1.
Company Formation and Features of Shares
Private vs. Public Companies: Private companies are smaller, closely held, and have
restrictions on share transferability, while public companies have shares listed on stock
exchanges and are open to the public for investment. This section explains the structure of
a company from its incorporation, the role of shareholders, and the differences between
private and public companies .
Ordinary and Preference Shares:
o Ordinary Shares: Provide ownership in a company, with voting rights and potential
for dividends, though dividends are not guaranteed. Ordinary shareholders are the
last to be paid in the event of liquidation.
o Preference Shares: Typically offer fixed dividends and have priority over ordinary
shareholders when it comes to dividend payments and claims on assets in
liquidation. Preference shareholders generally do not have voting rights .
2. Share Dividend Yield Calculation
Dividend Yield: This is a ratio that indicates how much a company pays out in dividends
relative to its share price. The formula is:
3. Advantages, Disadvantages, and Risks of Owning Shares
Price Risk: The risk that the price of a share may decline.
Liquidity Risk: The risk of not being able to sell shares quickly at the market price.
Issuer Risk: The risk that the company issuing the shares may become insolvent.
Foreign Exchange Risk: For international investors, currency fluctuations can impact the
value of their investment .
4. Corporate Actions
Mandatory Corporate Actions: Include actions like dividends and stock splits where
shareholders do not need to act.
Voluntary Corporate Actions: Shareholders must decide whether to participate, such as in
takeovers and mergers.
Mandatory with Options: Shareholders have the right to choose from different options,
like in a rights issue .
5. Corporate Actions Terminology
Bonus/Scrip/Capitalization Issues: This involves issuing additional shares to shareholders
without receiving cash. It increases the number of shares but doesn’t impact the market
capitalization of the company.
Stock Splits/Reverse Stock Splits: A stock split increases the number of shares by reducing
the price per share, whereas a reverse split reduces the number of shares and increases
the price per share .
6. Stock Exchange Functions
Primary Market: Where new shares are issued and sold to investors for the first time.
Secondary Market: Where existing shares are traded between investors. Stock exchanges
like NASDAQ operate as secondary markets .
7. Depositary Receipts
American Depositary Receipts (ADR) and Global Depositary Receipts (GDR): These are
instruments that allow foreign companies to raise capital in international markets. ADRs
are listed on US exchanges, while GDRs can be traded globally .
8. Global Stock Exchange Indices
Various indices like the SSE Composite Index in China track the performance of stocks listed
on respective exchanges. These indices serve as benchmarks for investors .
9. Trading Mechanisms
On-Exchange vs Over-the-Counter (OTC): Shares can be traded on regulated stock
exchanges or OTC. The latter involves direct transactions between buyers and sellers.
Multilateral Trading Facilities (MTF): Provide alternative platforms for trading outside
traditional stock exchanges .
10. Settlement and Clearing
Settlement Cycles: After a trade is executed, the shares and cash are transferred between
parties. The standard settlement cycle for most equities is two business days (T+2).
Central Counterparty (CCP): Acts as an intermediary between buyers and sellers to ensure
the trade is completed smoothly .
This breakdown covers the main aspects of Equities/Stocks, giving you insights into company
formation, the different types of shares, risks, and how shares are traded and settled in the
market.
Price Risk: This is the risk that share prices might fall, which could result in a loss of capital for
investors, even if dividend payments are maintained. Market-wide declines or negative news related
to a specific company can lead to price falls(International Introduct…).
Liquidity Risk: This is the risk that shares might be difficult to sell at a reasonable price, especially
for shares in smaller or thinly traded companies. During market downturns, liquidity risk can be
exacerbated by widening bid-offer spreads(International Introduct…).
Issuer Risk: This refers to the risk that the issuing company might collapse, making its shares
worthless. While this risk is typically lower for large, established companies, events like the collapse
of Enron highlight that issuer risk remains a concern(International Introduct…).
Foreign Exchange Risk: This is the risk that fluctuations in currency exchange rates could negatively
affect the value of investments, particularly for investors holding foreign assets. Currency movements
can reduce or even wipe out gains(International Introduct…)(International Introduct…).
