Equities

• Company formation


  The process of incorporating (registering) a business in the form of a limited company
• Company (after registration)


  • Becomes a separate legal entity, distinct from its owners, responsible for its own finances, assets, and liabilities
• Memorandum of Association (MOA)


  A legal document that outlines the fundamental information and objectives of a company, defining the company's name, registered office address, objectives, and the types of activities it is authorized to undertake
• Articles of Association (AOA)

  A legal document that, along with the Memorandum of Association, forms the constitution of a company, providing detailed rules and regulations for the internal management and governance of the company
• Public Company


  A business entity whose ownership is distributed among the general public through the sale of shares on stock exchanges, listed on stock markets, subject to regulatory reporting requirements, and their shares are traded publicly
• Private Company


  A business entity that is owned by a smaller group of individuals, families, or private investors, not traded on stock exchanges, and with fewer regulatory reporting obligations compared to public companies

  
• Common stock/Ordinary shares


  A security that reflects the investor's ownership of a company, offering investors the power to elect the company's board of directors and have voting rights
• Features of common stocks

  • Ownership, Rights (voting, dividends, assets in liquidation, pre-emptive rights), Tradability, Listed on stock exchanges, Repayment priority (after preference shareholders, bondholders and other debt holders)
• Preference shares/Preferred stock


  A hybrid security with elements of both debt and equity, having legal priority over ordinary shares in respect of earnings and assets in the event of bankruptcy, often non-voting except in certain circumstances
• Types of preference shares

  • Cumulative, Non-cumulative, Participating, Non-participating, Convertible, Non-convertible, Redeemable, Irredeemable, Adjustable-rate, Fixed-rate
• Shareholder benefits


  • Dividends, Capital gains, Shareholder perks, Right to subscribe for new shares, Right to vote
• Dividends


  The return that an investor gets for providing the risk capital for a business, paid out of the company's distributable reserves (post-tax profits in excess of dividends paid)
• Dividend yield


  Dividend as a percentage of the current share price
• Capital gains


  Profits made on shares if their prices increase over time
• Pre-emption rights


  The right given to existing shareholders to subscribe for new shares before they are offered to the wider public, to prevent dilution of control
• Pre-emption rights are taken very seriously in the UK, imposing tough constraints on companies raising funds, while in the US, pre-emption rights for public companies are not common</b>
• Pre-emption rights


  Existing shareholders have the right of first refusal to subscribe for new share offerings before they are offered to the wider public
• Many countries impose rules on share issues forcing companies to tell existing shareholders of their plans or give existing shareholders the right of first refusal
• In the UK, pre-emption rights are taken very seriously and impose some of the toughest constraints on companies raising funds
• In the US, pre-emption rights for public companies are not common and management can sell new shares to the highest bidder, while existing investors have limited protection from their actions
• Elsewhere around the world, some form of pre-emption exists, but the procedures and the levels of protection differ
• Right Issue


  A method by which a company can raise additional capital, complying with pre-emptive rights, with existing shareholders having the right to subscribe for new shares
• Ordinary shareholders


  • Have the right to vote on matters presented to them at company meetings, including the right to vote on proposed dividends and other matters, such as the appointment, or reappointment, of directors
  • Votes are normally allocated on the basis of one share = one vote
  • Can attend the company meeting and vote or appoint someone else to vote on their behalf (voting by proxy)
• Some companies issue different share classes, for some of which voting rights are restricted or non-existent, allowing some shareholders to control the company while only holding a smaller proportion of the shares
• Price risk


  The risk that share prices in general might fall, even though the company involved might maintain dividend payments, leading to a loss of capital
• Price risk


  • Volatile shares, such as those in companies highly exposed to global economic trends, tend to exhibit more price risk than 'defensive' shares, such as those of utility companies
• Liquidity risk


  The risk that shares may be difficult to sell at a reasonable price, typically occurring in respect of shares in 'thinly traded' companies - smaller companies, or those that do not have much trading activity
• Liquidity risk can also happen, to a lesser degree, when share prices in general are falling, in which case the spread between the bid price and the offer price may widen
• Shares in smaller companies tend to have a greater liquidity risk than shares in larger companies, and also tend to have a wider price spread than larger, more actively-traded companies
• Issuer risk


  The risk that the issuer collapses and the ordinary shares become worthless
• Larger, well-established companies are unlikely to collapse, but events such as the collapse of Enron and Lehman Brothers show that the risk is a real and present one and cannot be ignored
• Shares in new companies which have not yet managed to report profits may have a substantial issuer risk
• Foreign exchange risk


  The risk that currency price movements will have a negative effect on the value of an investment
• Currency movements can wipe out or reduce a gain, but equally can enhance a gain if the currency movement is in the opposite direction
• Corporate action


  When a company does something that affects its share capital or its bonds
• Types of corporate actions

  • Mandatory
  • Mandatory with options
  • Voluntary
• Mandatory corporate action


  One mandated by the company, not requiring any intervention from the shareholders or bondholders, e.g. payment of a dividend
• Mandatory corporate action with options


  An action that has some sort of default option that will occur if the shareholder does not intervene, but until the date at which the default option occurs, the individual shareholders are given the choice to select another option, e.g. a rights issue
• Voluntary corporate action


  An action that requires the shareholder to make a decision, e.g. a takeover bid
• Securities ratio


  How many new shares the holder is entitled to receive for each existing share they hold, e.g. 1:4 means the investor will receive one new share for each four existing shares held