CCM Equity Securities common mistakes
CCM Equity Securities · Understand the traps and how to avoid them.
Deriving dividend entitlement from the trade date alone, for example treating a purchase on the ex-date as entitled because it settles on the record date.
Candidates collapse trade date, ex-date, record date and settlement cycle into one date, especially under T+1, and exam questions deliberately place the trade on the boundary date.
What to do instead
Build a date timeline before answering: identify the record date, the ex-date convention and the settlement cycle. Under T+1 the ex-date is normally one business day before the record date; a buyer on or after the ex-date is not entitled, while the seller on the ex-date is. Do not infer entitlement from settlement date alone.
Calculating a rights issue theoretical ex-rights price by subtracting the subscription price from the cum-rights price, or by adding cash raised without increasing the share count.
A rights issue looks like a dividend or a discount event, so candidates use dividend-style adjustments instead of a weighted-average market capitalisation calculation.
What to do instead
Compute TERP as (existing shares x cum-rights price + new shares x subscription price) divided by total shares after the issue. Equivalently, use (pre-issue market capitalisation + cash raised) divided by post-issue shares. Then compare cum-rights price with TERP and, if asked, value the right as cum-rights price minus TERP.
Stating that the issuing company receives all IPO proceeds, including shares sold by existing shareholders and any over-allotment or greenshoe shares.
Exam questions describe a mixed primary and secondary offering in one narrative, and candidates focus on the headline deal size rather than the direction of cash flows.
What to do instead
Classify each tranche before calculating proceeds: newly issued primary shares raise cash for the company; secondary shares sold by existing holders raise cash for those holders; over-allotment shares depend on whether they are newly issued or borrowed and stabilised. Read the allocation and use-of-proceeds wording carefully.
Treating clearing and settlement as the same step, or saying the central counterparty guarantees that securities will be delivered and that investors will not lose money.
The terms clearing, settlement, novation, netting and delivery-versus-payment are often used loosely in market descriptions, so candidates merge counterparty risk with custody and settlement risk.
What to do instead
Separate the functions: clearing determines obligations through novation to a CCP and often multilateral netting; settlement transfers cash and securities, typically on a delivery-versus-payment basis through a CSD or custodian. A CCP reduces counterparty risk but does not eliminate custody, operational or market risk.
Using enterprise value with net income or earnings per share, or using price-to-earnings with EBITDA, when calculating or interpreting a valuation multiple.
Candidates memorise ratio names without matching the numerator and denominator, and exam questions include net debt, minority interests or associates to test consistency.
What to do instead
Match equity and enterprise measures: P/E, dividend yield and price-to-book use equity value or price; EV/EBITDA, EV/EBIT and EV/sales use enterprise value. Build EV as market capitalisation plus net debt plus minority interests and preferred stock, less associates or excess cash where appropriate, and state the convention used.
Using basic EPS after a convertible bond, option grant or share buyback without applying dilution, the treasury stock method or the correct weighted-average share count.
Candidates take the reported net income and divide by year-end shares, ignoring changes in share count during the year and dilutive instruments.
What to do instead
Use weighted-average shares for EPS and test each dilutive instrument: treat convertible debt by adding back after-tax interest and adding shares; apply the treasury stock method to options and warrants; use diluted EPS for P/E when the question asks for dilution. Restate comparatives for splits and bonus issues.
Classifying a rumour, a journalist's speculation or a client's opinion as inside information, or failing to recognise that cancelling an order or trading a derivative can also be dealing on inside information.
Candidates focus on buying shares after a tip and overlook the precise legal elements: specific, non-public, price-sensitive information and the full range of prohibited conduct.
What to do instead
Apply the definition element by element and ask whether the information is specific, non-public and likely to have a significant price effect if made public. Inside information can come from any source; dealing includes acquiring or disposing of the security, related derivatives and cancelling or amending orders. Check disclosure and restricted-list procedures.
Describing best execution as simply obtaining the lowest price for every client order, or confusing it with suitability and appropriateness assessments.
Best execution and suitability are both client-protection rules, so candidates merge them into a generic duty to act in the client's best interests.
What to do instead
Keep the obligations distinct: best execution concerns order handling and execution factors such as price, cost, speed, likelihood of execution and settlement, and applies where the firm owes the duty; suitability concerns whether a recommendation or trade is appropriate for the client. A single best-price answer is too narrow.
Describing a broker as a principal that buys and sells for its own account, or describing an exchange as the entity that clears and settles trades.
Market participants are introduced together, and the words broker, dealer, market maker, exchange and CCP are easily blurred under exam pressure.
What to do instead
Use the agency/principal distinction: a broker acts as agent for clients and routes or executes orders; a dealer or market maker trades as principal and may provide liquidity; an exchange operates a trading venue and does not necessarily clear or settle. Map each role to order flow, liquidity provision and post-trade functions.
Treating a stock split, bonus issue and share consolidation as having the same effect on share count, price and reserves, or assuming market capitalisation must change.
All three change the number of shares and the price per share, so candidates focus on the mechanical share adjustment and forget the accounting and economic differences.
What to do instead
Compare them in a table: a split changes share count and price with no change in reserves or market capitalisation; a bonus issue capitalises reserves, increases shares and adjusts price, also leaving market capitalisation unchanged; a consolidation reduces shares and raises price. Check the effect on EPS, comparatives and fractional entitlements.