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35 Cards in this Set
- Front
- Back
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Forming a company
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To form a company 2 documents are required:
- Memorandum of Association - confirms intention to form a company under companies act 2006 and agreement to become a member and take at least one share each. - Articles of Association - covers relationship between the company and its owners, ie, shareholders. |
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Public and private companies
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- Private companies - Ltd - such companies can have just 1 shareholder.
- Public companies - Plc - need a minimum of 2 shareholders. Only Plcs can be listed but not all Plcs are listed. |
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Company Meetings
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- Annual general meeting (AGMs) - shareholders given the opportunity to question directors regarding company strategy. Shareholders can vote in person or by proxy.
Ordinary resolutions require a 50%+ general consensus. - Extraordinary general meeting (EGM) - called at any time (30 days notice) usually to resolve a major decision. Votes require a 75%+ majority. |
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Types of Equities
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Capital of a company is made up of a combination of borrowing and money invested by its owners. Long - term borrowing or debt of a company are usually referred to as bonds.
Money invested by its owners usually referred to as shares or equity. |
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Ordinary Shares
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- The owner of Ordinary Shares owns the company.
- They carry full risk and reward of investing in the company. - Ordinary shareholders share in the profits of the company by receiving dividends declared by the company (tend to be paid half yearly or even quarterly). - If company does badly, its ordinary shareholders will suffer. - when a company wraps up the ordinary shareholders get paid last but get the lion's share of any profits. - Some ordinary shares may be referred to as Partly paid or contributing - meaning that only part of their nominal value has been paid up. |
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Preference Shares
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- Some companies have preference Shares as well as ordinary shares.
- Articles of association set out how preference Shares differ from ordinary shares. Normally, preference Shares: - are non-voting - pay a fixed dividend each year, amount set when shares are first issued. - rank ahead of Ordinary shares (in terms of being paid back if the company is wound up, up to a limited amount to be repaid. |
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Preference Shares
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- Cumulative - dividend entitlement accumulates if not paid.
- Participating - directors can award an extra dividend on top of the fixed amount, in a good year. - Convertible - with an option to convert into ordinary shares at set intervals. - Redeemable - with a date on which the nominal value will be repaid. |
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Benefits of owning shares
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Shares carry risks. As a reward for holding them, shareholders hope to benefit from the success of the company.
Reward or return can take one of the following forms: - Dividends - Capital Gains - Shareholder benefits |
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Dividends
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Dividend is the return that an investor gets for providing the risk capital for a business. Dividends are paid out of a companies profits which form part of their distributable reserves (the post tax profits made over the life of a company, in excess of dividends paid.
Total dividend ÷ (No. of shares x share price) x 100 = dividend yield |
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Capital Gains
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Capital Gains can be made on shares if their prices increase over time.
If an investment were to increase in value and the shares not sold, the gain would be described as 'unrealised'. |
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Shareholder Benefits
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Some companies provide perks to shareholders, such as a telecoms company offering shareholders a discounted price on their mobile phones or a shipping company offering cheap ferry tickets.
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Shareholder Rights
- Right to subscribe to new shares |
Rights issues are essentially one method by which a company can raise additional capital.
Existing shareholders have a Pre-emptive right to subscribe for new shares, to avoid dilution of their share of ownership. |
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Right to vote
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Ordinary shareholders have the right to vote on matters presented to them at company Meetings. This would include the right to vote on proposed dividends and other matters, such as appointment of directors.
Votes normally allocated on a 1 share = 1 vote basis. Voting can be carried out in person or by proxy. |
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Risks of owning shares
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- Price Risk - share price may fall
- Liquidity Risk - shares may be difficult to sell at a reasonable price or traded quickly to prevent loss. - Issuer Risk - risk that the issuing company may collapse. - Foreign Exchange risk - currency movement may have negative effect on investment value. |
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Corporate Actions
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A corporate Action occurs when a company does something that affects its shareholders or bondholders.
- mandatory corporate Action - something that is going to happen. - mandatory with options - an action that has some sort of default option that will occur if the shareholder does not intervene. - Voluntary corporate Action - an action that requires the shareholders decision. |
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Securities Ratios
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A company may announce a bonus issue whereby it gives new shares to its investors in proportion to the shares they already hold.
Terms of the bonus issue may be expressed as 1:4, which means that the investor will receive 1 new share for each existing 4 shares held. US approach differs. The 1st number in the ratio indicates the final holding after the event and the 2nd number is the original number of shares held. |
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Rights issues
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a company may wish to raise additional finance by issuing shares. It is common for a company to approach its existing shareholders with a 'Cash call' - opportunity to buy further shares at a discount to market price. Mandatory with options. Each shareholders must decide, whether to:
- take up the rights - sell the rights to another investor - do nothing - Sell sufficient rights to raise cash and use this to take up the rest. |
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Bonus Issues
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A bonus issue (known as a script or a capitalisation issue) is a corporate Action where the company gives existing shareholders extra shares without them having to subscribe any further funds. The company is simply increasing the number of shares held by each shareholder and capitalises earnings by transfer to the shareholders' funds. It is a mandatory corporate Action.
The reason for this is to increase the companies shares in the market and to bring about a lower share price. |
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Dividends
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- mandatory corporate Action
- represent the part of a company's profit that is passed on to its shareholders. Most large companies pay these twice yearly. Cum-dividend - with dividend Ex - dividend - without dividend |
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Takeovers and mergers
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Companies seeking to grow can do so either organically or by buying other companies.
Takeover - can be friendly or hostile - predator company seeks to acquire the target company. - predator will need to buy more than 50% of the shares of the target. Merger - similar but 2 companies of similar size will agree to merge their interests. - it is usual for 1 company to exchange new shares for the shares of the other. |
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Listing
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When a company decides to seek a listing, it is known as:
- becoming listed or quoted - floating on the stock market - going public - making an initial public offering (IPO) Primary market - marketing new shares for the first time. Secondary market - Once acquired if the shares are sold on this is referred to as 'dealing on the secondary market'. |
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Advantages of listing
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- Capital - an IPO provides the possibility of raising capital and once listed further offers of shares are easier to make.
- Takeovers - a listed company could use its shares as payment to acquire the shares of other companies as part of a takeover or merger. - Status - listing should help the business in marketing itself to customers, suppliers and potential employees. - Employees - stock options to key staff are a way of providing incentives and retaining employees. |
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Disadvantages of listing
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- Regulation - listed companies must govern themselves in a more open manner.
- Takeovers - listed companies are at risk of being taken over themselves. - Short-terminism - shareholders may exert pressure on the company to reach short - term goals, rather than be more patient and look for longer term investment and growth. |
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Requirements for listing on LSE
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Responsibility for allowing a company to be listed on the LSE rests with a division of the FCA, known as the UK listing Authority (UKLA).
Requirements: - must be a PLC - expected market cap of £700,000 - trading for at least 3yrs and 75% + of its business supported by an historic revenue earning record for that period. - 25% of the company's shares should be in public hands or available for purchase by the public. - Sufficient working capital for the next 12 months. Once listed, companies are expected to fulfil rules known as the continuing obligations and are obliged to issue a half - yearly report with any new, price - sensitive information. |
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Aim - The alternative investment market
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Aim was established by the LSE as a junior market for younger, smaller companies. Such companies apply to LSE to join AIM, whereas full listing requires application to the UKLA.
Requirements: - no trading history required. - no minimum market capitalisation. - no minimum proportion of the shares to be held by the 'public' |
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Major international exchanges
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- NYSE - continuous auction format/open outcry; some electronic trading
- NASDAQ - electronic trading; known for technology companies and new, volatile stocks. - London Stock Exchange (LSE) - main trading system SETS (order-driven), plus SETSqx and SEAQ (using market makers). Also the ORB (Order book for retail bonds). - Euronext - order-driven electronic trading of equity, bond and derivatives markets in Paris, Brussels, Lisbon and Amsterdam. Merged with NYSE in 2007 to form Euronext. - Deutsch Borse - electronic trading (Xetra); owns Clearstream. - Tokyo Stock Exchange (TSE) - electronic trading, continuous auction format with price controls |
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UK Stock market indices
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Markets worldwide compute 1 or more indices of share prices of their country's large companies.
Indices provide a snapshot/ benchmark how share prices are progressing and a basis for many tracker products. - FTSE 100 - largest 100 companies in terms of market cap (70% of overall market by value) - FTSE 250 - the next 250 below the 100. - FTSE 350 - total of the 100 and 250 combined. - FTSE All share - 800 companies including the 350; 98% of the UK market by value. |
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World indices
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US
- DJIA (Dow Jones Industrial Average) - narrow view of US Market - 30 stocks. - S&P 500 (standard & poor's): wider view of US Market - 500 stocks - NASDAQ Composite - 3000+ stocks Japan - Nikkei 225 - 225 stocks France - CAC 40 - 40 stocks Germany - Xetra DAX - 30 stocks Hong Kong/ China - Hang Seng - 58 stocks |
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Trading
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LSE has undergone major development to its trading platforms in response to MiFid.
Trading system known as Millennium Exchange. - SETS - used to trade shares within FTSE All Share Index. Combines order-driven trading with integrated market maker liquidity provision. 2 way prices for the most liquid and international securities. -SETSQX - system for low share volume trades. Quote driven with market makers providing liquidity during trading day. Yellow strip displays current best bid and offer prices based upon market maker quotes only. SEAQ (Automated Quotation) - Trading for fixed interest market and AIM securities not traded on SETS or SETSQX. Each stock has a page on which LSE member firms can display 'quoted prices', 'bid prices' and 'offer' prices. Advertising prices and quantities. |
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Holding title
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holding shares in registered form involves the investor's name being recorded on the share register.
Many companies now issue registered shares on a non-certificated basis. The alternative to holding shares in a registered form is to hold bearer shares, transfer of ownership occur with share transfer. In most cases UK companies are required to maintain a share register, kept by the company registrar. - Certificated Settlement Historically , each shareholder also held a share certificate. When shares were sold, the seller sent their share certificate and a stock transfer form to the company registrar , they would delete the seller's name and insert the name of the buyer into the register. The registrar then issued a new certificate to the buyer. Over the past decade most UK settlement has moved to a paperless, dematerialised (or uncertificated) form of settlement through CREST. |
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Clearing and central counterparties
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The clearing process includes:
- recording key trade info - formalising legal obligations between counterparties - matching and confirming trade details - agreeing settlement procedures for transaction. - calculating settlement obligations and sending out settlement instructions to brokers, custodians and central securities depository (CSD). - managing margin and making margin calls. - Bilateral Settlement - Settlement directly between the trading counterparties. - Novation - clearance of trades using a central counterparty (CCP). Buyer and seller remain anonymous to each other. LCH.Clearnet provides CCP services in the UK and NYSE Euronext European Markets for trading in equity, derivatives and energy products. |
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Settlement
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process by which legal title of a security is transferred from seller to buyer in exchange for equivalent value in cash - known as delivery versus payment (DVP).
Crest Settlement - holdings are uncertificated - real - time matching of trades - Settlement of transactions - Electronic transfer of title - guaranteed obligations to pay cash outside CREST. - coverage includes shares, corporate and government bonds and other securities held in registered form. - a range of corporate Actions are processed. |
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Holding securities in CREST
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- Direct Member - members name appears on the issuing companies register. (more than one account can be held)
- Sponsored member - generally a private investor and his/her name will appear on issuing companies register. A direct member will act as a sponsor and provide the link to CREST. - Custodian - beneficial shareholder appoints a nominee who is a direct member of CREST. Nominee holds securities on behalf of the shareholder, through a designated stock account. |
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Settlement in CREST
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Stage 1 - Trade Matching
Stage 2 - Stock Settlements Stage 3 - Cash Settlement Stage 4 - Register Update |
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Holding of securities in certifcated form
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If a member of CREST sells securities that are in certifcated form, the member will deposit a CREST transfer form and the relevant share certificate (called a deposit set) at a regional CREST counter and input an electronic CREST record.
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