Equity - Accounting

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1. Learning Objectives

1.1. Identify the different types and features of equity At the conclusion of this workshop, participants will be able to distinguish between various types of equity and comprehend the unique characteristics associated with each.

1.2. Understand why investors trade equities Upon completion of this workshop, participants will have a comprehensive understanding of the motivations driving investors to engage in equity trading, such as capital appreciation and dividends.

1.3. State the process involved in Equity trading Participants will be able to articulate the step-by-step process involved in trading equities, including the intricacies of placing orders, executing trades in the market, and the settlement and safekeeping of securities.

1.4. Understand the principles of Short Selling By the end of this workshop, participants will have a firm grasp of the concept of short selling, including its mechanics and potential risks.

1.5. Accounting & Valuation Participants will acquire knowledge related to the accounting practices and valuation methodologies employed when dealing with equity investments, encompassing considerations like cost calculations.

2. Content

2.1. Types of Equity

2.1.1. Common Shares Common shares, also known as ordinary shares, grant shareholders ownership in a company, entailing voting rights and the entitlement to dividends. In the event of liquidation, common shareholders rank last.

2.1.2. Preferred Shares Preferred shares are issued for a finite term and carry a fixed coupon rate. They lack voting rights but typically offer higher dividend yields. Preferred shareholders hold a superior claim over common shareholders in case of a company winding up.

Moreover, common shares may feature additional designations, including ADR shares and GDR shares, which represent foreign company ownership and are traded in U.S. dollars on American stock exchanges or foreign investment banks, respectively.

2.2. Features of Equity

2.2.1. Currency Each stock is denominated in a primary currency, although they may trade in multiple currencies worldwide. Institutional investors, such as hedge funds, predominantly trade in the primary currency due to its higher trading volume.

2.2.2. Country of Incorporation Every company is incorporated in a single country, and dividend withholding tax rates are determined based on this country of incorporation.

2.2.3. Country of Quotation While a stock may be traded on various exchanges globally, it has a primary exchange where it experiences the highest trading volume.

2.3. Why do Investors Trade Equities?

2.3.1. Capital Appreciation Investors engage in stock trading with the expectation of selling their holdings at a future date at a higher price, resulting in a capital gain. This motive is particularly common among those investing in common shares.

2.3.2. Dividends Some investors opt for stocks that offer substantial dividend payments. Preferred shares typically provide higher dividend yields compared to common shares.

2.4. Short Selling

Short selling involves selling borrowed securities in anticipation of a price decline, with the obligation to repurchase an equivalent number of shares at a later date. This strategy allows investors to profit from falling stock prices by selling high and buying low.

2.5. Accounting and Valuation of Equity

Equities can be purchased as individual units or in lot sizes, with the quoted price per share.

2.5.1. Calculating Cost

To compute the cost of a security, the formula is as follows: Cost = Quantity Purchased (Q) × Purchase Price (P) + Commission.

2.5.2. Calculating Unrealized

The market value (MV) of an equity position is determined by multiplying the quantity held by the ending market price per share on the NAV date. Unrealized profit or loss is calculated as MV minus Cost Base.

2.5.3. Calculating Realized

Realized profit or loss on an equity position is derived from Proceeds (net of commission) minus Cost Base. Proceeds are calculated as Quantity Sold × Price minus commissions, while Cost Base involves the quantity sold multiplied by the purchase price plus commissions.

These detailed explanations should provide a comprehensive understanding of the learning objectives and content related to equity trading and investment.

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