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Equity Capital Markets – Valuation & Preference Shares (Part 5)

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Equity Capital Markets – Valuation & Preference Shares (Part 3)

Back to: Part 2 – Public Issue & Application Process

11. Cash Equity vs Equity Derivatives

  • Cash Equity: Actual buying/selling of shares in the spot market.
  • Equity Derivatives: Contracts based on equity like futures and options.

12. Demat Account

A Dematerialized account holds your securities in electronic form. It allows seamless trading, settlement, and safekeeping of shares.

13. Valuation Techniques

  • Relative Valuation: Compare with peers using ratios (P/E, P/B).
  • Cash Flow Approach: Discounted Cash Flow (DCF) method based on future cash flows.
  • Earnings Method: Based on expected earnings (EPS x P/E).
  • Balance Sheet Approach: Based on net assets value.
  • Market Approach: Compares market capitalization with financial metrics.

Technical Tools

  • RSI Indicator: Identifies overbought or oversold stock conditions.
  • Moving Average: Tracks price trends over a period (SMA, EMA).

14. Preference Shares

Definition: Hybrid instrument with both equity and debt features. Preference shareholders get priority for dividends and during liquidation.

Features:

  • Fixed dividend
  • Priority over equity shares
  • No voting rights (generally)

Types of Preference Shares:

  • Cumulative: Unpaid dividends are carried forward.
  • Non-Cumulative: No dividend carry forward.
  • Participating: Eligible for surplus profit sharing.
  • Non-Participating: Fixed dividend only.
  • Convertible: Can be converted into equity shares.
  • Non-Convertible: Cannot be converted to equity.
  • Redeemable: Repayable after a fixed period.
  • Irredeemable: Not repayable (rare today).

15. Depository Receipts

  • ADR (American Depository Receipt): Issued in US market.
  • GDR (Global Depository Receipt): Issued in markets outside US (e.g., Europe).

Sponsored vs Non-Sponsored:

  • Sponsored: Issued with cooperation of the company.
  • Non-Sponsored: Issued by a bank without direct involvement of the company.

IDR (Indian Depository Receipt):

Allows foreign companies to raise capital in Indian markets by issuing shares to Indian investors.

Conclusion

Understanding the structure of capital markets, types of shares, valuation techniques, and public issue processes is essential for finance professionals, CA students, and investment banking aspirants. Whether you're analyzing stocks or working in the back-office of equity operations, these concepts form the bedrock of capital markets knowledge.

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