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What type of funding is represented by the category of stocks in a company's financial structure?
What type of funding is represented by the category of stocks in a company's financial structure?
Which of the following best describes the maturity characteristic of shares?
Which of the following best describes the maturity characteristic of shares?
What can a shareholder do during general meetings as part of their rights?
What can a shareholder do during general meetings as part of their rights?
What is the primary difference between private companies limited by shares and public limited companies?
What is the primary difference between private companies limited by shares and public limited companies?
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In the context of shares, what does 'limited liability' mean for shareholders?
In the context of shares, what does 'limited liability' mean for shareholders?
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What are the two main sources of profits that a shareholder can expect from their investment in shares?
What are the two main sources of profits that a shareholder can expect from their investment in shares?
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What signifies the 'bid-ask spread' in stock trading?
What signifies the 'bid-ask spread' in stock trading?
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What is a significant feature of a public limited company compared to private companies?
What is a significant feature of a public limited company compared to private companies?
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What does market capitalization represent?
What does market capitalization represent?
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Which statement is true regarding common shares?
Which statement is true regarding common shares?
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What is a characteristic of redeemable shares?
What is a characteristic of redeemable shares?
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What advantage do preference shares provide to shareholders?
What advantage do preference shares provide to shareholders?
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What are the two sources of return in the holding period return (HPR)?
What are the two sources of return in the holding period return (HPR)?
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What does a warrant allow an investor to do?
What does a warrant allow an investor to do?
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Which of the following is NOT a type of share mentioned?
Which of the following is NOT a type of share mentioned?
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How is the holding period return (HPR) calculated?
How is the holding period return (HPR) calculated?
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Study Notes
Introduction to Finance - Chapter 11: Stocks
- Stocks represent ownership rights in a company.
- Shareholders are the owners of the firm.
- Stocks are a form of equity financing.
- Issuing stocks increases the company's par value, and potentially its capital surplus.
- Stocks are part of external funding.
Typical Structure of Funding Sources
- Funding sources are categorized as assets, equity, and debt (liabilities).
- Equity includes stocks, reinvested profits, private equity, and subsidies.
- Debt (liabilities) includes shareholder loans, loans/credit, payables, leases, and bonds.
Definition of Shares
- Stocks are securities representing firm membership and ownership rights.
- Issuing stocks increases the par value of the stock and potentially its capital surplus.
- Issuing stocks are an example of external financing.
Features of Shares
- Stocks have no maturity date (no repayment needed).
- Stocks represent ownership rights.
- Stocks indicate limited liability for shareholders. The shareholder is liable for the debt only up to the share's value.
- Stock returns are uncertain.
Rights of Shareholders
- Shareholders have the right to participate in general meetings (proposing, reporting, and voting).
- A specified proportion of votes (usually 5%) allows shareholders to initiate general meetings.
- Shareholders are entitled to receive dividends.
- Shareholders have liquidation rights. They receive a share-proportionate part of the divisible money after liquidation.
- In liquidation, shareholders are last in line.
Private Company vs Public Limited Companies
- Private companies: Founders provide the capital, shares are not publicly traded.
- Public companies: Shares are offered publicly, investors are able to trade, involves an initial public offering (IPO).
Bid and Ask Prices
- Bid: Price where market participants are willing to buy the security.
- If you own the share, this is the price at which you can sell it.
- Ask: Price where market participants are willing to sell the security.
- If you wish to buy the share, this is the price you would pay.
- The bid-ask spread is the difference between the bid and ask prices.
- A more liquid market has a smaller bid-ask spread.
Market Capitalization
- Market capitalization is the combined market price of all issued shares (market value of equity).
- Market capitalization = Number of Shares * Market Price per Share.
- Market capitalization measures the value based on trading activity and expectations regarding the future, whereas a book value focuses on historical events.
Types of Shares
- Common shares
- Preference shares
- Redeemable shares
- Warrants
Common Shares
- Grant traditional ownership rights.
- Entitle shareholders to dividends.
- Offer voting rights.
- Motivate investors through dividends, capital gains, and strategic goals.
- Traded on secondary markets.
- Mandatory for public limited companies (PLCs).
Preference Shares
- Provide an advantage in one dimension (preferential right):
- Preferred dividend: Paid before common shareholders.
- Voting rights: Special cases include veto power.
- Preferred liquidation rights: Paid before common shareholders.
- In other dimensions, rights are limited:
- Not entitled to voting, typically.
- Not traded publicly.
Redeemable Shares
- A company agrees to redeem or buy back the shares at a future date.
- Strategic considerations drive redeemable shares.
Warrants
- A type of call option that confers the buy right but not the obligation to buy stock at a pre-determined price at a future date, and often requires a payment in the present.
- Warrants are potentially equity-type securities, with the firm having to sell shares at the pre-arranged price upon exercising the option.
Holding Period Return
- The percentage return achieved by holding a share over a specified time.
- Sources of return include dividend gain and capital gain.
- Holding period return = (Dividend received + Ending Price – Beginning Price) / Beginning Price.
What is Dividend?
- Cash paid to shareholders.
- Source of dividend payment is the firm's profit.
- Shareholders receive dividends proportionally to the number of shares held.
- Paying dividends is optional.
Economic Meaning of Dividend
- For shareholders: Rent after capital contribution, income.
- For the firm: Money excluded from operations decreasing internal funding, cost of equity funding.
How do We Pay Dividends?
- Net profit or income is calculated, and a dividend payout ratio (d) is derived.
- Earnings per share (EPS) multiplied by the dividend payout ratio equals the dividends per share (DIV).
- Total dividends paid is calculated by multiplying DIV by the number of shares.
- Reinvested profits are the remaining amount of net profits after calculating dividend payments.
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Description
This quiz explores the fundamental concepts of stocks, including ownership rights, equity financing, and funding sources. It covers the definition and features of shares and their impact on a company's financial structure. Test your knowledge of the essential principles that govern stock ownership and corporate finance.
