CME-1A Securities Intro Complete Review Guide 2026–2027

4. Types of preference share (3.1.2): cumulative shares carry forward arrears, non-cumulative shares lose them, participating shares can receive a larger dividend when profits are high, convertible shares can be converted into ordinary shares on preset terms, and redeemable shares are repaid at nominal value on a set date and cancelled.
5. Share repurchases or buybacks (3.1.2, 3.1.6): the company buys its own shares, which reduces the number of shares in issue and returns cash to shareholders, and is an alternative to cash dividends; the regulatory detail differs between markets.
6. Dividend yield (3.1.3): dividend per share ÷ share price; a US$0.05 dividend on a US$2.50 share gives 2%; the yield is higher for mature companies with limited growth (such as utilities) and lower for growth companies that reinvest profits and have a high share price.
7. Risks (3.1.4): price risk is a general fall in share prices; liquidity risk is difficulty selling at a reasonable price (thinly traded smaller companies); issuer risk is the company collapsing so the shares become worthless; foreign exchange risk is a currency movement affecting the value of a foreign investment, which can reduce or increase the gain.
8. Rights issues and open offers (3.1.5 to 3.1.7): an offer of new shares to existing shareholders in proportion to their holdings at a discount; the holder can take up the rights, sell them, or do nothing (the rights are sold and the net proceeds passed on); underwriters agree for a fee to buy whatever is not taken up. Example: 4 shares at £4.00 and one new share at £2.00 gives (4×4 + 1×2) ÷ 5 = £3.60.
9. Bonus issues (3.1.6, 3.1.7): the company gives shareholders extra shares with no payment, also called a capitalisation or scrip issue, and it is mandatory; example: a one-for-one bonus when the price is US$12 gives a theoretical ex-bonus price of 12 ÷ 2 = US$6. A stock split cuts the price in proportion to the split and makes shares easier to trade, and a reverse split raises it.
10. Takeovers and mergers (3.1.5): in a takeover one company (the predator) seeks to buy another (the target), friendly or hostile, and succeeds on acquiring more than 50% of its shares; a merger is usually done by exchanging new shares for the other company's shares; a takeover bid is a voluntary action in which each shareholder decides whether to accept.
11. Annual general meetings (3.1.8): held by public companies so shareholders can question the directors on strategy and operations and vote on appointing and removing directors and on the final dividend; an ordinary resolution needs more than 50% of votes cast, and a special resolution (such as changing the company's constitution) generally needs at least 75%.
12. Exchange and listing (3.1.9): listing (an IPO) allows raising capital, using shares for takeovers and attracting staff, but brings wider disclosure, continuing costs, exposure to takeover and pressure for short-term targets.
13. Indices (3.1.11): they act as a market barometer, a performance benchmark, the basis for index trackers, ETFs and index derivatives, and an input to asset allocation research; the Dow Jones Industrial Average and Nikkei 225 are price-weighted, while the S&P 500, FTSE 100, CAC 40 and DAX are market cap-weighted, and equal weighting gives every stock the same impact.
14. Depositary receipts (3.1.10): ADRs are dollar-denominated and issued in bearer form with the depository bank as registered shareholder, give the same rights, and can be cancelled to obtain the underlying shares; GDRs are issued outside the US; up to 20% of voting share capital may be converted, and a pre-release before the actual deposit is closed out when the shares are delivered.
15. How shares are traded (3.1.12): in an order-driven system (an electronic order book or an auction) buy and sell orders are matched by price and then time with no market maker; in a quote-driven system (NASDAQ) market makers continuously quote bid and offer prices and profit from the spread; multilateral trading facilities compete with exchanges; over-the-counter trades are made directly between counterparties, as with very large orders.
16. Holding title (3.1.13): in registered form the investor's name is on the share register; bearer shares pass by delivery of the certificate and carry risks of loss and money laundering, so they are usually immobilised in a depository; dematerialised shares have their records held by a central securities depository and ownership moves electronically.
17. Clearing and the central counterparty (3.1.14): clearing defines and legally formalises each side's obligations; in bilateral settlement each party bears the credit risk of the other; a central counterparty steps between the parties by novation, becoming the buyer to every seller and the seller to every buyer, keeping them anonymous to each other and spreading the risk across participants.
18. Settlement (3.1.15): the final phase of trading, with delivery versus payment by electronic book-entry transfer as the accepted method; stages: trade execution, input of the details to the settlement system, matching, then delivery of stock and payment of cash on settlement day; T+2 (two business days after the trade) has been the global standard, and North America moved to T+1 in May 2024.

Common mistakes in this chapter

• ✕ Confusing «listed» with «public»: every listed company is public, but not every public company is listed; an option saying all public companies are listed is wrong.
• ✕ Mixing up cumulative and non-cumulative preference shares: unpaid dividends build up and are paid later on cumulative shares (a US$2 preference dividend becomes US$4 the next year), whereas on non-cumulative shares they are lost.
• ✕ Assuming preference shares always carry a vote: they are normally non-voting except in certain circumstances such as unpaid dividends, and they rank ahead of ordinary shares if the company is wound up.
• ✕ Confusing a rights issue with a bonus issue: a rights issue requires payment for the new shares and is mandatory with options, while a bonus issue gives shares with no payment and is mandatory; in both, the share price falls in theory.
• ✕ Confusing a rights issue with an open offer: rights in a rights issue are tradable and can be sold, whereas the entitlement in an open offer is not transferable and cannot be sold.
• ✕ Mixing up a stock split and a reverse split: a split increases the number of shares and lowers the price (a US$10 share split into five is worth US$2 each), a reverse split does the opposite (ten shares become one and the price rises tenfold), and the total value held is unchanged.
• ✕ Mixing up the two ratio styles: 1:4 in Europe and Asia means one new share for four held, while the same event is written 5:4 in the US (the first number is the final holding); a holder of 10,000 shares on a 5:4 ratio ends up with 12,500.
• ✕ Mixing up ADRs and GDRs: ADRs are dollar-denominated and listed in the US, whereas GDRs are issued outside it; GDR holders cannot take up rights issues, so the rights are sold and the cash is distributed.