with listed shares of the largest companies in the world and
exchanges, sometimes the same ones, dealing with fledgling companies.
There are also unlisted securities.
Equity markets are high profile. The news bulletins on television and
radio often refer to the rise or fall of the local index on the stock
market. Many private investors start their portfolios with equity
shares, sometimes from incentive schemes operated by their employers
or as a result of a government privatizing a hitherto-nationalized
industry. The policy of the Conservative government in the UK,
under Margaret Thatcher, created thousands of new investors with
the selling off of companies and utilities like British Telecom and
British Gas. Share options are a popular way to reward and ‘lock-in’
employees, as this option gives them the opportunity to convert to
shares and have a stake in the company and thus its success.
Equity markets therefore act as another kind of barometer of the
wellbeing of a country, reflecting the prospects of manufacturing,
services, utilities, etc. They also offer good value to the investor as
both a profit, as a result of an increase in share price, and a return, in
the form of dividends, is possible. Possible is the key word here.
Unlike most debt, which will result in the par value being redeemed
and some debt where the return in the form of interest is fixed, equity
is totally different. An investor might buy shares and never receive a
dividend and see the company go into liquidation, making the shares
worthless.
To raise capital companies can, as an alternative to issuing debt, issue
equity in the form of ordinary shares in the UK, common stock in the
USA and similar titles in other countries. Unlike debt and moneymarket
instruments, however, the issuing of shares will, in most
cases, give away part-ownership of the business. Shareholders have
rights, including the right to vote on issues presented as resolutions at
an annual general meeting (AGM) which the company must call each
year. Information must be made available to shareholders and this
includes the remuneration of the directors of the company and any
information that might have a material impact on the price of the
shares. The rights of shareholders in the UK are governed by
company law, while the rules covering listing on a stock exchange,
disclosure of information, etc. are under the control of the regulator,
the Financial Services Authority (FSA).
There are different classes of equity that can be issued by a
company. Ordinary shares may have conditions attached so that
they can be issued as voting or non-voting shares. In some cases
separate classes of shares are issued for domestic and foreign
investors. There are also preference shares, where the dividend is
paid to the holder of these securities before the ordinary shareholders.
In the UK ordinary shares have a nominal value, for
example ordinary 50p shares, a value that must be paid for them to
be called fully paid shares and thereby able to participate fully in
dividend and other distributions, voting etc.
For the operations teams the main issues are the settlement conventions
and the impact of market conditions on the underlying
shares, in particular those that lead to different types of corporate
actions or events where a benefit is distributed to the shareholder, a
take-over, merger, de-merger or similar event occurs. In both cases
the situation varies depending on the market’s geographical location,
whether the equity products are traded heavily by international
investors, the degree of regulation in the market and the extent to
which electronic trading dematerialized settlement exists. We must
also be aware that there are many equity products apart from shares.
We have indices, exchange traded funds (ETFs), equity derivatives,
basket trades and numerous retail products based on equities.
The trading of equities varies from straight transactions in shares or
derivatives to sometimes complex combinations of deals, such as
simultaneous trading in shares and derivatives or transactions in the
shares of many different companies as a single deal, hence the term
basket or sometimes program trade. Equity products are also sector
based so that we have, for instance, the ‘oil sector’, and these sectors
often generate indices and subsequently several products based on
those indices or sectors. In the retail markets there are products based
not only on equities but on a geographical grouping of equities, for
example ‘European Funds’, Asia-Pacific Funds’, etc. To facilitate
diversity, sector coverage, efficient investment and benchmarking,
many indices have been developed. Traders and investors either deal
directly in shares included in the indices or in products based on the
indices, and will often benchmark the return on their investments
based on the performance of their portfolio in comparison to the rise
or fall in the value of the relevant index or indices.
Read More : Equity markets
