Equity Markets

• What are the functions of a modern and efficient stock exchange?

  1. Facilitating the issue, buying and selling of securities,
  2. Provision of a securities trading system
  3. Regulation and monitoring of market integrity
  4. Operation of a clearing and settlements system
  5. Provision of a well informed market.
• What are the types of financial securities?

  Equity securities, including common and preferred shares, debt securities such as bonds, debentures, notes and CD's, derivatives such as options, futures and swaps and hybrid securities including convertible bonds and preferred shares. Additionally, money market instruments such as treasury bills, commercial paper and repurchase agreements.
• What is the securities trading system in Australia?

  The ASX uses ASX Trade and ASX Trade 24, which are integrated computer based trading systems to trade all listed securities and derivatives.
• What determines the price of a share?

  Supply and Demand - The number of shares available for purchase and the demand for shares by investors
• What is the Australian clearing system and what is the processing time?

  Each transaction is completed through the Clearing House Electronic Sub-register System (CHESS). T+2, settlement of a share transaction will occur in two business days.
• How does the ASX monitor activity?

  The ASX concentrates on real-time market surveillance, compliance with trading and listing rules, and broker monitoring to maintain market integrity.
• What is the most important factor in determining the supply & demand of the ASX?

  Market sentiment
• What is the primary market role?


  Efficient and orderly sale of new issue securities
• What is the difference between IPOs, rights issues, placements and dividend reinvestment plans?

  IPO - Initial public offering - the initial listing of securities on the stock exchange

  Rights Issue - the issue of additional shares to existing shareholders

  Placement - the issue of additional shares to selected institutional investors

  Dividend reinvestment plan - allowing shareholders to reinvest divideneds by buying additional shares
• What is the secondary market role?

  To facilitate buying and selling of existing financial securities by providing liquidity.
• What is liquidity

  In the share market, it means participants can buy and sell shares without disturbing current market prices of the shares being traded
• How does liquidityaffect decisions?

  • Investors prefer liquid markets because they can easily enter and exit positions
  • The assets tend to be more stable and closer to their intrinsic value
  • Reduced risk of price manipulation
  • Accurate pricing information
  • Minimises risk of being unable to sell an asset
• Measuring market liquidity

  1. Market liquidity = share turnover/market capitalisation

  2. Share Turnover = Trading volume/# of shares outstanding

  3. Market cap = number of shares x current share price
• What is the managed product role?

  To provide investors with access to professionally managed, diversified portfolios, which can help in achieving specific financial goals, managing risk and enhancing returns.
• What are the different managed products?

  Exchange Traded Funds (ETFs) Contracts for difference, Real Estate Investment Trusts, Infrastructure Funds
• What is the derivative market role?

  Risk management, speculation and arbitrage
• What are the different types of derivatives?

  Futures, Forwards, Options, Swaps, Warrants.
• What is the interest rate market role?

  To provide a platform for investors to manage interest rate risk, speculate on interest rate movements and facilitate borrowing and lending activities.
• Which debt instruments are traded on the stock exchange?

  Corporate bonds, floating rate notes, convertible notes and preference shares.
• How does the stock exchange add value to the debt issue?

  Transparency - the exchange provides access to information about the price, yield, maturity, credit rating and other characteristics of debt securities.

  Ease of entry and exit - ability to place orders through a stock broker with minimum cost and little delay

  Liquidity - facilities the transfer of ownership from the buyer to seller through access to a retail market
• What is the role of the information market?

  To facilitate the exchange of information and data among market participants, enabling informed decision-making, price discovery and efficient allocation of resources.
• Who are the main supervisors of the markets?

  The ASX, ASIC and the RBA
• What is the ASIC's regulatory role?


  ASIC is responsible for market surveillance, regulatory enforcement and oversight of financial services providers, ensuring fair and efficient markets and protecting investors.
• What is the RBA's regulatory role?

  The RBA focuses on payment systems oversight, ensuring systemic risk monitoring and efficient market operations.
• What is an underwriter?

  An underwriter is a financial institution or individual that assesses the risk of issuing securities and guarantees to purchase them from the issuing company or government entity at a specified price. This process, known as underwriting, helps entities raise capital by ensuring that the securities will be sold, even if market conditions are unfavorable. Underwriters may also assist in structuring the securities offering and marketing them to investors.
• What is an underwriter's role in IPOs


  Assessing the company, structuring the offering, marketing and distributing the shares, setting the offering price, stabilising the stock price after the IPO, ensuring regulatory compliance and executing the underwriting agreement.
• What is an out clause?

  It allows underwriters to withdraw from an agreement under specific conditions without facing penalties.
• What is a prospectus?

  A document that provides information about a financial investment offering to potential investors including essential details about the issuing company and the terms of the offering.
• What type of shares are issued in IPOs?

  In IPOs, companies typically issue ordinary shares, also known as common shares or equity shares, which represent ownership in the company and entitle shareholders to voting rights and dividends.
• What is limited liability? 


  Limited liability is a legal concept where the liability of a company's shareholders or owners is limited to the amount of their investment in the company, protecting their personal assets from the company's debts and obligations.
• What are the other forms of equity in finance?

  Preferred stock, convertible preferred stock, warrants, equity derivatives, equity crowdfunding.
• What is a rights issue?

  A method by which a company raises additional capital by offering existing shareholders the right to purchase new shares in proportion to their existing holdings, usually at a discounted price.
• What happens to the price after a rights issue?

  the price typically decreases due to the dilution effect caused by the issuance of new shares. As the total number of shares outstanding increases, the company's earnings are spread over a larger number of shares. Additionally, the discounted price offered to existing shareholders may create downward pressure on the stock price as investors adjust to the new supply of shares in the market.
• What factors influence the issue price?

  The company's cash flow requirements, projected return on assets expected to derive from the new investments funded by the issue and the cost of alternative funding sources.
• What are the two types of rights issues?

  Renounceable - a right attached to a security that can be sold to a third party, and non-renounceable - a right attached to a security that cannot be sold to a third party.
• What is a placement?

  Raising further equity funds by issuing ordinary shares to selected investors like fund managers.
• What is a takeover issue?

  An equity-funded takeover refers to an acquisition in which the acquiring company finances the purchase of the target company's shares primarily through the issuance of its own equity securities, such as stocks or convertible securities, rather than using cash or debt.
• What is a dividend reinvestment scheme?

  A dividend reinvestment scheme (DRIP) is a program offered by a company that allows shareholders to automatically reinvest their cash dividends into additional shares of the company's stock, often at a discounted price and without incurring brokerage fees.
• What are preference shares?

  They entitle holders to fixed dividends paid out before the dividends are distributed to common shareholders. In the event of liquidation, preference shareholders have priority over common shareholders in receiving assets. They can be cumulative or non-cumulative.
• What are cumulative preference shares?

  If the company fails to pay dividends in one period, it must make up for it in future periods before paying dividends to common shareholders.