offer for sale? (listing on the stock market)
- Offer for sale - the most expensive method since it requires a large amount of publicity and also underwriting. A company will issue a prospectus and then investors are encouraged to apply for shares by a given day. The sponsor will then announce whether the issue is over or under-subscribed. If it is oversubscribed there may be a ballot or applications will be scaled down whereas if it is undersubscribed then underwriters will have to buy the shares at the offer price.
What is a tender offer? (listing on the stock market)
In a conventional offer, the investors are told the share price in advance whereas in a tender offer they pick the price themselves (though a minimum price is usually set). When all the tenders are in the highest will be awarded shares, then the next highest and so on down until all the shares are allocated. They are unpopular with institutional investors as there is less chance of an increase in price when the shares start trading. Private investors are also less inclined to apply for tenders. Hence they are rare and only tend to be used when an issue looks certain to be popular.
What is a placing? (listing on stock market)
The most common forming of listing. The sponsoring bank or broker contacts key investment institutions and asks them to take some shares. The placing method is cheaper and tends to ensure that all shares are in the hands of a few, supportive instutitions.
