Chapter 3: Equities Flashcards
how is a company formed?
founders of the company complete a series of documents and lodge these with the appropriate authority and the registrar of the companies at companies
what is the difference between a private and a public company?
public companies have at least 2 shareholders and they are the only ones allowed to issue shares. private companies can have just 1 shareholder
what does plc mean?
private limited company, the liability of the shareholders for the debts of the company is limited to the amount that they paid for the initial subscription to become a shareholder
what are the constitutional documents of a company commonly known as?
memorandum of association (confirms the subscribers intent to form a company under the companies act 2006), articles of association (details the relationship between the company and the owners of the company)
what is the purpose of AGMs?
gives shareholders the oppurtunity to question the directors about the company’s strategy and operations, as well as vote on company matters
how are matters settled by vote in an AGM?
most matters are sorted via simple majority which is needed for ordinary resolutions. for special resolutions, 75% of the vote is needed to pass the motion
what is it called when a shareholder apoints someone to vote on their behalf?
voting in proxy, shareholder fills out form enabling the person to vote on their behalf
what are the features of ordinary shares?
carry full risk and reward of investing in company, can vote yes or no to resolutions, recieve a share of profits through dividends (need to be ratified), suffer if company does badly. if company closes down they will be paid last
what is a partly paid/contributing share?
a share where only part of the nominal value of the share has been paid (shareholder still owns the full share), shareholder has an obligation to pay the remaining amount when the company calls them to do so
what are the features and benefits of preference shares?
elements of both equity and debt (fixed income payments) but still an equity security, legal seniority to ordinary shareholders (get paid first if the company is going down), non-voting unless in special circumstances, paid a fixed dividend annually (set when they begin their subscription),
what is it when a preference share is cumulative?
if the company does nto make enough profit in a certain year, then the value of the dividend owed will roll onto the next year, if the preference is not cumulative then if the situation arises, then shareholders will lose the dividend for that year
what is it when a preference shareholder is participating?
they will be entitled to their basic dividend but if the company experiences bumper profits, then they may be entitled bonus dividends at the discretion of the directors, the shareholder can ‘participate’ in the bumper profits
what do convertible preference shares allow the shareholder to do?
convert their preference shares into ordinary shares
what are redeemable preference shares?
they are preference shares that have a date where they can be redeemed for their nominal value
what are the features and benefits of dividends?
a dividend is a return that an investor gets for providing the risk of capital to a company, they are paid out of distributable profits (post tax profits), companies may pay increasing dividends to keep shareholders happy
what is the dividend yeild used for and how is calculated?
potential shareholders compare the dividend paid on a company’s shares with other investments, which is helped by the calculation of the dividend yeild
dividend yeild yeild= (dividend/market capitalisation)x100
why may a company have a higher than average dividend yield?
company is mature and continues to generate healthy levels of cash, but limited in growth (potentially due to market constraints or heavy regulation) meaning no need to reinvest profits to grow so surplus profits paid to shareholdersin the form of dividends
also, company may have a low share price and expected to be relatively unsuccessful so assumed that comparatively dividends may not last.
what is capital gain, how can it potentially be lost?
profits made on shares if their prices increase over times. shares need to be sold to realise capital gains. if the share is unsold then capital gain is unrealised. risk of share price falling which then means capital gains is diluted or lost.
what are rights issues?
when the company try’s to raise additional capital by issuing new shares with existing shareholders having the pre-emptive right to subscribe for new shares prior to them being released onto the public
what are the risks of owning shares?
market and price risk i.e., if share prices within the market fall, the shareholder might lose out e.g., subprime crisis and credit crunch in 2008, NASDAQ fell by 40.54%, FTSE fell by 31%.
liquidity risk: hard for shareholders to unload their shares for a reasonable price or quickly enough to prevent loss
issuer risk: issuing company collapses and the ordinary shares become worthless
what is a corporate action?
when a company engages in a decision that affects shareholders or those that hold bonds from that company
what are the different types of corporate actions?
mandatory: action that doesn’t require any intervention from shareholders
mandatory with options: when there is a default position that will be taken unless shareholders intervene (up until the point where the decision is made, shareholders reserve the right)
voluntary: shareholder has to make a decision e.g., during a takeover bid, they have to vote to accept of decline the bid
