174 Questions
What is the term used for the long-term borrowing of a company?
Bonds
Which type of shares may involve the investor having their name recorded on the share register?
Registered shares
What is the alternative to holding shares in registered form?
Bearer shares
What is the electronic record of ownership for shares referred to when issued in a non-certificated basis?
Share certificate
How do bearer certificates prevent their use in financial crime?
By being immobilized in vaults operated by central securities depository
In what way does ownership of bearer shares pass to a new owner?
By physical handover of share certificate
What type of company can issue shares to the public?
Public companies
In the UK, how can you differentiate a public limited company (plc) from a private company?
Plc companies have 'limited' or 'ltd' in their names
What is the main implication of limited liability for shareholders?
Shareholders can never lose money invested in shares
What documents are required to be lodged to form a company in the US?
Certificate of Incorporation or Articles of Incorporation
Which term is used interchangeably with ordinary shares or common stock?
Common shares
If a shareholder subscribes for 30 ordinary £1 shares in a UK company, how much will they pay?
$30.50
What happens if ordinary shares are only partly paid and the company goes bankrupt?
Shareholders are called on to subscribe the balance to meet the company's debts
Which characteristic is common to ordinary shares, common shares, and common stock?
$100% risk and $100% reward
What is a common indication that a UK company is public rather than private?
'Plc' in its name
What is one of the key differences between private and public companies according to the text?
Only public companies can issue shares to the public.
In a company, who has the legal priority over ordinary shares in terms of earnings and assets?
Preference Shares
What is the term used to describe shares where only part of the nominal value has been paid up?
Partly Paid Shares
What happens if dividends cannot be paid in a particular year for cumulative preference shares?
Dividend entitlement accumulates
Who are the owners of a company that vote on resolutions at company meetings?
Shareholders
What happens if shareholders vote 'no' to a resolution proposed by the company directors?
The resolution will not be passed
What is the term used to describe shares with characteristics of both debt and equity?
Hybrid Shares
What do liquidators do in relation to the remaining balance of partly paid shares when a company goes into liquidation?
Call for the remaining balance to settle debts
'Preference shares have legal priority over ordinary shares.' What does this mean?
'Preference shares are prioritized in terms of earnings and assets.'
'Partly Paid Shares' require shareholders to pay the remaining balance when called upon. This is an example of:
'Shareholder Obligation'
'Preference shares pay a fixed dividend each year.' Which aspect of preference shares does this statement refer to?
'Debt-Like Characteristic'
What is a 'naked or uncovered dividend'?
A dividend paid when current year's profits are insufficient to cover it
Why do companies seek to pay steadily growing dividends?
To maintain shareholder loyalty and confidence
How is the dividend yield calculated?
Dividend as a percentage of the current share price
Why might a company have a higher-than-average dividend yield?
Due to government regulation of selling prices
In terms of shareholder benefits, what are 'perks' that some companies offer?
Discounted price on the company's products/services
What happens if a shareholder makes an unrealized capital gain?
The gain is described as being unrealized until the share is sold
Why do shares need to be sold to realize capital gains?
To convert paper gains into actual profits
What does it mean when preference shares are described as 'non-cumulative'?
Arrears of unpaid dividends are lost and not carried forward.
In what circumstances would convertible preference shares typically be converted into ordinary shares?
At set intervals and on pre-set terms.
What is the main benefit of owning shares in a company?
Getting a return on risk capital invested in the business.
What happens to the dividend of non-cumulative preference shares if the company does not make sufficient profits?
It is lost and not carried forward.
What is a characteristic of redeemable preference shares?
They are not paid out before ordinary shareholders.
How are dividends paid out for cumulative preferred shares?
Based on the company's total profits.
What distinguishes participating preference shares from other types of preference shares?
They entitle the holder to a larger dividend when profits exceed a certain level.
What is the main difference between perpetual and redeemable preference shares?
Perpetual shares are never repaid, while redeemable shares can be repaid on a specific date.
In what circumstance might directors of a company offer a larger dividend for participating preference shareholders?
When profits exceed a certain level.
What is a key characteristic of irredeemable preference shares?
There is no fixed date for repayment of the nominal value.
How does owning preference shares differ from owning ordinary shares?
Preference shareholders get paid out before ordinary shareholders in case of liquidation or winding up.
What is the purpose of pre-emption rights for existing shareholders in companies?
To allow existing shareholders to buy new shares before the public
How does the UK handle pre-emption rights compared to the US?
The UK imposes strict rules while the US allows management to sell to the highest bidder
In the example of ABC plc shares, what percentage did the investor hold before the new share issue?
20%
What is a rights issue according to the text?
A method for raising additional capital with pre-emptive rights
How are votes allocated for ordinary shareholders at company meetings?
On the basis of one share = one vote
What is a common way for individual shareholders to vote without attending a company meeting?
By appointing someone else to vote on their behalf
How do some companies ensure control by certain shareholders even with a smaller proportion of shares?
By restricting or removing voting rights for specific share classes
In what form are most shares held these days?
In electronic form in stockbrokers' or investment managers' nominee accounts
What type of shareholder response have approaches such as those used by Alphabet met with?
Mixed response from investors as demands for environmental and social governance grow.
What does it mean for a nominee company to be described as 'bankruptcy remote'?
The nominee company only holds and administers shares, reducing liquidation risks.
What is the main risk associated with holding shares in general?
Price risk
Which event on 19 October 1987 led to a significant decrease in worldwide equities?
Black Monday
What is the potential benefit that shares offer when a company is successful?
Potential for high returns
Which factor contributes to determining the level of risk associated with holding shares of a company?
Management team and industry
What was the significant impact on share prices during 'Black Monday'?
22.3% fall in Dow Jones index
What sparked a surge in internet stocks, many of which were quoted on the NASDAQ exchange?
'New economy' suggestions
What was the percentage decline in the NASDAQ in 2008?
33.84%
Which type of shares tends to exhibit more price risk due to global economic trends?
Volatile shares
What does the term 'liquidity risk' in equities refer to?
Difficulty in selling shares at a reasonable price
What does issuer risk refer to in equity investments?
Risk of the issuer collapsing and shares becoming worthless
What is a characteristic of thinly traded companies in relation to liquidity risk?
They are more likely to face liquidity risk
In what scenario might an investor have difficulty selling their shares at a reasonable price?
During a general market downturn
'Nasdaq index crashed to below 2000' refers to which financial event?
'Dot-com' bubble burst
'Enron and Lehman Brothers' collapses highlighted which type of financial risk?
'Issuer risk'
'Equity markets worldwide fell due to the coronavirus pandemic' is an example of what type of financial event?
'General price collapses'
'Shares in new companies with no reported profits may have substantial issuer risk.' This statement relates to which type of risk?
'Issuer risk'
What type of corporate action is a rights issue, as described in the text?
Mandatory corporate action with options
In the US, how are corporate actions classified according to the text?
Mandatory and voluntary
What does a securities ratio specify in a corporate action according to the text?
The final number of shares held after the event
How is a bonus issue expressed in terms of securities ratios in European and Asian markets?
$1 bonus for every $4 held
What would be the result of a 5:4 bonus issue by a US company if an investor holds 10,000 shares?
The investor ends up with 12,500 shares
What does it mean when a corporate action is classified as 'mandatory with options'?
Shareholders are required to make a decision
Which region uses the classification system of 'mandatory with options' for corporate actions?
Europe and Asia
What distinguishes a rights issue from other types of corporate actions?
'Pro rata' distribution to existing shareholders
'1:5' is an example of expressing which type of corporate action terms?
Bonus issue terms in European and Asian markets
What does it mean when a company announces a '5:6' bonus issue according to the text?
For every 5 shares held, an investor will receive 6 new shares.
What percentage of shareholders is generally required to vote in favor of a special resolution at a company meeting?
At least 75%
What voting threshold is needed for most matters put to shareholders as ordinary resolutions?
50%
In what form can shareholders cast their votes without attending a company meeting in person?
Proxy voting form
Which term is used in the US to refer to the annual general meetings that public companies must hold?
Stockholders' meeting
What is the main purpose of annual general meetings (AGMs) for public companies?
To give shareholders the opportunity to question directors
What is the main difference between an ordinary resolution and a special resolution at a company meeting?
The number of shareholders required for approval
What is the main difference between a bonus issue and a stock split?
A bonus issue increases the number of shares held by each shareholder, a stock split decreases the per unit price of each share.
What distinguishes an open offer from a rights issue?
An open offer allows existing shareholders to subscribe for additional shares, a rights issue grants existing shareholders transferable rights to buy new shares.
What motivates a company to do a reverse stock split?
To increase the share price to make shares more marketable.
Why might companies choose to offer bonus issues instead of cash dividends?
To return value to shareholders without using cash reserves.
How does an open offer differ from a bonus issue?
An open offer gives existing shareholders the opportunity to buy more shares, a bonus issue provides additional shares without further investment.
What is the purpose of a stock split?
To reduce the per unit price of each share.
Why might a company prefer an open offer over a rights issue?
To provide an opportunity for oversubscription by existing shareholders.
'Dividends are an example of a mandatory corporate action.' What does this mean?
'Mandatory' signifies that companies are required by law to distribute dividends to shareholders.
'A stock split involves sub-dividing or splitting each share into a number of shares.' Why would a company choose to do this?
'To increase the marketability of shares by lowering the per unit share price.'
What is the term used for the lowest price at which existing shareholders can purchase additional shares in a rights issue?
Discounted price
If a shareholder chooses to do nothing following a rights issue, what will the company's advisers do with the shareholder's rights?
Sell them at the best available price
What term is given to the point at which shares and rights are traded as two separate instruments?
Theoretical ex-rights price milestone
What does the premium refer to in the context of a rights issue?
The difference between the current market price and the rights issue price
What could be a consequence if a company sets the price of new shares too high in a rights issue?
Lower demand for new shares
What might be an outcome if investors view a company's expansion strategy favorably following a rights issue?
Subsequent increase in share price
When does the theoretical ex-rights price come into effect in relation to a rights issue?
At the point where shares and rights separate
What could be a potential risk for an institution underwriting a share issue that fails to raise necessary funds?
Having to purchase unsold shares at the offering price
What happens to dividends of cumulative preference shares if profits are insufficient in any given year?
They are paid out of future profits if available.
What is the main difference between a takeover and a merger?
A merger involves two friendly companies, while a takeover can be hostile.
What happens to the price of shares on the ex-dividend date?
It decreases by the amount of the declared dividend.
Why would problems occur if a trade made on Wednesday did not settle by Friday according to the text?
The buyer would not receive the dividend.
What is the significance of the record date in relation to dividends?
It determines which shareholders are entitled to receive the declared dividend.
What distinguishes a hostile takeover from a friendly one?
A hostile takeover requires approval from the target company's board.
Why do shares go ex-dividend before the dividend payment date?
To allow for new buyers to acquire shares at a lower price.
In what way does a merger differ from a takeover when acquiring another company?
In a merger, two companies merge to form a bigger entity; in a takeover, one company gains control over another.
'Ex-dividend' means that buyers of shares are not entitled to which benefit?
$0.08 per share
'Cum-dividend' shares are those that entitle the purchaser to which benefit?
$0.08 per share
What is the process called when the custodian bank issues depositary receipts before the actual deposit of the underlying shares?
Pre-release
When GDR holders are not able to take up rights issues, what happens instead?
Rights are sold and cash is distributed
What is the percentage of a company's voting share capital that may be converted into depositary receipts?
20%
In what currency are GDRs typically settled at on the LSE through Euroclear or DTCC Depository Bank?
US dollars
How are voting rights exercised by GDR holders in the context of depositary receipts?
Indirectly through Depository Bank
What happens to a pre-release of ADR when the underlying shares are delivered by the depository bank?
It gets closed out
What is the process called when a company decides to seek a listing for its shares for the first time?
Going public
In which market are new shares in a company marketed to investors for the first time?
Primary market
What is the purpose of primary markets in relation to raising capital?
Matching surplus funds with investment opportunities
What does the term 'listing' refer to in the context of stock exchanges?
Becoming a member of the exchange
What facilitates a two-way trade in issued securities by enabling investors to dispose of acquired shares?
Trading on the stock exchange
In what way does a stock exchange contribute to market efficiency based on the text?
Facilitating a two-way trade in securities
Which of the following is NOT an advantage of listing a company on a stock exchange?
Increased possibility of takeovers and mergers
What distinguishes American Depositary Receipts (ADRs) from Global Depositary Receipts (GDRs)?
ADRs are traded on the NYSE and NASDAQ, while GDRs are not listed on any exchanges.
What role does a depository bank play in the issuance of American Depositary Receipts (ADRs)?
Acting as the registered shareholder for ADR holders
What is a key benefit of using American Depositary Receipts (ADRs) for non-US companies?
Avoiding high dealing and settlement costs in the US market
What does 'bearer form' mean in the context of American Depositary Receipts (ADRs)?
The shares being represented by physical certificates
How are dividends paid out to American Depositary Receipt (ADR) holders?
In US dollars by the depository bank after conversion
Why do non-US companies issue Global Depositary Receipts (GDRs) instead of American Depositary Receipts (ADRs)?
To avoid listing on US exchanges like NYSE and NASDAQ
'Each ADR represents 0.2 individual Volkswagen shares.' What does this imply?
'Investors can only purchase Volkswagen AG shares in fractions through ADRs.'
'ADRs give investors a simple, reliable and cost-efficient way to invest in other markets.' What aspect does this highlight?
'The flexibility of converting ADRs into ordinary shares easily.'
What does it mean when an American Depositary Receipt (ADR) holder cancels the ADR and becomes the registered owner of the shares?
The ADR holder gains full voting rights and benefits as a registered shareholder.
What is the primary role of market makers in quote-driven trading systems?
Providing continuous two-way prices for specific securities
How have most stock exchanges evolved in terms of their trading methods?
By adopting partially electronic or fully electronic systems
In the context of stock exchanges, what does it mean for a company to be 'listed'?
Meeting specific criteria set by regulatory bodies
What distinguishes quote-driven trading systems from order-driven trading systems?
Quote-driven systems use market makers for pricing securities
Why is it important for stock exchanges to have their own rules and regulations for companies seeking a listing?
To enhance market efficiency and transparency
How do stock exchanges contribute to the overall market efficiency?
By offering companies unlimited access to capital funds
Which type of system does NASDAQ exemplify?
Quote-driven system
What is the purpose of market timing in equity indices?
To identify the right point to buy or sell securities
How are buyers and sellers matched in order-driven systems?
In strict chronological order by price and quantity
Which type of indices takes into account the relative market capitalization of each stock in the index?
Free-float capitalization-weighted indices
What is the term used to describe a stock with lots of orders waiting to be dealt on either side?
Deep order book
What is a key purpose of index tracker funds and exchange-traded funds (ETFs)?
To replicate the performance of specific indices
Which trading facility emerged as a competitor to traditional exchanges?
Multilateral Trading Facilities (MTFs)
Which type of indices assume an equal investment in each stock?
Equal-weighted indices
What do stock market indices provide for investors?
A benchmark for assessing portfolio performance
Why are free-float capitalization-weighted indices considered more accurate?
They exclude shareholdings held by governments
What distinguishes the DJIA from broader-based indices?
It is price-weighted without market capitalization consideration
How is queue priority determined in order-driven systems?
Based on time and then price
Why do some equity indices exclude shareholdings held by large investors?
To calculate free-float capitalization accurately
What role do multilateral trading facilities (MTFs) play in trading?
They are powerful competitors to traditional exchanges
What is the main difference between holding shares in registered form and bearer form?
Holding registered shares requires recording the investor's name in a share register.
What is the primary reason bearer shares are regarded unfavorably by regulatory authorities?
They increase the risk of money laundering.
What is the key drawback of certificated settlement for share transfers?
It is inefficient compared to dematerialized settlement systems.
What does the term 'clearing' refer to in the context of trading securities?
Defining and formalizing obligations between trade counterparties.
Why do most markets prefer dematerialized (demat) settlement over certificated settlement for shares?
Dematerialized settlement simplifies ownership transfer electronically.
In bilateral settlement, what risk is typically borne by each trading party against their counterparties?
Credit risk
What is one key advantage of having a central securities depository in modern markets?
It simplifies ownership transfer through electronic records.
Why are bearer shares often immobilized in depositories like Euroclear or local country registries?
To reduce opportunities for money laundering
What is the primary function of a central counterparty in clearing and settlement?
To define and formalize obligations to ensure successful trade settlements
How does dematerialized (demat) settlement differ from certificated settlement?
Dematerialized settlement simplifies electronic ownership transfer
What is the role of a central counterparty (CCP) in trades?
Act as a mediator between buyers and sellers
Which process allows buyers and sellers to remain anonymous to each other?
Novation
What is the main reason regulators promote the use of central counterparties (CCPs) in trades?
To spread default risks among participants
What is the final phase of the trading process according to the text?
Settlement
In the delivery versus payment (DvP) method, what is required for the exchange to take place?
Simultaneous exchange of stock and cash
What mechanism is used for settlement involving changing electronic records of ownership?
'Book-entry transfer'
When does settlement typically occur in European equity trades?
$2 business days after trade date
Why is settlement considered a crucial phase in trading?
To finalize trading contracts
How does the settlement system help ensure a successful trade settlement?
'Trade Matching'
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