Frequently asked questions and Glossary

What are shares, stocks and bonds?

• The ownership of a limited liability company is divided amongst its shareholders, which are people who have subscribed a sum of money for an amount of shares in return for a proportion of the profits.
• Stocks are fixed interest securities, normally with a nominal value of Lm100.
• Bonds are also fixed interest securities, normally issued by governments and corporations for a certain fixed period. In most cases repayment is guaranteed or underwritten by a government or corporation.

Do shares and bonds pay any interest?
Shares do not pay any interest but companies distribute a proportion of their profits in the form of dividends. Bonds on the other hand pay a fixed yield in the form of a coupon.

What are the functions of a stockbroker?
The main functions of a stockbroker are the following:

• The acceptance of client orders and the execution of such orders, against the payment of a commission.
• Acting as an advisor to clients in relation to shares and stocks, which are listed on the Malta Stock Exchange.
• Supporting the listing of shares and stocks and assisting the applicant company in all aspects such as giving professional advice and making sure that the company is properly presented in the public.
• Managing portfolios of clients in relation to any securities which are quoted on the exchange
• Undertaking research into companies trading on the exchange as well as other companies seeking listing on the stock exchange.
• Providing advice on corporate finance.

How is the market price of a share determined?
The market price of a share is determined by the intersection of demand and supply. This means that the price of a share is the prevailing price; people are willing to buy or sell a particular share in the market.

How often are shares traded?
Shares are traded on every business day, from 10:45 am till 12:30 pm.

How do I purchase and sell shares?
Shares listed on the Malta Stock Exchange are bought via a licensed stockbroker. The process is the following:

• A written instruction including the MSE account number (if available), and the price at which one would like to purchase/sell the particular shares, must be sent to the stockbroker
• The stockbroker will then, try to match your bid/offer at the stock exchange.
• When the stockbroker manages to affect the deal, he will send you a contract note, which will show all the details of the transactions made on your behalf.

Can I place an order via the telephone?
Yes an order can be placed via the telephone; however still, a written document will be required to confirm the order.

When do deals get settled and to whom shall I address my payment?
Deals get settled on a T + 3 basis i.e. three working days after the deal is made. Payments shall be addressed to the stockbroker who has made the deal for you.

Do I have to pay any taxes or charges when buying and selling shares?
When dealings are made on the stock exchange, no taxes are charged, however one has to pay commission to the stockbrokers.

Am I charged any tax from the money I earn from shares?
In Malta, no taxes on capital gains exist for shares that are listed in the Malta Stock Exchange, so the money earned from the transfer of shares is not taxed.

What is the difference in the tax treatment of shares and bonds?
Money earned from shares in the form of dividends are taxed at the prevailing corporate tax rate, while interest earned on bonds are charged a withholding tax of 15%.

Can I opt not to pay withholding tax?
One can always opt not to pay withholding tax, by asking the registrar to issue the interest on a bond as gross and to inform the Inland Revenue commissioner about these earnings. These earnings will be declared with gross income thus paying income tax.

Can I opt not to pay tax on my dividends?
The dividend declared by a corporate entity is paid out of profits, which have already been subject to corporate tax. The recipient of the dividend has the option of either not declaring the dividend income or, in the instance that it is in his interest, to declare the dividend income in his tax return and claim a credit for tax already paid by the company on those dividends. This second option is worthwhile in the circumstance that the recipient's personal tax rate is lower than the rate at which the dividends were subject to tax.

How often are dividends and coupons normally paid?
Governments stocks pay interest at pre-set six monthly intervals while corporations vary in their payment periods. Some corporation pay coupons and dividends annually while others make their payments twice a year.

Can I buy shares directly from a friend of mine?
One can buy shares directly from someone else, but through a stockbroker. This procedure, where the stockbroker affects a simultaneous deal for the two clients is known as put-through.

 

Glossary

 

At best                  an instruction to a stockbroker to conduct the market transaction immediately and at the best possible price.

 

At par                    refers to the nominal value of a security.

 

Bargain                 a purchase or sale on the stock exchange

 

Basis point           is the unit of an index. The movement of an index will be described either by percentage movement or by the change in basis points.

 

Bear                       one who thinks that the prices of investments are going to move downwards for one reason or another.

 

Bear market        a market characterised by consistent fall in share prices.

 

Bid                          the price at which an individual/institution is prepared to pay for a particular security.

 

Bid-Offer

Spread                   the difference in the buying and selling price of most investments including unit trusts, and assurance funds.

 

 

Blue chip               a term used for an investment, which is quite solid and safe. Normally these are companies with big household names such as IBM and Proctor and Gamble.

 

Bond                      a fixed interest security, particularly issued by governments and other large corporations.

 

Bonus issue          is an issue of free shares to the existing shareholders of the company

 

Bull                         an investor who thinks that prices of investments are going to move upwards.

 

Bull market          a market where prices are on the rise and expected to rise further.

 

Capital gain          the increase in price of an investment above the purchase price realised on sale of shares.

 

Capital gains

tax                          is a tax on the net appreciation in the value of an asset. In Malta all securities are free of capital gains tax.

 

Collective

Investment

Scheme                 is a fund made up of a number of small investors and managed by an institution, which invests money in accordance with the investment criteria of the particular fund.

 

Contract note      a written confirmation of the purchase or sale of an investment issued immediately after the deal is struck.

Convertible

bonds                     are bonds with the rights to convert to ordinary shares or preference shares at a predetermined price and at a stated time in future.

 

Deal                       the point at which a bid and an offer are matched to form a trade.

 

Debenture            A bond or fixed interest security issued by a company, usually secured on company's assets 

 

Dividend               the part of a company's profits which is distributed amongst shareholders.

 

Dividend

Yield                       is the dividend per share divided by the current market price of the share

 

DPS                        Dividend per share is a ratio expressing the total amount of dividends divided by the number of ordinary shares.

 

EPS                         Earnings per share is a ratio expressing the company's earnings divide by the number of ordinary shares.

 

Equities                 the term given to investments in company’s listed on a stock exchange

 

Ex-coupon            this entitles the seller of security to keep the coupon

 

Ex dividend          when a dividend is quoted ex, it means that the deal carries no entitlement to the distribution of dividend.

 

Flotation               the offering of a company’s stock to the public for the first time on a stock market.

                                 

Fringe benefit     a term used when shareholders of a company receive additional benefit over and

                        above the dividends received.

 

Initial charges    the charges paid on investing in collective investment schemes. Normally these charges cover administration costs and commissions, which are paid by the fund manager.

 

Initial public

Offering (IPO)    American equivalent to a public flotation.

 

Interim

statement            a financial report covering only a part of the financial year. Public companies normally issue six-month statements informing their shareholders about changes in the company’s balance sheet and profit and loss account.

 

Issued share

Capital                   is the capital actually held by shareholders, distinct from the authorised share capital, which is the maximum amount of share capital the company can hold.

 

Market

Capitalisation      The value of a company represented by a number by the total value of it shares. It is

                        Calculated by multiplying the number of shares in issue by the current market price.

 

Mutual fund          another word for unit trust, where investors pool in their money invest using the

                        expertise of a fund manager.

 

Nominal value     another term for par value. This is the face value of a security, which is normally Lm100.

 

No-load funds      a collective investment scheme with no initial and exit charges.

 

Offer price           the price at which a security is offered for sale.

 

Official List           it is a list off all securities that trade on the Malta Stock Exchange. It provides details of dividend dates, prices, rights issue and other pertinent information attached to a particular security.

 

Ordinary shares  are shares in a company that normally account for the bulk of a company’s share capital.

 

Over

subscription         is when more applications for a share issue/ offer are received than there are shares for offer.

 

Overvalued          is when the market prices overstate the real value of a company or market given its actual performance.

                                                       

 

Par value              see nominal value.

 

Portfolio               a collection of investments held by an individual, corporation or fund.

 

Preference

share                     are shares in a company normally paying a fixed interest, ranking after creditors but before ordinary shareholders in the event of liquidation.

 

Premium               is a sum paid in addition to the market value of an asset

 

Price-Earnings

Ratio                      analysis the market value of a share and the company’s profit. It is found by dividing the market price of a share by the earnings per share.

 

Put-through         a simultaneous deal effected by a stockbroker for two clients where one is selling and one is buying.

 

Quoted

company           a company listed on the Stock Exchange.

 

Redeemable

Preference

shares                   preference shares that the company has the right to redeem before a particular date.

 

Register                a list of holders of a security

 

Return on

capital

employed             is the pre-tax profit divided by the ordinary share capital, reserves and loan stock.

 

Rights issue         an invitation to existing shareholders to acquire additional holdings the respective company

 

Risk Profile          the different levels of losses in the money invested one is ready to accept, as the price of potentially earning higher returns.

 

Securities             the general term for shares, stocks and debentures of all types.

 

Share Capital       represents the ownership of a company, as distinct from debt.

 

Share premium   the amount above par value that a company issues/ offers its shares for sale.

 

Share split            is the issue of additional shares with the aim of reducing the value of the existing shares.

 

Solvency ratio     a ratio used to evaluate the ability of a company to meet its’ long term obligations.

 

Stockbroker         a member of the Stock Exchange licensed to deal on the market on behalf of his clients.

 

Subsidiary

Company              a company that is the property of another company. A company qualifies as a subsidiary, providing that the holding company holds more than voting shares in the subsidiary.

 

Underwriter         a company that guarantees to buy all the shares in a public offering provided that they are not fully subscribed by the public.

 

Yield                       a term used to describe the annual return from an investment.

 

Yield to Call

(YTC)                      the Yield on a bond assuming the bond will be redeemed by the issuer at the first call date specified in the indenture agreement. 

 

Yield to Matu-

rity (YTM)             YTM takes into account gain or losses of principal at maturity. YTM allows investors to compare bonds with different maturities that sell at a price different to par.

 

Yield to Worst

(YTW)                    YTW is the lowest yield from a corporate bond that a buyer can expect among reasonable alternatives, such as Yield to Maturity, Yield to Call and Yield to Refunding.