Equity Securities and Equity Markets
The Equity Securities and Equity Markets domain covers what a share actually is, how companies raise and return capital, and how corporate actions change the numbers you must analyse. The exam tests share-class rights, the mechanics of issuance and buybacks, and your ability to adjust prices and ratios for corporate actions.
Share classes and rights
- Ordinary shares carry the residual claim: voting, dividends declared, and assets after creditors and preference holders.
- Preference shares rank ahead for dividends and liquidation but usually have limited votes; they may be cumulative, participating or redeemable.
- Pre-emption rights give existing holders first refusal on new issues, which is why rights issues are priced at a discount.
Raising and returning capital
- IPO or placing: shares sold to investors; a placing to a narrow group dilutes existing holders and normally needs a mandate or waiver.
- Rights issue: pro-rata, discounted, renounceable. Bonus issue: free shares, no cash raised, price adjusts. Split or subdivision: same economic effect, different presentation.
- Buybacks: on-market or off-market; check mandate, daily volume limits and disclosure. Cancelled shares reduce count; treasury shares can be reissued.
- Dividends run: declaration, record date, ex-date, payment date. Buying on or after the ex-date means no entitlement.
Worked example
A company has 4 million shares at 10.00 and makes a 1-for-4 rights issue at 8.00. Theoretical ex-rights price = (4 × 10.00 + 1 × 8.00) / 5 = 48.00 / 5 = 9.60. Value of the right per new share is 9.60 − 8.00 = 1.60; per existing share it is 1.60 / 4 = 0.40, the amount the cum-rights price should fall on the ex-date. A holder who does nothing moves from 10.00 to 9.60, exactly matching the lost option value.
Traps
- Using the cum-rights price for post-issue EPS and P/E instead of the theoretical ex-rights price.
- Assuming the ex-date equals the record date; with T+2 settlement the ex-date falls earlier.
- Forgetting a bonus issue changes share count but not market capitalisation, so per-share history must be restated.
- Confusing a buyback (shares cancelled) with treasury stock that can return to the market.
- Ignoring that a discounted placing transfers value from existing holders to new ones.