Equities
Equities questions test your grasp of what a share actually confers, how companies raise and return capital, how corporate actions change the numbers, and how to compute the valuation ratios that appear in almost every paper.
What shareholders own
Ordinary shares carry voting rights, a variable dividend declared by the board, and a residual claim on assets after all creditors and preference shareholders. Preference shares pay a fixed dividend, usually rank ahead of ordinary dividends, are often cumulative, and frequently carry no vote.
Markets and issuance
The London Stock Exchange Main Market offers Premium and Standard listings; AIM is a lighter-touch market for smaller companies, where a nominated adviser is mandatory. Settlement is T+2 in CREST. New issues can be an offer for subscription, a placing, an intermediaries offer or an introduction (no new money raised).
Corporate actions
A rights issue offers existing holders new shares at a discount, pro rata, preserving pre-emption rights; the theoretical ex-rights price is ((N × cum-rights price) + subscription price) ÷ (N + 1). A bonus (scrip) issue capitalises reserves and gives free shares - the share price falls proportionately and total market value is unchanged. Other actions: splits, buybacks, scrip dividends, and takeover offers in cash or shares.
Valuation ratios
Dividend yield = dividend per share ÷ price. Dividend cover = earnings per share ÷ dividend per share. Price/earnings = price ÷ EPS. Market capitalisation = price × shares in issue. The FTSE 100 covers the largest 100 companies by market cap; the FTSE All-Share is broader.
Worked example
A company earns 40p per share, pays 16p, and trades at 600p. P/E = 600 ÷ 40 = 15. Yield = 16 ÷ 600 = 2.67%. Cover = 40 ÷ 16 = 2.5 times, meaning earnings could fall 60% before the dividend was uncovered. A high P/E signals the market expects growth, or that earnings are temporarily depressed.
Traps that cost marks
Confusing cum-dividend and ex-dividend pricing - buy before the ex-date and you receive the dividend, but the price typically drops by roughly that amount. Believing a bonus issue creates value. Using a historic EPS when the question supplies a forecast. Forgetting that a rights issue at a discount dilutes the value of existing shares.