CISI Course - Chapter 4

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When is a company formed?: When the relevant documents are lodged with Registrar of Companies at Companies House
What does Ltd after a company\'s name mean? (3): 1. That the company is private
2. Its shares are not publicly traded
3. Company may have a single shareholders
What does PLC mean after a company\'s name? (3): 1. That the company is a public limited company
2. The securities in the company are usually tradeable
3. More than one shareholder
Who directs a company?: The company officers (its directors) direct the company with the approval of the shareholders.
How do shareholders voice their concerns? (2): 1. Companies are obliged to hold an annual general meeting (AGM)
2. Votes are cast
Describe voting at a shareholders\' meeting (3): 1. Votes by ordinary resolution (50% plus 1 vote)
2. More serious matters require a special resolution (75% of votes required)
3. If a shareholder can\'t attend can appoint a proxy to vote on his behalf.
What is capital?: Usually describes the resources available to a particular provider
How would a state raise capital? (4): Levying taxes on:
1. Individuals
2. Corporate entities
3. Issuing debt securities to investors
How does private enterprise raise capital? (2): 1. Issuing debt to investors
2. Issuing shares
Describe a company\'s share captial.: 1. Authorised share captial - Amount a company is allowed to issue under its constitution
2. Issued/paid up share captial - refers to shares that are actually in the hands of shareholders
What is the advantage of having a large authorised shar captial?: The company can in the future issue the authorised shares without having to amend the company\'s constitution.
Describe an ordinary share\'s nomainl value (2): 1. The amount paid for the shares by original invetors in the company
2. As a company grows and becomes more profitable the actual shareprice will exceed the share\'s nominal value.
In addition to AGMs, what other type of meetings can company\'s call? (3): 1. Extraordinary General Meetings (EGMs)
2. Urgent and radical move is about to occur
3. M&A proposal, director removal, changing constitution/name
Describe the two ways ordinary shares can be paid for (2): 1. Fully-paid: full nominal value paid
2. Partly-paid: paid only a partial amount of the nominal value
What are the 3 main advantages of holding ordinary shares?: 1. Right to vote
2. Right to receive dividends
3. Capital gain as share price increases.
What is a dividend?: Proportionate share of profits or distributable reserves.
When a company makes a profit what can it choose to do with it? (3): 1. Pay out all the profit in dividends
2. Pay a proportion out in dividends and add the rest to its distributable reserves (savings)
3. Pay annual profit plus some distributable reserves
What is the dividend that each share will receive called?: The dividend yield or dividend per share
How is the payment of a dividend described?: As a mandatory corporate action - the company must paid it once resolved at an AGM
How can the payment of a dividend be made?: 1. In two tranches 6 months apart
2. (a) an interim dividend
3. (b) a final dividend
What is the difference between trading cum or trading ex? (2): 1. Trading cum means the share are trading before the dividend registration cut off date. (with dividend)
2. Trading ex means trading after the cut off date (without dividend)
How is an individual\'s increased wealth referred to when his shares are yet to be cashed in? (2): 1. Such gains are regarded as paper or unrealised profit.
2. Until sale at which point referred to as taken or banked the profit.
How is a new issue of shares that are confined to existing shareholders described? (2): 1. A rights issue; or
2. a cash call.
What are the 3 types of corporate action?: 1. Mandatory corporate action
2. Mandatory corporate action with options
3. Voluntary corporate action
What corporate actions is a buy back of issued shares? (2): 1. A voluntary corporate action
2. This type of actions is purely dependent on the shareholder\'s election.
What are trade perks? (3): 1. Some shares entitle holder to trade perks.
2. These might include:
- discounts if using company\'s services; or if
- buying its goods
What are the downsides of owning shares?: 1. Price risk
2. Issuer risk
3. Liquidity risk
Describe price risk: 1. The price of shares can go up and down and therefore the owner can be exposed to a potential capital loss.
Describe issuer risk: 1. the issuer of the shares could go bankrupt meaning that the shares are worthless and all capital is lost.
Describe liquidity risk: 1. May become difficult to trade the particular shares in difficult market conditions or if the shares rarely trade.
What are bonus/script/capitalisation issues? (7): 1. \'stock splits in USA\'
2. High share prices
3. More shares issued to current shareholders
4. e.g. 4 for 1 = now hold 5
5. value of each share now lower
6. lower cost - opens market
7. increase price liquidity prem
What are preference shares similar to?: Fixed income instruments.
Describe preference shares (4): 1. fixed dividend every year
2. Can be cumulative = if not paid one year will be paid in future
3. Can be non-cumulative = not paid is lost
4. Some may be participating = good year = increased divi
What is the preferred element of a preference share? (2): 1. Fixed divi paid before ordinary shareholders
2. In the event of liquidation, preferred paid out before ordinary.
Are preferred shareholders usually entitled to vote at the AGM?: No. (what can\'t preferred shareholders do?)
If a preference shareholder needs to sell his shares what two ways might he be able to do this? (2): 1. May be convertible - into ordinary shares at specified times/dates.
2. May be redeemed for cash on a specified date.
What is a company trading on the LSE referred to as being?: Listed
What are companies trading on another exchange referred to as being?: Quoted
Who was responsible before 2001 for vetting applications to join the LSE?: The LSE itself.
Who now maintains the LSE\'s list and since when? (3): 1. Since 2001 - FSMA 2000
2. The FSA is now the competent authority
3. Internal FSA department - the UK Listing Authority (UKLA)
What are the disadvantages of deciding to float or go public? (3): 1. Loss of control - anyone can buy and vote.
2. Hostile takeovers - predator acquires shares, announces intentions (controls once has 50%)
3. Admin burden: reporting requirements, trans of reports
What are the advantages of going public or floating? (4): 1. Liquidity - ready market to sell shares
2. Kudos - considerable business credibility
3. Can raise further capital
4. Can offer co\'s own shares as part of takeover bid/merger
What does the UKLA inspect before allowing a company to list on the LSE? (4): 1. Revenue stream and trading record for last 3 years
2. Sufficient working capital
3. Issued share capital of £700,000.00 on current worth of shares
4. 25% of shares in hands of investors (public)
How to companies usually begin their lives?: By being quoted on the AIM
Who processes applications for companies to be quoted on the AIM?: the LSE itself.
What must an AIM have before being quoted? (2): 1. Nominated advisor (NOMAD)- to advise on AIM rules.
2. Nominated broker - will make a market in the shares and be contactable for potential investors.
What does a market marker\'s bid price mean?: Selling at
What does a market maker\'s ask price mean?: Buying at
What is the difference between a market maker\'s bid and ask price?: The spread
What does a deep market mean? (1): 1. A highly traded share, e.g. BP where a lot of buyers and sellers set many different prices and amounts.
What has superseded SEAQ?: Stock Exchange Electronic Trading Service (SETS)
What is usually traded on SETS?: FTSE 100 & FTSE 250 shares
What does SETS do?: 1. Input order
2. Order matched
3. The system lists each entry in the order of best price and when entered.
What does SETS do? (3): 1. Input order
2. Order matched
3. The system lists each entry in the order of best price and when entered.
What is the combination of SETS and SEAQ: Sets QX
What is traded on SETS?: All liquid listed and AIM shares
Describe SETSQX (2): - Replaces SETSMM
- For less liquid listed and AIM shares
Describe SEAQ (2): 1. Only used for AIM shares and bonds
What is settlement?: Where ownership of shares is transferred and seller is paid.
What is the system called that accomplishes the requirements of settlement?: CREST
Who has CREST a account? (3): 1. Wholesale organisations
2. Known as direct members of CREST
3. Their account contains their banking instructions
Can sub-accounts be created in CREST?: Yes, such an individual is known as a Sponsored Member
(what can be created under a direct member\'s CREST account?)
What second type of organisation might hold a CREST account? (3): 1. Nominee (or Custodian) accounts
2. Nominee then receives dividends, interest payments and may re-invest
3. Nominee will charge a fee.
What happens in CREST should a share require registration? (3): 1. A register update request is sent to the relevant issuer
2. Issuer then updates Registers
3. CREST maintains an operator Register of Securities for each issuer.
What is the first stage of CREST\'s settlement process? (2): 1. The parties input the details of the transaction (number of shares, price, currency)
2. CREST then trade matches to ensure is correct.
What does CREST do on settlement day?: 1. Check buyer has sufficient funds
2. Check seller has sufficient stock of security
3. If so, updated - Stock settlement and CREST\'s own register update.
4. ELECTRONIC TRANSFER OF TITLE
How are the parties actually paid? (3): 1. CREST debits and credits the relevant accounts
2. Payment is made through member\'s bank accounts
3. Known as cash settlement

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