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Stocks and Equity: Rights and Characteristics
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Stocks and Equity: Rights and Characteristics

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Questions and Answers

What is a synonym for a share in the context of financial markets?

  • Security
  • Stock (correct)
  • Equity
  • Bond

    • Equity securities can be in bearer form.

    False

    What are the two types of rights that shareholders have?

    Pecuniary rights and Membership rights

    Shareholders have the right to a _______________ share of the remaining equity if the corporation is liquidated.

    <p>pro rata</p> Signup and view all the answers

    What is the withholding tax rate in Belgium?

    <p>30%</p> Signup and view all the answers

    Retail investors are exempt from withholding tax.

    <p>False</p> Signup and view all the answers

    Match the following types of dividends with their descriptions:

    <p>Cash dividend = Paid out in cash Stock dividend = Paid out in additional shares Choice dividend = Allows shareholders to choose between cash and stock</p> Signup and view all the answers

    What is a bonus dividend?

    <p>A dividend paid out of the reserves</p> Signup and view all the answers

    What happens to foreign dividends if there is no double taxation treaty between the countries involved?

    <p>They are taxed twice</p> Signup and view all the answers

    An American Depository Receipt (ADR) is a type of bond issued by a foreign company.

    <p>False</p> Signup and view all the answers

    What is the main purpose of an American Depository Receipt (ADR)?

    <p>To give non-US listed firms access to the US market</p> Signup and view all the answers

    The _______________ Doctrine is a concept that emphasizes the importance of shareholder rights.

    <p>Frieman</p> Signup and view all the answers

    What is the primary market related to?

    <p>Stock exchange</p> Signup and view all the answers

    A shareholder has the right to request the underlying shares of an ADR at any time.

    <p>True</p> Signup and view all the answers

    The global depository receipt is also known as the _______________.

    <p>IDR</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Double Taxation = When foreign dividends are taxed twice Stakeholder Model = A model that emphasizes the importance of all stakeholders, not just shareholders ADR = A negotiable certificate issued by a US bank, which certifies that a specific number of foreign shares have been deposited Primary Market = A section of the stock exchange where new securities are issued</p> Signup and view all the answers

    What is considered the first stock exchange in the world?

    <p>Amsterdam</p> Signup and view all the answers

    The Scheldt was closed in 1585.

    <p>False</p> Signup and view all the answers

    What is the term for collateralized loans in the Dutch Republic?

    <p>Lijfrente</p> Signup and view all the answers

    The Dutch Republic introduced the first corporation that acted as a ______________ and issued shares.

    <p>legal person</p> Signup and view all the answers

    Who is credited with introducing actuarial methods in the Dutch Republic?

    <p>Johan de Witt</p> Signup and view all the answers

    Vereenigde Oostindische Compagnie (VOC) issued shares without dividends.

    <p>False</p> Signup and view all the answers

    Match the following financial instruments with their definitions:

    <p>Lijfrente = Collateralized loans Annuities = Collateralized loans Shares = Equities in companies Forwards = Financial derivative</p> Signup and view all the answers

    What is the term for equities in companies?

    <p>Shares</p> Signup and view all the answers

    In an order-driven trading system, what is the purpose of fixings?

    <p>To assign buy orders to sell orders</p> Signup and view all the answers

    In a quote-driven trading system, market makers/specialists can trade for their own account.

    <p>True</p> Signup and view all the answers

    What is the term for the process of paying/receiving money and receiving/delivering the stock?

    <p>Settlement</p> Signup and view all the answers

    MiFiD (Markets in Financial Instruments Derivatives) imposes a lot of rules towards _______________, among other things.

    <p>business conduct</p> Signup and view all the answers

    What is a characteristic of the secondary market?

    <p>Institutionalisation of the stock market</p> Signup and view all the answers

    Short selling is unrestricted in the secondary market.

    <p>False</p> Signup and view all the answers

    Match the following trading systems with their characteristics:

    <p>Order-driven trading = Orders are entered into an order book Quote-driven trading = Market makers/specialists give quotes in the form of a bid and an ask price</p> Signup and view all the answers

    In the context of settlement, T+2 refers to the _______________ settlement system.

    <p>rolling</p> Signup and view all the answers

    What happens to foreign dividends if there is no double taxation treaty between the countries involved?

    <p>They are taxed twice</p> Signup and view all the answers

    An American Depository Receipt (ADR) is a type of negotiable certificate issued in the US by a US bank.

    <p>True</p> Signup and view all the answers

    What is the main purpose of an American Depository Receipt (ADR)?

    <p>To give non-US listed firms access to the US market.</p> Signup and view all the answers

    An American Depository Receipt (ADR) is a negotiable certificate in registered form issued in the US by a US bank, which certifies that a specific number of foreign shares have been deposited with an overseas branch of the bank (or another _______________).

    <p>financial institution</p> Signup and view all the answers

    What is the primary market related to?

    <p>Issuance of new securities</p> Signup and view all the answers

    Retail investors are exempt from withholding tax.

    <p>True</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Equity Holder = Has rights as a shareholder Stakeholder = Has interests in a company beyond just financial Shareholder Model = Emphasizes shareholder rights Frieman Doctrine = Emphasizes shareholder rights</p> Signup and view all the answers

    What is the main difference between the shareholder model and the stakeholder model?

    <p>The shareholder model emphasizes shareholder rights, while the stakeholder model considers the interests of all stakeholders, not just shareholders.</p> Signup and view all the answers

    What is the formula for calculating market capitalization?

    <p>price per share x number of outstanding shares</p> Signup and view all the answers

    The free float market capitalization is often used to track market trends.

    <p>True</p> Signup and view all the answers

    What is the market capitalization range for a mid-cap company?

    <p>1 billion to 10 billion USD</p> Signup and view all the answers

    A company with a market capitalization of over 200 billion USD is classified as a _______________ cap.

    <p>mega</p> Signup and view all the answers

    What is the main reason for the shift from mutual member-owned floor trading exchanges to publicly owned computer-based trading exchanges?

    <p>Increased efficiency</p> Signup and view all the answers

    Match the following asset classes with their corresponding market capitalization ranges:

    <p>Mega cap = &gt; 200 billion USD Large cap = 10 billion to 200 billion USD Mid cap = 1 billion to 10 billion USD Small cap = 300 million to 1 billion USD</p> Signup and view all the answers

    The government regulation of the market has remained unchanged over the years.

    <p>False</p> Signup and view all the answers

    What is the primary purpose of automation in settlement systems?

    <p>Increased efficiency</p> Signup and view all the answers

    Study Notes

    Stocks and Equity

    • Stocks can be shares or bonds, but in this context, "stock" refers to a share.
    • Equity securities represent a nominative or dematerialized ownership interest in a corporation.

    Equity Holder and Their Rights

    • Shareholders have two types of rights: pecuniary rights and membership rights.
    • Pecuniary rights include:
      • Entitlement to distributed profits (dividends)
      • Pro rata share of remaining equity in case of liquidation
      • Pre-emptive right in case of new share issues
      • Bonus share (scrip issues) and stock split participation
    • Membership rights include:
      • Voting rights
      • Right to ask questions at the Annual General Meeting (AGM)
      • Power to hire or fire members of the Board of Directors (BoD)
      • Right to exercise control over the Executive Committee (Exco)
      • Right to call for an extra AGM

    Dividends

    • Dividends can be in the form of cash, stock, or choice dividend.
    • Timing and source of dividends include:
      • Interim dividend (paid out of realized profit)
      • Final dividend
      • Bonus dividend (paid out of reserves)

    Withholding Tax

    • Institutional investors are exempt from withholding tax.
    • Retail investors are not exempt.
    • In Belgium, the withholding tax is 30%.
    • Foreign dividends are taxed twice if there is no double taxation treaty between countries.

    Alternative to Dividends

    • No specific information provided.

    The Frieman Doctrine: The Shareholder Model

    • No specific information provided.

    From Shareholder Model to Stakeholder Model

    • No specific information provided.

    American Depository Receipts (ADRs)

    • ADRs are negotiable certificates issued in the US by a US bank.
    • They certify that a specific number of foreign shares have been deposited with an overseas branch of the bank.
    • Dividends can be received, and voting rights can sometimes be exercised.
    • ADRs give non-US listed firms access to the US market.

    Primary Market

    • No specific information provided.

    Some Financial History

    • The London Trade Exchange was established.
    • Antwerp came under siege in 1585, and the Scheldt was closed in 1587.
    • The Dutch Republic introduced huge financial innovations, including:
      • Collateralized loans
      • "Lijfrente" (annuities)
      • Actuarial methods (developed by Johan de Witt)
      • The first corporation that acted as a legal person and issued shares
    • Johan de Witt (1625-1672) was a significant figure in financial history.
    • The Vereenigde Oostindische Compagnie (VOC) issued shares with dividends in 1602.
    • The first stock exchange in the world was established in Amsterdam.
    • The oldest book on stocks, forwards, and options was written.

    Secondary Market

    • Orders are entered into an order book, which can be classified into market orders, conditional orders, and other types.
    • Conditional orders include limit orders, stop-loss orders, hidden orders, and fill or kill orders.
    • Fixings assign buy orders to sell orders, following market regulations.

    Quote Driven Trading

    • Market makers/specialists provide quotes in the form of a bid and an ask price.
    • Bid-ask spreads are implicit transaction costs.
    • Market makers may trade for their own account or on behalf of clients.
    • Transactions between market makers are facilitated by interdealer-brokers.

    Settlement

    • Settlement is the process of paying/receiving money and receiving/delivering the stock.
    • T+2 (rolling settlement, spot transactions) and "Quinzaines" (fortnightly account system, forward transactions) are common settlement methods.

    Constraints on the Free Market

    • MiFiD (Markets in Financial Instruments Derivatives) imposes rules on business conduct, best execution, and KYC.
    • Trading limits have been installed, including market-wide and stock-specific circuit breakers.
    • Limit-up/down rules implement a trading collar.
    • Short selling restrictions, such as the up-tick rule, are in place.
    • Market conduct forbids some trading by insiders.
    • There is a shift from retail investors to institutional investors.
    • Foreign dividends are taxed twice if there is no double taxation treaty between countries.
    • Administrative costs of handling have to be paid as well.

    Equity Holder and Their Rights

    • An Alternative to Dividends exists for equity holders.

    The Frieman Doctrine: the Shareholder Model

    • The Frieman Doctrine is a model that outlines the rights of shareholders.

    From Shareholder Model to Stakeholder Model

    • The Stakeholder Model is an alternative to the Shareholder Model.

    American Depository Receipts (ADRs)

    • ADRs are negotiable certificates in registered form issued in the US by a US bank.
    • ADRs certify that a specific number of foreign shares have been deposited with an overseas branch of the bank.
    • Dividends can be received, and voting rights can sometimes be exercised.
    • At any time, the holder of the certificate can request the underlying shares.

    Primary Market

    • The primary market has undergone changes, including a shift from mutual member-owned floor trading exchanges to publicly owned computer-based trading exchanges.
    • Automation of settlement systems has occurred.
    • Government regulation of the market has changed.

    Second Markets

    • Second markets exist for shares that do not (fully) meet the listing requirements.
    • These markets are less regulated and illiquid.

    Composition of the World Stock Market

    • The composition of the world stock market is a key concept.

    Asset Classes

    • Market capitalization (market cap) is a key concept in asset classes.
    • Market capitalization is calculated by multiplying the price per share by the number of outstanding shares.

    Market Capitalization Based Asset Classes

    • Asset classes can be categorized based on market capitalization, including:
      • Mega cap (> 200 billion USD)
      • Large cap (10 billion to 200 billion USD)
      • Mid cap (1 billion to 10 billion USD)
      • Small cap (300 million to 1 billion USD)
      • Micro cap (50 million - 300 million USD)
      • Nano cap (< 50 million USD)

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    Related Documents

    unit4.pdf

    Description

    Learn about the characteristics of stocks and equity, including the rights and benefits of being an equity holder. Understand pecuniary and membership rights, dividend distribution, and more.

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