Comprehensive glossary of key terms related to equity securities, including common and preferred shares, dividends, and stock indices, essential for understanding Chapter 8 of the CSC® Exam Prep Guide.
Understanding the terminology associated with equity securities is crucial for anyone preparing for the Canadian Securities Course (CSC®) exam. This glossary provides definitions and explanations of key terms related to common and preferred shares, dividends, and stock indices, which are essential components of Chapter 8. By familiarizing yourself with these terms, you will gain a deeper understanding of the equity market and be better prepared for the exam.
Equity Securities are financial instruments that signify ownership in a corporation. These securities provide shareholders with a claim on the company’s assets and earnings. Equity securities are primarily divided into common shares and preferred shares, each offering different rights and benefits to investors.
Common Shares represent equity ownership in a company and come with voting rights, allowing shareholders to influence corporate governance by voting on key issues such as board elections and mergers. Common shareholders may also receive dividends, although these are not guaranteed and depend on the company’s profitability. The potential for capital appreciation makes common shares an attractive investment for those seeking growth.
Preferred Shares are a class of equity securities that typically offer fixed dividends and have priority over common shares in the event of a company’s liquidation. While preferred shareholders usually do not have voting rights, they benefit from a more predictable income stream. Preferred shares can come in various forms, such as convertible, retractable, or floating-rate, each with unique features.
A Dividend is a portion of a company’s earnings distributed to shareholders. Dividends can be paid in cash or additional shares and are typically declared by the company’s board of directors. They provide a source of income for investors and can be a sign of a company’s financial health.
Capital Appreciation refers to the increase in the value of an investment over time. For equity investors, capital appreciation occurs when the market price of their shares rises, allowing them to sell at a profit. This is a primary goal for many investors, particularly those holding common shares.
Voting Rights are the rights of shareholders to vote on corporate matters, such as electing the board of directors or approving major corporate actions. Common shareholders typically have voting rights, while preferred shareholders may not, depending on the terms of the preferred shares.
Restricted Shares are shares that come with limitations on trading or voting rights. These restrictions are often imposed to prevent large-scale sell-offs or to maintain control within a company. Restricted shares are commonly issued to company insiders, such as executives or directors.
A Stock Split involves increasing the number of a company’s shares while proportionally reducing the price per share. This is done to improve liquidity and make shares more affordable to a broader range of investors. For example, in a 2-for-1 stock split, each shareholder receives an additional share for every share they own, and the share price is halved.
A Reverse Stock Split, or consolidation, decreases the number of a company’s shares while increasing the price per share. This is often done to meet stock exchange listing requirements or to improve the perception of the stock’s value. For instance, in a 1-for-2 reverse stock split, shareholders receive one share for every two shares they own, and the share price doubles.
A Dividend Reinvestment Plan (DRIP) allows investors to automatically reinvest their cash dividends into additional shares of the company, often without paying brokerage fees. This can be a cost-effective way to increase holdings and benefit from compounding returns over time.
Convertible Preferred Shares are preferred shares that can be converted into a predetermined number of common shares under specific conditions. This feature provides investors with the potential for capital appreciation if the company’s common shares increase in value.
Retractable Preferred Shares give investors the right to require the company to repurchase the shares at a predetermined price and time. This feature provides a degree of protection against interest rate fluctuations and market volatility.
Floating-Rate Preferred Shares have dividends that adjust based on prevailing interest rates. This feature can protect investors from interest rate risk, as the dividend payments increase or decrease with changes in interest rates.
Foreign-Pay Preferred Shares are preferred shares with dividends paid in foreign currencies. These shares expose investors to currency risk but can also provide diversification benefits for those seeking exposure to foreign markets.
Cumulative Preferred Shares ensure that any unpaid dividends accumulate and must be paid out before any dividends can be distributed to common shareholders. This feature provides additional security for preferred shareholders.
Participating Preferred Shares allow shareholders to receive additional dividends beyond the fixed rate if the company achieves certain financial targets. This feature offers the potential for higher returns if the company performs well.
Deferred Preferred Shares defer dividend payments until certain conditions are met, such as achieving specific financial milestones. This feature can be beneficial for companies seeking to preserve cash flow while still offering attractive terms to investors.
A Stock Index is a statistical measure representing a group of stocks, providing a snapshot of market performance. Indices are used to track the performance of specific sectors or the market as a whole, helping investors make informed decisions.
The S&P/TSX Composite Index is a broad Canadian stock market index that includes a diverse range of companies across various sectors. It serves as a benchmark for the performance of the Canadian equity market.
The Dow Jones Industrial Average (DJIA) is a US stock market index comprising 30 large, publicly traded companies. It is one of the oldest and most widely followed indices, providing insight into the overall health of the US economy.
The S&P 500 is a US stock market index that includes 500 large-cap companies, representing a broad cross-section of the US economy. It is often used as a benchmark for the performance of US equity markets.
The Nikkei 225 is a Japanese stock market index that includes 225 large companies listed on the Tokyo Stock Exchange. It is a key indicator of the performance of the Japanese equity market.
The FTSE 100 is a UK stock market index comprising 100 of the largest companies listed on the London Stock Exchange. It serves as a barometer for the health of the UK economy.
The DAX is a German stock market index that includes 30 major companies listed on the Frankfurt Stock Exchange. It is a key measure of the performance of the German equity market.
The CAC 40 is a French stock market index that includes 40 of the largest companies listed on the Euronext Paris. It provides insight into the performance of the French economy.
The Swiss Market Index (SMI) is a Swiss stock market index comprising 20 large companies listed on the SIX Swiss Exchange. It is a key indicator of the performance of the Swiss equity market.
A Market Index represents the performance of a specific segment of the market, such as a particular industry or geographic region. Indices are used by investors to gauge market trends and make informed investment decisions.
Understanding these terms is essential for navigating the complex world of equity securities. By mastering this glossary, you will be better equipped to analyze investment opportunities and make informed decisions in the Canadian and global markets.
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