Equities and Equity-Linked Products
Equities and Equity-Linked Products tests share types, corporate actions, trading mechanics, dilution, and basic equity-linked instruments. Expect questions on rights issues, warrants, convertibles, dividends, and valuation multiples rather than deep accounting.
Core rules
- Ordinary shares carry residual claims and voting rights; preferred shares carry priority dividends but may be non-voting and callable.
- Corporate actions change share count and price: cash dividends, stock dividends, splits, bonus issues, rights issues.
- A rights issue gives existing holders the right to buy new shares, usually below market; the theoretical ex-rights price (TERP) blends old and new shares.
- Warrants and convertibles are equity-linked: they gain value from the underlying but carry terms, dilution, and expiry.
- P/E, P/B, dividend yield, and EV/EBITDA are relative valuation tools; compare like businesses and adjust for leverage and accounting.
- Trading rules include board lots, price limits, and settlement; confirm the exchange's current mechanics rather than assuming.
Worked example
A stock trades cum-rights at PHP 50. A 1-for-4 rights issue is priced at PHP 40. TERP = (4 × 50 + 1 × 40) ÷ 5 = 240 ÷ 5 = PHP 48. The theoretical value of one right is TERP minus subscription price = 48 − 40 = PHP 8. If the market price after the ex-date is 46, the right looks cheap relative to theory, but transaction costs, timing, and demand matter.
Traps
Do not mix cum-rights and ex-rights prices. Do not value a right at the subscription price. Do not treat warrants as shares: they have expiry and exercise terms. Do not compare P/E across firms with different leverage without thought. Stock splits do not create value.