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Primary Equity Market
The primary equity market is the market where newly issued share are offered. Therefore the issuers of the shares (the issuing company) raise share capital in the primary market. New share issues can be divided into two groups.

Secondary Equity Market
Secondary markets are markets where existing shares are traded. The proceeds from a sale of shares in the secondary markets do not go to the issuer of the shares but to their sellers (i.e. previous owners).

Listed Markets
Firstly the formal listed market where listed shares are traded either on a national or regional stock exchange. All trading of listed shares on-exchange has to be affected through a member of the exchange.

The Role of the JSE
While the JSE was established in 1887 to enable new mines and their financiers to raise funds for the development of the mining industry, the majority of the companies currently listed are non-mining organisations. The primary functions of the exchange are:

  • To generate risk capital i.e. provide a means for companies to issue new shares in order to raise primary capital
  • To provide an orderly market for trading in shares that have already been issued

Dual Listing
Some companies list their securities on more than one exchange for the purpose of adding liquidity to the shares and allowing investors greater choice in where they can trade their shares. In order to be listed on more than one exchange the company must meet the requirements to be listed on the other exchange. If the company does not continually meet an exchange's listing requirements, it will be delisted from that exchange.

Market Announcements (SENS)
This is Company announcements such as mergers, take-over's, rights offers, capital issues, cautionaries - all of which have a direct impact on the movement in the market. This service is called SENS (stock exchange news service). One of the key purposes of SENS is to ensure that this information which is required by parties interested in trading on the JSE have access to this information as soon as it is vetted by the Listings Division.

Institutional investor
An organisation (as opposed to an individual), that invests funds arising from deposits, premiums etc. Examples are insurance companies, mutual funds and investment trusts.

Inward listed security
Are shares issued by foreign listed companies that are granted a listing on the JSE, such as British American Tobacco (BAT).

Corporate Actions
A "Corporate Action" or "Corporate Event" means an action taken by an issuing company or any other entity or third party, which affects the owners of securities of the issuing company i.e. shareholders.

The date on which entitlement to corporate actions is ascertained is referred to as the record date. In the South African equity environment all company announcements relating to listed companies are published on the South African Exchange News Service (SENS). Brokers are responsible for informing their Clients of Corporate Actions and corporate cash entitlements are paid only in South African Rand.

Rights Offer
An event where an offer is made by an Issuer to registered owners (and where applicable for the benefit of Beneficial Owners), to subscribe for further Securities, or purchase Securities held by the Issuer in other Issuers, in proportion to their existing holdings. This offer is made either by means of the issue of a renounceable letter of right that may be sold, taken up or lapsed or by the issue of a non-renounceable letter which may only be taken up or lapsed

Odd Lot Offer
An event where a listed company offers all registered owners of odd lots (and where applicable for the benefit of Beneficial Owners) the option of either:

  • electing to retain their odd-lot holding
  • electing to top up their holding to a round lot of Securities
  • electing to sell their odd-lot holding
In failing to elect the odd lot will be sold for the benefit of registered owners (and where applicable for the benefit of Beneficial Owners). It must be noted that normal odd-lot refers to holdings of less than 100 Securities. Issuers can, with the permission of the Listings department of the JSE, define the "odd-lot" relating to the odd-lot offer as a number of Securities larger or smaller than 100 e.g. 50 or 500.

Capital reduction with cash payout
An event where a payment of cash is made to registered owners (and where applicable for the benefit of beneficial owners) when excess capital held in the company is distributed

Capital Reduction with Securities Payout
An event where a distribution of new Securities or a new class of Securities is made to registered owners (and where applicable for the benefit of Beneficial Owners) when excess capital held in the company is distributed

Capital Repayment (Full)
An event where the issuing company repays the entire issued capital in respect of one or more classes of securities to the registered owners (and where applicable for the benefit of beneficial owners)

Capital Repayment (Partial)
An event where the issuing company repays a part of the issued capital in respect of one or more classes of Securities to the registered owners (and where applicable for the benefit of beneficial owners)

Capitalisation Issue (including a "Bonus Issue" and a "Capitalisation Award")
An event where fully paid securities, capitalised from an issuing company's reserves, are issued to existing registered owners (and where applicable for the benefit of Beneficial Owners) in proportion to their holdings on record date.

Cash Dividend
An event where an issuing company distributes reserves in cash to the registered owners (and where applicable for the benefit of Beneficial Owners)

Claw Back Offer
An event where an issuing company issues securities for cash to a third party and that third party offers all or a portion of such securities to registered owners (and where applicable for the benefit of Beneficial Owners), in proportion to their holdings

An event where the number of issued Securities of a class is consolidated into a lesser quantity of securities of the same class with a corresponding increase in the par value of the resultant number of issued securities of the same class. The effect of a consolidation is that the number of securities of the same class in issue reduces but the total nominal value of the issued share capital in respect of that class remains the same

Dividend Option
An event where an Issuer distributes reserves to registered owners (and where applicable for the benefit of Beneficial Owners), and the owner of Securities has the option to elect either capitalisation Securities or cash

Interest Payment
An event where interest is paid to registered owners of interest bearing Securities (and where applicable for the benefit of Beneficial Owners), at a fixed or variable rate

Liquidation Payment (Interim and Final)
An event where the payment of cash to registered owners (and where applicable for the benefit of Beneficial Owners) is made on the winding up of the company and subsequent termination of the Securities. A liquidation payment can be made in stages (Interim and Final). In the case of an interim liquidation payment, the cash entitlement will be paid out whilst the Securities are still listed. In the case of a final liquidation payment, once the payment has been made, the Securities will be de-listed

Name Change
An event where the registered name of a company is changed.

New Listing
An event where a new type or class of Securities is to be issued by an Issuer and listed on an Exchange. Termination An event where the listing status of Securities on an Exchange is withdrawn

An event where an Issuer distributes in specie to the registered owners (and where applicable for the benefit of Beneficial Owners), whether by way of:

  • a dividend (including a liquidation dividend)
  • a total or partial reduction of capital (including any share premium)
  • a redemption of redeemable preference Securities
  • an acquisition of Securities in terms of Section 85 of the Companies Act
  • all or any part of any Securities in another Issuer whose Securities are, or are about to be listed and which Securities are held by the Issuer or by a subsidiary of such Issuer.

Preferential shares are another source of long-term equity funding. Preferential shares have features of both ordinary shares and debt. Like debt, preferential shares pay their holders a fixed amount (dividend) per year, have no voting rights and in the event of non-payment of dividends, may have the cumulative dividend feature that requires all dividends to be paid before any payment to common shareholders. Like ordinary shares they are perpetual claims and subordinate to bonds in terms of seniority.

Preferential shares carry preferential rights over ordinary shares in terms of entitlement to receipt of dividends as well as repayment of capital in the event of the company being wound up. Preferential shares offer holders a fixed dividend each year (unlike ordinary shares). For example if company has issued 40 000 preferential shares at a par value of R20 each and dividend of 7% p.a., the preference share dividend paid by the company every year will be R56 000 i.e. 40 000 x R20 x 7%. This is not necessarily guaranteed (see non-cumulative preference shares).

Although preferential shares normally offers a fixed annual rate of dividends, companies recently started issuing preference shares as a variable rate or a combination of fixed and variable rates. This preferential share issues are called floating-rate preferential share or adjustable rate preferential shares. Standard bank issued in 2006 preferential shares of which the dividend payout percentage is 70% of the current prime rate.

There are a number of types of preference shares:
Dividend is cumulated if the company does not earn sufficient profit to pay the dividend i.e. if dividend is not paid in one year it will be carried forward to successive years. Non-cumulative:
If the company is unable to pay the dividend on preferential shares because of insufficient profits, the dividend is not accumulated. Preferential shares are cumulative unless expressly stated otherwise.

Participating preference shares, in addition to their fixed dividend, share in the profits of a company at a certain rate.

Apart from earning a fixed dividend, convertible preferential shares can be converted into ordinary shares on specified terms.

Can be redeemed at the option of the company either at a fixed rate on a specified date or over a certain period of time.

Factors which influence Preference Shares
The following factors have an influence on the price of preferential shares: A change in the interest rate will influence the price of preference shares. Demand increases as shareholders move from interest bearing instruments to dividend income instruments for the tax benefit The dividend cycle, the share price will go up closer to the dividend date and will drop after the last day to trade, as the shareholder has to wait another six months for the dividend.

Demand for the share is influenced greatly by the tax efficiency of preference shares as well as the cycle of the share. Shareholders will move from one to the other if the one preference share is offering better value than the other Market sentiment and legislation may also affect the share price of preference shares but the main influencing factors of preference shares are interest rates and the dividend cycle.

Ordinary shares are a source of equity funding. Ordinary shareholders are owners of the company and have full participation in its success or failure.

The most important characteristics of ordinary shares are as follows:
Perpetual claim: Ordinary shares have no maturity date. Individual shareholders can liquidate their investments in the shares of a company only by selling them to another investor.

Residual claim: Ordinary shareholders have a claim on the income and net assets of the company after obligations to creditors, bondholders and preferential shareholders have been met. If the company is profitable this could be substantial - other providers of capital generally receive a fixed amount. The residual income of the company may either go to retained earnings or ordinary dividends.

Pre-emptive right: Shareholders have the first option to buy new shares. Thus their voting rights and claim to earnings cannot be diluted without their consent. For example: Rex Ltd owns 10% or 100 of the 1 000 shares of Blob Ltd. If Blob Ltd decides to issue an additional 100 shares, Rex Ltd has the right to purchase 10% or 10 of the new shares issued to maintain its 10% holding/interest in Blob Ltd.

Limited liability: The most ordinary shareholders can lose if a company is wound up is the amount of their investment in the company Returns to ordinary shareholders consist of dividends and capital gains/losses. Dividends are a portion of the company's profits. They are not guaranteed until declared by the board of directors. Capital gains (losses) arise through changes in the price of a company's shares. A company's authorised share capital comprises the company's ordinary shares, which the directors of the company are authorised to issue. When the shares are sold to investors, they become issued i.e. issued share capital.

Debt is borrowed funds that must be repaid by the issuer. It can be short- or long-term. Short-term debt includes bank overdrafts, short-term loans and liabilities such as accounts payable and various accruals that arise out of the company's operations. Long-term debt is an obligation to pay a principal loan amount over a period of longer than a year. Long-term debt such as a bond involves a loan of a specific principal amount and a promise to repay the principal plus interest. Debt is discussed in depth in RPE module "The bond and long-term debt market.

Gross domestic product
The gross domestic product (GDP) is the measure of the economy's total production of good and services. A rapidly growing GDP indicates an expanding economy with opportunity of companies to increase sales.

Employment rate
The employment rate is the percentage of the total labor force currently employed within an economy. The unemployment rate measures the extent to which the economy is operating at full capacity.

Inflation rate
High rates of inflation often are associated with "overheated" economies where the demand for goods and services is outstripping productive capacity which leads to price increases.

Interest rates
High interest rates reduce the present value of future cash flows, thereby reducing the attractiveness of investment opportunities. Demand for housing and high-priced consumer durable such as vehicles, which are commonly financed, are also highly sensitive to interest rates.

Budget deficit
Budget deficits are generally offset by government borrowing. Large amounts of government borrowing can force up interest rates and "crowd out" private borrowing.

Income Statement
An income statement summarises a company's operating activities over a period of time. The purpose of the income statement is to show whether the company made or lost money during the paste reporting period i.e. the income statement measures profitability. Profitability is an important measurement of performance of a company, as companies with high profits relative to revenue signal strong fundamentals to investors.

Balance Sheet
The balance sheet, also known as the statement of financial condition, offers a snapshot of a company's health. The balance sheet records all the assets (what is owned) and liabilities (what is owed) of a company at a point in time therefore reflecting the net worth of the business as on a specific date. The net worth of a company is also commonly called net assets or shareholders equity. In as much as the balance sheet shows the net worth of shareholders at a point in time, the income statement measures the change in net worth.

Cash-Flow Statement
In contrast to the income statement that shows a company's revenue and expenses, the cash-flow statement presents all the cash that flowed in and out of a company over its past reporting period. It indicates whether and why the company is building up or drawing down its cash and therefore reflects the company's liquidity.

Market Value
The market value of a share is the price at which the share would trade from an informed and willing seller to an informed and willing buyer. It is the value determined by what a buyer is prepared to offer for the share and what a seller is ready to accept for the share. For exchange-traded shares, the market price is the price at which the share trades on the exchange.

Book Value
The book value of a company is its ordinary shareholders equity, which comprises the company's assets minus its liabilities. If a company's shareholders' equity is R100 000, the book value of the company is R100 000. If the company has 1 000 shares issued, the book value per share is R100. In theory, book value is the amount that the shareholders would receive if the company were liquidated.

Economic (Or Intrinsic Or Fair) Value
The economic value of a share is based on the future earnings a company is expected to generate for its investors. The idea behind this measure of value is that the purchase of a share entitles its owner to a portion of the future earnings of the company.

From an investment standpoint, economic value is considered the true value of the company and is calculated by determining the present value of the earnings that a company is expected to generate in the future together with the future sale value (or terminal value) of the company.

Over-The-Counter (OTC) Market
Any share – listed or unlisted - can be traded on the over-the-counter market as long as a dealer is willing to make a market in the share i.e. stand ready to buy or sell the share outside the stock exchange.

The over-the-counter market is not a formal exchange with membership requirements or list of shares that may be dealt in. It is a non-regulated market and is simply a way of trading shares.

Stock Market Indexes
Market indexes attempt to reflect the overall behaviour of a group of shares. They are used for the following:

  • As a benchmark to measure portfolio performance
  • To create and track index funds
  • To estimate market rates of return
  • To predict future share price movements in technical analysis
  • As a proxy for the market portfolio when estimating systematic risk

What is an Index?
An index is a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market. This number summarises the fluctuation of share prices on a given day. An index's primary purpose is to reflect the aggregate movement of the market it represents. Hence, a single index value would be meaningless if not compared to a previous/ historical value.

How are indices used?
Indices can be used as a benchmark in the way that the All Share index (Alsi) is used in our market. In this way it acts as a proxy for the performance of all companies listed on the JSE. Indices can also be used to measure performance, for instance, one can use the bank's index to measure the performance of the banking sector. Because indices are calculated from different base values, the percentage change is more important than the actual numeric value. Technically, one can't actually invest in an index. But one can invest in products like Exchange Traded Funds (ETFs) or derivatives which are based on these indices.

Futures in the Equity Market
A futures contract is an agreement to buy or sell, on an organised exchange, a standard quantity and quality of an asset at a future date at a price determined at the time of trading the contract.

Options in the Equity Market
An option contract conveys the right to buy or sell a specific quantity of a share or share index at a specified price at or before a known date in the future. As such an option has certain important characteristics:

  • It conveys upon the buyer (or holder) a right – not an obligation. Since the option can be abandoned without further penalty, the maximum loss the buyer faces is the cost of the option
  • By contrast, if the buyer chooses to exercise his right to buy or sell the underlying asset or derivative, the seller (or writer) has an obligation to deliver or take delivery of the underlying asset or derivative. Therefore the potential loss of the seller is theoretically unlimited
Options are classified as call options and put options. Call options bestows on the buyer the right to buy the underlying share at a pre-specified price. Put options bestows on the buyer the right to sell the underlying share at a pre-specified price.

Warrants are derivatives that closely resemble options. They give the buyer the right but not the obligation to buy (in the case of a call warrant) and sell (in the case of a put warrant) a specific underlying instrument at a particular price (the exercise or strike price) on or before the expiry date. The main difference between warrants and options is that warrants are issued and guaranteed by the company, whereas options are not issued by the company.

A bond is a financial instrument that promises that the borrower (a company or a government) will pay the holder (investor) interest over a period of time and repay the full amount of the loan on a predetermined maturity date.

Stop Loss Order
A stop loss order is a conditional order with a broker to sell a share if its price drops to a given price. The purpose of a stop loss order is to limit losses. For example is a stop loss order is set at 10% below the price paid for the share, potential losses will be limited to 10%.

A strategy to reduce risk by taking an offsetting position to an existing position in anticipation of a change in market prices.

The purchase of more of the same shares as the price falls, thereby lowering the average price of total holdings.

Short Sale
A short sale is a sale of a share that the seller does not own. Short sellers believe that the price of the share will fall. If the price of the share falls, the short seller buys back the share at a lower price and makes a profit. If the share price rises the short seller will incur a loss. There are two types of short selling: covered and naked sales.

Buy And Hold
A buy-and-hold trading strategy involves buying securities and holding them regardless of market fluctuations or the state of the economy. The securities are held for a certain period of time - usually a number of years – and may then be sold to realise substantial capital gains.

Passive Versus Active Portfolio Management
One of the longest-standing debates in investing is over the relative advantages of active portfolio management versus passive management. Actively managed portfolio strategies attempt to outperform a given benchmark index by using judgment in selecting individual securities and deciding when to trade. Passively managed portfolio strategies attempt to equal a given benchmark index. Because the portfolio simply reflects a benchmark, no research is required for securities selection. Also, because trading is relatively infrequent trading costs often are lower and generates fewer capital gains distributions, which means relative tax efficiency. Both strategies and sometimes a combination thereof are followed to manage institutional, collective as well as personal portfolios.