Chapter 3 · Equities

A public limited company (PLC) may offer its shares to the general public and typically qualifies to list on a stock exchange. A private limited company may not — its shares are held by a restricted group, usually founders/employees/family/select investors.

Limited liability applies to both: shareholder loss is capped at the amount paid (or contractually owing) for the shares. Personal assets are protected on winding-up.

Ordinary shareholders get: variable dividends (from residual profits, declared by the board), voting rights (typically one vote per share at general meetings), and a residual claim on assets in a winding-up — they rank LAST after all creditors and preference shareholders.

Standard rule for the exam: one share = one vote. Dual-class super-voting share structures exist in some real markets (e.g. many US tech IPOs) but are not the IISI default.

Preference shares pay a FIXED dividend (e.g. "5% preference share"), rank ahead of ordinary shares for dividends and on winding-up, and typically have restricted or no voting rights.

The trade-off: certainty of income + priority ranking, in exchange for capped upside and less influence.

Each variant modifies the plain preference share:

• CUMULATIVE — unpaid dividends accumulate; ALL arrears must be cleared before ordinary shareholders receive any dividend. Non-cumulative simply loses missed dividends.
• PARTICIPATING — gets the fixed preference dividend PLUS a share in additional profits above a defined threshold. "Preference in name, ordinary-like upside in spirit."
• REDEEMABLE — the COMPANY may buy back the share at a pre-agreed price on/before a stated date. Non-redeemable (irredeemable) stays outstanding indefinitely.
• CONVERTIBLE — the HOLDER may convert into ordinary shares at a pre-set ratio.

Four distinct benefits — the exam sometimes asks which is NOT a benefit:

1. Dividends — periodic profit distributions
2. Capital gains — rise in share price above purchase price
3. Shareholder perks — free products, member rates, discounts (some companies only)
4. Right to subscribe for new shares — pre-emption rights via a rights issue, protecting against dilution
5. Voting rights — one vote per ordinary share at AGMs / EGMs

Market risk is exposure to broad market or economic factors that affect all shares — interest rates, sentiment, recessions, geopolitics. It cannot be diversified away within an equity portfolio.

Benchmark data point the exam sometimes references: on Black Monday (19 Oct 1987) the Dow Jones fell approximately 22.3% in a single day — worst single-day % decline in DJIA history, wiping ~US$500bn off share prices.

The difficulty of quickly selling a holding without significantly moving the price. Worst in small-cap and thinly-traded shares; least in blue-chip index constituents (Apple, Microsoft, etc.).

Firm-specific risk — a scandal, profit warning, fraud, or bankruptcy at ONE company. UNLIKE market risk, issuer risk CAN be diversified away by holding many shares.

If a UK investor holds US shares in USD and the dollar weakens against sterling, the sterling value of the holding falls — even if the USD share price is unchanged. Hedgeable via FX forwards or currency-hedged funds; comes at a cost.

DPS = Total dividends ÷ Number of shares in issue.

Worked example: total dividends US$2,000,000; 10,000,000 shares → DPS = $2,000,000 ÷ 10,000,000 = $0.20 per share.

Dividend Yield = Annual DPS ÷ Current share price × 100.

Worked example: DPS US$0.20, share price US$1.50 → Yield = 0.20 ÷ 1.50 × 100 = 13.3%. (In reality, most equity yields are 2–5%; the exam uses stylised numbers.)

EPS = Net profit attributable to ordinary shareholders ÷ weighted-average ordinary shares in issue.

P/E = Share price ÷ EPS. Interpretation: the number of years of current-level earnings the market is paying for the share.

High P/E signals growth expectations (or an over-valued share). Low P/E signals value (or a troubled company).

Dividend Cover = EPS ÷ DPS. Number of times the dividend could have been paid from current-year earnings.

Cover above 2× = safe dividend. Below 1× = the dividend is being paid from reserves and is likely unsustainable.

Market cap = Shares in issue × Current share price.

Worked example: 50,000,000 shares × £4 = £200 million.

Book value = accounting net asset value (total assets − total liabilities), from the balance sheet. Market value = market cap (share price × shares). Most companies trade at a premium to book (price-to-book > 1), particularly in services / tech.

A corporate action is any event initiated by a company that affects its securities or shareholders. Three categories:

• Mandatory — happens automatically, shareholder has no choice. Examples: cash dividend, bonus issue, stock split.
• Mandatory-with-choice — happens automatically but the shareholder picks between outcomes. Classic example: scrip dividend (take cash OR take shares).
• Voluntary — the shareholder must actively decide whether to participate. Examples: rights issue, tender offer.

The company offers existing shareholders the RIGHT to buy new shares at a fixed (typically discounted) price, in proportion to their existing holding. Purpose: raise NEW CAPITAL from existing shareholders. Protects against dilution via pre-emption.

Shareholder's three options: take up the rights (subscribe), sell the rights on the market, or let them lapse.

An open offer is similar to a rights issue but with NO TRADABLE RIGHTS. Shareholders can subscribe or not — they cannot sell the entitlement to someone else. Less flexibility, otherwise identical purpose (raise capital from existing holders).

Free additional shares distributed to existing shareholders in proportion to holdings. NO subscription required. The number of shares rises but the total value is unchanged — the share price adjusts down proportionally.

Worked: pre-bonus price £6, 1-for-2 bonus (one new share for every two held). Old value = 2 × £6 = £12. After bonus, holder has 3 shares for £12 total → new price = £4.

Stock split (e.g. 2-for-1): twice as many shares, half the price. Total market cap unchanged. Typically used to bring share prices to a "tradable" range.

Reverse split (e.g. 1-for-10): fewer shares at a higher price per share. Often used by companies whose share price has fallen too low (e.g. to meet exchange minimum-price requirements). Can be a warning sign.

Cum-dividend (CD): buyer of the share WILL receive the upcoming declared dividend.
Ex-dividend (XD): buyer will NOT receive the upcoming dividend.

On the ex-dividend day, the share price typically FALLS by approximately the dividend amount — reflecting the fact that new buyers no longer capture that dividend.

A mandatory-with-choice corporate action. Shareholder elects: take the dividend as CASH, or take additional SHARES in lieu of cash. Helps the company preserve cash if many investors elect shares.

Takeover: one company acquires control of another by purchasing a majority of its shares. Can be agreed (recommended) or hostile (resisted by the target board). Subject to extensive regulation (in the UK, the Takeover Panel / Takeover Code).

Merger: combination on roughly equal terms — often creating a new combined entity. In practice the distinction blurs; "merger of equals" is sometimes a face-saving term for a takeover.

The company uses its cash to repurchase its own shares in the open market. Reasons: return cash to shareholders (often more tax-efficient than a dividend), boost EPS (fewer shares outstanding for the same earnings), signal management's view that shares are undervalued.

Repurchased shares held by the company are called treasury shares. They receive no dividends and carry no voting rights while held. They can later be re-issued or cancelled.

Mandatory annual meeting where shareholders vote on routine matters and can question the board. Typical AGM items:

• Adoption of the annual accounts
• Declaration of the final dividend
• Re-election of directors
• Appointment (and remuneration) of the auditors
• Sometimes: director remuneration report

NOT voted on at AGMs: day-to-day operational decisions — those are management's job.

An Extraordinary General Meeting (EGM) — also called a Special General Meeting (SGM) — is any general meeting that is NOT the AGM. Called when urgent matters arise between AGMs (M&A approval, large rights issue, board reshuffle).

ORDINARY resolution: simple majority — more than 50% of votes cast. Used for routine matters (accounts, dividend, director re-election).

SPECIAL resolution: at least 75% of votes cast. Required for major changes: amending the Articles of Association, changing the company name, share buy-back authority, capital reduction.

A shareholder unable to attend a meeting can appoint a proxy to vote on their behalf — typically the chairman or a named individual. Appointment is done via a specific proxy form, NOT via power of attorney (which is a different legal instrument).

PRIMARY market: where NEW shares are issued for the first time (IPO, rights issue, private placement). The ISSUER receives the proceeds.

SECONDARY market: where investors trade EXISTING shares among themselves. The issuer does NOT receive the proceeds — those go to the selling investor.

Liquidity in the secondary market is essential to make the primary market attractive: investors will only buy in an IPO if they can exit later at a fair price.

A private company's first sale of shares to the public, typically alongside admission to a stock exchange. Generates capital for the issuer and creates a tradable market for the shares. Managed by investment bank underwriters who guarantee minimum proceeds.

Underwriter: an investment bank that commits to buying any unsold shares onto its own books at the offer price — guaranteeing the issuer the capital it expected. Charges a commission for bearing this risk.

Bookbuilding: the bank takes indications of interest from potential investors at various prices and builds a "book" of demand. The final IPO price is set based on this — typically near the top of the indicated range if demand is strong.

• Access to a wider pool of capital
• Public profile / brand credibility
• "Currency" for acquisitions — use shares instead of cash in M&A
• Employee compensation via share options / RSUs

• Substantial ongoing regulatory + disclosure obligations (quarterly/annual results, material event disclosure, ESG reporting)
• Governance requirements + listing fees
• Vulnerability to hostile takeovers
• Market scrutiny and short-termism pressure

A Multilateral Trading Facility (MTF) is an alternative venue for trading equities and bonds — competes with traditional stock exchanges. Operated by investment firms or other market operators; matches multiple buyers and sellers electronically. Examples: Cboe Europe, BATS.

AIM is the London Stock Exchange's junior market for smaller, growth-focused companies. Lighter listing rules (no minimum size, no minimum trading history). Higher risk, often higher reward. Nominated Adviser (NOMAD) sponsors each listing.

Standard equity settlement was T+2 globally until May 2024, when the US moved to T+1. UK and EU remain at T+2 as of 2026. Settlement cycles are progressively shortened to reduce counterparty exposure.

A certificate representing shares in a non-US company, denominated in US dollars and traded on US exchanges. Allows US investors to gain exposure to foreign companies without FX conversion / overseas broker accounts.

Like an ADR but listed on non-US exchanges — commonly London (LSE) or Luxembourg. Popular with emerging-market issuers who want non-US international investors without doing a full secondary listing.

Neither ADRs nor GDRs are issued by the underlying foreign company directly. A depositary bank (typically BNY Mellon, JPMorgan, Citi, or Deutsche Bank) holds the underlying foreign shares in trust and issues the depositary receipts that trade in the receipt-holder's home market.

NYSE consistently leads globally. Top 4 typically: NYSE, Nasdaq, Shanghai, Euronext or Tokyo. London has shrunk relatively but is still top 10.

Second-largest US exchange (after NYSE). Notable concentration of technology stocks — Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, Tesla all primarily listed on Nasdaq.

Bull market: sustained upward trend, investor optimism. Bear market: sustained downward trend, typically defined as a 20%+ drop from peak.

10–20% drop = correction. Under 10% = minor pullback. 2022 saw both S&P 500 and Nasdaq enter bear-market territory.

Free float: the proportion of shares actually available for trading (excluding shares held by insiders, governments, or long-term strategic owners). High free float = more liquid trading. Index inclusion typically requires a minimum free float.

In the UK, a "premium" listing on the LSE meets higher UK listing standards (Corporate Governance Code, free-float minimums) and is eligible for inclusion in FTSE UK indices. A "standard" listing meets only the basic EU-equivalent regime.