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Financial Markets > Topic 6: the Equity Markets > Flashcards

Topic 6: the Equity Markets Flashcards

1
Q

Why is equity different from debt?

A

Debt has a time frame, equity is perpetual.
Debt is a contractual claim over the borrower. Equity is a residual claim.
Debt holders have a fixed rate of interest, face less risk and lower return.
Equity faces greater risk, hence greater returns.

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2
Q

Describe the nature of the equity market?

A

Equity securities are organised on the ASX.
Both wholesale and retail.
Trades 24 hours a day, 5 days a week.

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3
Q

Who participates?

A

Brokers
Investors
ASX (stock exchange)
Corporations

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4
Q

Describe brokers?

A

Licensed parties who negotiate with clients
Paid on commission
Provide advice, research, cash management.

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5
Q

Describe shareholders?

A

Individuals
Insurance and superannuation companies (majority)
Trust companies.

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6
Q

Define a company?

A

Is a separate legal entity from owners (shareholders)
Owners so not participate with day to day business
Limited liabilities

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7
Q

How can liability be classified?

A 
By shares (if company sued you'd be limited to the shares)
By guarantee
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8
Q

Name 3 types of company’s?

A

Proprietary limited
Public company
Listed public company

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9
Q

Describe proprietary company?

A 
Private
2 owners to sign the docs to create the company.
Less than 50 shareholders.
Small to medium sized business's.
Shares privately traded and held.
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10
Q

Describe public company?

A

5 owners to sign documentation
Shareholders must be greater than 50
A prospectus is required to invite the public to buy shares

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11
Q

Describe listed public company?

A

If public company seeks to rise additional equity it must apply to the stock exchange and meet the requirements - a min of $1million in issued capital and a min of 500 shareholders.
(About 1.5 mill register but only 2,200 listed)

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12
Q

What are the rules for floating a company?

A

Floating means new shares are offered to the public via a prospectus.
IPO - initial public offer
Must apply to ASX for approval and conform to their rules and corporations law.
ADVANTAGES:
Liquidity and increased share price
Management and employee motivation
Enhanced image
Access to capital
Ancillary benefits ( provides support to primary activities of the organisation)

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13
Q

Describe the private placement of new shares in raising capital?

A

Least expensive
Usually involves one large investor to buy the shares (like a super fund)
No need for a prospectus
Save in admin expenses
Quick
HOWEVER
Price will be discounted
Restrictions on what can be sold on the open market (liquidity risk)
Existing shareholders portion will be diluted (therefore limited to 10% of capital issued in one year)

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14
Q

Describe public offer?

A

Involves inviting the public to buy shares
Either by floating or to raise additional shares after it has been floated.
Greater capital can be raised.
HOWEVER
Costly - prospectus expensive to make admin expenses
timely- some months to complete
Can dilute existing shareholders share, must be approved by shareholders before happening.

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15
Q

Explain Rights issue/ pro-rata issue?

A

Granting existing shareholders the right to buy new shares at a discounted price.
Pro rata means proportionate allocation, ie: May offer existing shareholders the right to buy 1 more share (discounted) for every 10 shares they own.
Therefore they will not be diluted.

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16
Q

Explain renounceable shares?

A

Can be taken up or sold on secondary market.

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17
Q

Explain non-renounceable rights?

A

Cannot be sold separately from the shares.
If not taken up, it lapses.
Most rights issues are renounceable, which is in the interest of the shareholder.

18
Q

Explain ordinary shares?

A

Most common instrument on equity market.
Represents partial ownership of company.
Residual claims on company profits.
Company is not obligated to pay dividends.
Company decides whether to pay dividends on level of profits, if they have the cash, or it’s policy re dividends.
They are not redeemable at a date (irredeemable) but company can buy them back.

19
Q

Explain preference shares?

A

Receive preferential treatment.
Still rank behind debt holders.
Receive fixed dividend payment.
Less risky than ordinary shares (as they may or may not receive dividends)
If participating preference shares then they get extra profits.
If redeemable they can sell shares back to the company.
If irredeemable then no such right exists. Company is not obligated to buy them back.

20
Q

Explain convertible bonds?

A

These are convertible into shares, it is the option of the bond holder.
They are a hybrid security.
Until the bonds can be converted they are strictly speaking, debt.
However, if the shares increase in value the bonds may be converted into shares.

21
Q

Explain share options?

A

Gives the shareholder the right, not the obligation, to take up shares at a preset price by a certain date.

22
Q

Explain warrants?

A

A type of option.
Options issued by a investor, approved by ASIC.
Not issued by they company itself.

23
Q

Explain dividends?

A

Earnings distributed by companies.
A number of cents per share.
Up to the company whether they pay them.
Shareholders may reinvest the dividends and receive new shares rather than cash - benefit is avoidance of fees.

24
Q

Name three things that determine whether a dividend is paid?

A

Whether there has been a profit.
If there is cash available.
What the managements dividend policy is.

25
Q

Describe interim dividends?

A

May be paid halfway thru the year, based on an estimate of profit.

26
Q

Describe final dividends?

A

Paid after the profit has been earned.

27
Q

Described fully franked dividends?

A

Tax has already been paid on them by the company, owner can use as a tax credit.

28
Q

Describe partially franked shares?

A

Partly taxed and partly untaxed shares.

29
Q

Describe un franked shares?

A

No tax has been paid by the company, owner will have to pay the tax on them.

30
Q

What is volatility in finance?

A

Risk. Bonus dividends may be paid rather than increasing a dividend. If the increase is removed it is viewed by investors as bad news.

31
Q

Describe bonus shares?

A

Free of charge shares to existing holders. Ie: 1 bonus share to every 5 shares owned.

32
Q

Explain the functions of the ASX?

A

Facilitate the issue of shares in the primary market.
Provide a secondary market to trade company shares.
Regulate the industry - must be fair, honest competitive and informed.

33
Q

Name some of the rules a company must meet to be on the ASX?

A

Must have $1million in issued capital
Have at least 500 shareholders profits from the last 3 years must have been at least $1million
IPO and prospectus

34
Q

Describe floor trading?

A

Stock brokers on a floor communicating face to face.

Not efficient considering new technologies.

35
Q

Describe screen trading?

A

Stockbrokers buy and sell using computer screens.
Highest bids are matched with lowest offers.
Circa 1987

36
Q

What is CLICK XT?

A

An integrated trading system (ITS).
Screen based, used by ASX.
Since been replaced by ASX trade.
Can buy or sell 24 hrs a day, overnight it ranks the orders and at 10am it matches bids and offers, then executes them.

37
Q

What is CHESS?

A

Clearing house electronic sub-register.

Transfers shares, shares are now recorded electronically.
It can provide shareholder info so dividends can be paid.

38
Q

What does a high turnover of shares mean?

A

There is market confidence.

The market is more liquid.

39
Q

What is share price indices?

A

The change in value of all shares.
Most are value weighted.

AOI: all ordinaries index. Top 500 companies.
ASX 100,200,300,500: number indicates which of the highest companies is being measured. 
DOW JONES: US top 30 companies
S&P:standard & poor US top 500.
NASDAQ: US OTC tech stocks
FTSE: UK
Hang Seng: Hong Kong 
NZSE: New Zealand 
DAX: Germany 
CAC: France 40
STI: Singapore 
KLCI: Kuala Lumpur
40
Q

What is equity?

A

Ownership of an asset
Permanent capital of a business
Represents a share in profits and loss of a business

Financial Markets (14 decks)

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