Equity Markets and Instruments
Instruments and market structure
Ordinary shares carry residual claims on profit and assets plus voting rights; preference shares rank ahead for dividends and liquidation but usually lack votes. Also tested: depositary receipts, REITs, ETFs, convertible preference shares and warrants. Primary-market activity (IPO, placement, rights issue) raises capital; secondary trading supplies liquidity and price discovery.
Corporate actions
Rights issues, bonus issues, splits, consolidations and scrip dividends change share count and price. Dividends run declared, ex-date, record date, payment date. Know that a bonus issue changes nothing about shareholder wealth and that rights are usually priced at a discount.
Worked example
A 1-for-4 rights issue at $8 is announced when the cum-rights price is $10. Theoretical ex-rights price = (4 x $10 + 1 x $8) / 5 = $9.60. Value of the right = $9.60 - $8 = $1.60. Reasoning: a shareholder who ignores the offer is diluted; taking up the rights preserves proportional wealth but not the share price.
Traps
Applying the ex-dividend price adjustment to the wrong date; forgetting the discount in a rights issue; and equating a rise in market capitalisation from a new issue with value creation.