ASX Trading Products
The number of different financial products traded on the Australian Securities Exchange (ASX) is significant, and includes:
- Fully Paid Ordinary (FPO) shares
- Preference Shares
- Instalment Receipts (Contributing Shares)
- Interest Rate Securities
- Exchange Traded Options (ETOs)
- Company Issued Options
- Exchange Traded Funds (ETFs)
Some of these products will be explained further:
Fully Paid Ordinary (FPO) shares
This is the normal share that investors purchase. Fully Paid Ordinary Shares or FPOs are equity securities, and represent the basic unit of ownership in a company. The total of all the FPOs in a company represents its equity capital. Equity capital is also often referred to as risk capital as the owners have no guarantee on a return on their investment, or it being repaid. When you buy FPOs, you become a part owner of the company and consequently, share in its profits and losses.
Despite whether companies pay dividends or not, another benefit of owning FPOs is the capital gain you can enjoy. Share prices fluctuate on a daily basis due to the prevailing supply and demand and equity holders are able to benefit from a favourable move in the share price. It is this benefit that is most appealing to traders, whereas many investors are attracted to companies for dividends.
Preference shares entitle the shareholder to preferred dividend payments which are normally set at a fixed rate of the market price. In the event that a company ceases trading, preference shareholders will receive their capital payment before ordinary shareholders. Preference shares are commonly categorised as hybrid securities in that they have characteristics of both equity and debt. There are several types of preference shares including converting, convertible, cumulative, participating and redeemable.
Preference shares still represent part ownership of a company (equity) but as they also entitle the holder to a fixed dividend rate, they can be classed as a form of debt. Furthermore the payment of those dividends may be specified at certain dates other than the normal dividend payable dates.
Instalment Receipts (Contributing Shares)
An instalment receipt allows the purchaser of shares to pay a partial payment now (amount will be stipulated in the disclosure document used) and then at a later date (which will also be set), pay the remaining amount. At the time of the final payment, the purchaser will receive full ownership of the underlying share(s). The term contributing shares is also used and this name reflects more on the nature of the payment schedule. When you have paid the first instalment, you have made a contribution towards owning FPOs.
An example that most Australians are familiar with is the issue of T1 and T2 during the part privatisation of Telstra.
A type of derivative product that are issued by a bank or other financial institution. Derivates are so named as they derive their price from something else. This is normally a fully paid ordinary share or an index, which is often referred to as the ‘underlying security’ or just the ‘underlying’. Primarily there are two types of warrants – calls and puts. A call warrant gives the buyer the right (BUT not the obligation) to buy a certain number of shares at a set price (the exercise or strike price) by a set date (the expiry date). A put warrant gives the buyer the right (BUT not the obligation) to sell a certain number of shares at a set price by a set date.
Company Issued Options
A company issued option is a financial product where you (as the holder of the option) have the right but not the obligation to purchase shares (receive equity) in the company issuing the option, at a set price (exercise price) by a certain date (expiry date). There is no obligation to purchase the shares and if the right has not been taken up by the expiry date, the option will lapse and be worthless.
Company issued options are simply another means of raising capital once a company is listed on the ASX. Company issued options are often used as incentives in remuneration packages for staff of a company, especially directors, although these are normally unlisted.
Exchange Traded Options (ETOs)
A type of derivative product that provides you the right but not the obligation to buy/sell shares in a company at a set price by a certain date. Warrants and Exchange Traded Options (ETOs) have many similar characteristics, however ETOs generally offer more flexibility than warrants.