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Financial Markets 2014 > Topic 5 - Equity markets > Flashcards

Topic 5 - Equity markets Flashcards

1
Q

5.01 - What is a share market?

A

A formal exchange facilitating the issue, buying and selling of equity securities

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2
Q

5.02 - What is a publicly listed corporation?

A

A company whose shares are quoted and traded on a formal stock exchange.

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3
Q

5.03 - What is an ordinary share?

A

The principal form of equity issued by a corporation which bestows a claim to residual cash flows and ownership and voting rights.

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4
Q

5.04 - How does a corporation differ from other business forms?

A
  • Ownership is widespread and easily transferable
  • Owners do not affect day-to-day running
  • Shareholder liability is limited
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5
Q

5.05 - How is the shareholder liability limited?

A

It is limited to the issue price of the shares for a limited liability company OR any partly paid portion of shares in a no liability company.

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6
Q

5.06 - What are the advantages of a corporation?

A
  • Obtain high finance relatively cheaply
  • Liquidity of securities facilitate investor diversification and encourage investment
  • ‘Perpetual succession’
  • Particularly suited to large scale operations
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7
Q

5.07 - What is ‘Perpetual succession’?

A

It is that corporations are not affected by changes in ownership.

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8
Q

5.08 - Separation of the ownership and control of a corporation allows what?

A
  • Appointment of specialised management

* Greater effectiveness in planning/implementing strategy

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9
Q

5.09 - What are the disadvantages of separate ownership and control of a corporation?

A
  • Conflict of interest between owners and managers (agency problem)
  • Management objectives may differ from shareholders
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10
Q

5.10 - What are the principal functions of a modern stock exchange include what?

A
  • Markets for a range of financial securities
  • Securities trading system
  • Clearing and settlement system
  • Regulation & monitoring of market integrity
  • Well-informed market
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11
Q

5.11 - What are the roles of a stock exchange?

A
  • primary/secondary market role
  • managed product role
  • derivative market role
  • trading & settlement role
  • information role
  • regulatory role
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12
Q

5.12 - What is an IPO?

A

Initial public offer - or ‘float’ is the listing of a new corporation to become publicly owned and is designed to satisfy the stock exchange listing requirements

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13
Q

5.13 - What are some of the factors that an IPO need to conform with?

A
  • IPO ASX listing requirements (min capitalisation and min number of shareholders)
  • Corporations law
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14
Q

5.14 - What are the different forms of equity finance available to listed companies?

A
  • Additional ordinary shares
  • Preference shares
  • Quasi-equity
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15
Q

5.15 - What types of shares are included in ‘additional ordinary share’ options?

A
  • Rights issue
  • Placements
  • Takeover issues
  • Dividend reinvestment scheme
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16
Q

5.16 - What types of equity funding is included under the ‘quasi-equity’ funding option?

A
  • Convertible notes
  • Options
  • Warrants
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17
Q

5.17 - What is a rights issue?

A

It is an issue of additional shares to existing shareholders on a pro-rata basis eg. 1 for 5. Rights issues are generally issued at a discount to the current share price.

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18
Q

5.18 - What are the factors that influence the rights issue share price?

A
  • Company’s cash flow requirements
  • Projected earnings flow from the new investments funded by the rights issue
  • Cost of alternative funding sources.
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19
Q

5.19 - What are the two types of rights issue?

A
  • Renounceable - shareholder may sell their right

* Non-renounceable - right may not be sold

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20
Q

5.20 - What are placements?

A

They are additional ordinary shares which are sold by a corporation to selected institutional investors, eg. funds managers.

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21
Q

5.21 - What is and is not required in order to offer a placement?

A
  • A prospectus is not required, but a memorandum of information is required
  • Minimum subscription of $500K
  • No more than 20 participants
  • Market price discount cannot be excessive.
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22
Q

5.22 - What are takeover issues?

A

In this offer the acquiring company offers additional ordinary shares to owners of the target company in settlement of the transaction. This alleviates the need for owners of acquiring company to inject cash for the purchase of the company.

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23
Q

5.23 - What is a dividend reinvestment scheme?

A

Shareholders have the option of reinvesting dividends in additional ordinary shares. These are usually discounted and there is no brokerage or stamp duty payable.

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24
Q

5.24 - What are preference shares?

A

These are classed as hybrid securities as they have debt and equity characters. A fixed dividend rate is set at the issue date.

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25
Q

5.25 - Where do preference shares rank in terms of payment of dividends and liquidation?

A

Ahead of ordinary shares.

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26
Q

5.26 - Preference shares include combinations of what features?

A
  • Cumulative or non-cumulative
  • Redeemable or non-redeemable
  • Convertible or non-convertable
  • Participating or non-participating
  • issued with different rankings
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27
Q

5.27 - What are the advantages of preference shares?

A
  • Fixed interest borrowings but they are an equity finance instrument
  • assist in maintaining debt to equity ratio
  • widen a company’s equity base
  • dividends may be deferred on cumulative shares and not paid on non-cumulative shares
28
Q

5.28 - Why is widening of a company’s equity base, an advantage of preference shares?

A

It allows further debt to be raised.

29
Q

5.29 - What is a convertible note?

A

A hybrid investment, issued for a fixed term at a stated rate of interest either by direct placement or pro-rata to shareholders.

30
Q

5.30 - What does a convertible note give the holder the right to?

A

To convert the note into ordinary shares at a specified future date and at a predetermined price.

31
Q

5.31 - How will the holder of a convertible note respond if the share price rises / falls?

A
  • has value if the share price rises

* does not need to be converted if share price falls

32
Q

5.32 - What are the advantages of a convertible note for the company?

A
  • The interest paid is generally less than other forms of debt
  • Notes can be issued for longer periods than other forms of debt.
33
Q

5.33 - What is a company issued option?

A

These provide the right but not the obligation to purchase shares at a stated price and date.

34
Q

5.34 - Why would a company issue options?

A

To raise equity funds at a planned future date (if options are exercised)

35
Q

5.35 - The stock exchange plays a role in managed products, what is this and what funds are covered?

A

They provide an option for managed funds units to be bought and sold, and include:

  • Exchange traded funds (ETFs)
  • Real estate investment funds (REITs)
  • Infrastructure funds
36
Q

5.36 - What are the two systems that the ASX use to trade investments and how do they settle investments?

A
  • ASX Trade and ASX Trade24

* To settle they use the Clearing House Electronic Sub-Register System (CHESS). Trades are settled T+3

37
Q

5.37 - What does the CHESS sub-register record?

A

Ownership of the listed securities.

38
Q

5.38 - Stock exchanges require listed entities to comply with the listing rules, including disclosure of what?

A
  • a change in a company’s financial forecasts
  • appointment of a liquidator
  • declaration of a dividend
  • notice of a takeover bid
  • disclosure of director’s interest
39
Q

5.39 - Who are the two regulators enforcing integrity in the market?

A

The ASX and ASIC

40
Q

5.40 - What is private equity?

A

It is an alternative source of funding for companies wanting to access equity capital without listing publicly.

41
Q

5.41 - Where could private equity come from? and what is it used for?

A

From superannuation funds or life insurance offices and are used to expand, recover fiance and allow takeovers

42
Q

5.42 - What are the two reasons why investors purchase shares?

A
  • Achieve an income stream

* Capital growth

43
Q

5.43 - What are the factors encouraging sharemarket participation?

A
  • Depth of the market
  • Liquidity of the market
  • Efficient price discovery
44
Q

5.44 - What is efficient price discovery?

A

It is the speed at which new information is reflected in the prices.

45
Q

5.45 - What are the two types of risk impact on security returns?

A

Systemic risk - market factors

Unsystemic risk - specific factors to the company.

46
Q

5.46 - What are some examples of systemic and unsystemic risk?

A

Systemic - economic growth / interest rate changes

Unsystemic - resignation of CEO / Technology failures

47
Q

5.47 - What is a diversified portfolio?

A
  • Contains a wide range of securities

* Diversifies the systemic risk of individual securities

48
Q

5.48 - What are the two key approaches to share market investment?

A
  • Active - decisions based on analysis and risk/return preferences
  • Passive - replication of an index (or use of an index managed fund)
49
Q

5.49 - In selecting an investment approach what does an investor need to consider?

A
  • Risk vs return
  • Income vs capital growth
  • Investment horizon
  • domestic and international shares
50
Q

5.50 - An investor’s asset allocation may be allocated in one of two ways?

A
  • Strategic - to meet an investor’s personal preferences

* Tactical - dynamic investment strategy

51
Q

5.51 - Stock market indices measure price performance of a share market, what are three key types?

A
  • Performance benchmark index
  • Tradeable benchmark index
  • Market indicator index
52
Q

5.52 - What is a performance benchmark index?

A

It is the overall sharemarket performance based on capitalisation and liquidity

53
Q

5.53 - What is a tradeable benchmark index?

A

A narrow index used as the basis of pricing certain derivative products

54
Q

5.54 - What is a market indicator index?

A

A measure of the overall share market performance

55
Q

5.55 - What is technical analysis of the share market and what is it used to predict?

A
  • Analyses past prices to detect patterns and predict future changes - prediction of direction rather than size of change.
56
Q

5.56 - What is fundamental analysis?

A

It analyses information about a company to detect underpriced or over priced shares.

57
Q

5.57 - What are the two ways that fundamental analysis can be conducted?

A
  • Bottom up approach - company specific information up

* Top-down approach - macro economy down to specific data

58
Q

5.58 - What does Algorithmic, Electronic and Program trading refer?

A

To buy and sell strategies generated by computer programs.

59
Q

5.59 - What are the latest developments in electronic trading?

A
  • High frequency trading
  • Dark pools
  • Chi-X
  • Increased liquidity, risk and competition
60
Q

5.60 - What are the three popular forecasting of sharemarket price movement theories?

A
  • the random walk hypothesis
  • The efficient market hypothesis
  • The behavioural finance hypothesis
61
Q

5.61 - What is the random walk hypothesis?

A
  • Each new share price change is independent.
62
Q

5.62 - What is the efficient market hypothesis?

A
  • Share prices reflect all available information and that superior profits are not available.
63
Q

5.63 - What are the three forms of the efficient market hypothesis?

A
  • weak form - share price changes are independent and not based on historic prices
  • Semi-strong form - all publicly available info is reflected in the share price
  • Strong form - all publicly available info & private research is reflected in the share price
64
Q

5.64 - Why was it an advantage to be a corporate during the GFC compared to a smaller firm?

A

Companies needed to raise additional capital to sure up their balance sheets, this was easier to access for listed companies and was cheaper.

65
Q

5.65 - What is a Minsky moment?

A

That a crisis comes at the moment D/E ratios are realised to be too high and too risky given revised expectations about future economic conditions.

66
Q

5.66 - Who is most at risk when an event such as the GFC impact the share market?

A

Pre-retirees as they have a much shorter investment horizon and therefore are more risk adverse.

Financial Markets 2014 (8 decks)

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