Master Element 3 of the RSE exam covering equities. Learn common shares, order types (Market, Limit, Stop), short selling mechanics, margin accounts, and stock classification for retail advisory.
RSE Exam Element 3: Equities (~10%, 12 Questions)
This section focuses on the characteristics of ownership (shares), how they trade, and the risks involved. Expect questions asking you to differentiate (e.g., Rights vs. Warrants, Growth vs. Value) and practical application questions regarding Order Types.
Common Shares - The Bundle of Rights
- Voting Rights: Shareholders vote for the Board of Directors
- Residual Claim: In bankruptcy, common shareholders are last in line after employees, tax authorities, creditors (bondholders), and preferred shareholders
- Limited Liability: You can lose your investment, but you cannot be sued for the company's debts
- Capital Appreciation: The primary source of return is the increase in share price over time
Dividend Timeline
| Date | Description |
|---|---|
| Declaration Date | Board announces the dividend |
| Ex-Dividend Date | Critical date - buy on or after this date = NO dividend |
| Record Date | Company checks books to see who owns shares |
| Payment Date | Cash is distributed |
Dividend Yield Formula: Annual Dividend per Share ÷ Current Stock Price
Types of Stocks - The Style Box
Blue Chip Stocks
Large, well-established companies with stable earnings and dividend payments (e.g., Royal Bank, BCE).
Growth Stocks
- Companies expanding faster than the economy
- High P/E ratios, pay little to no dividends (reinvest cash for expansion)
- High momentum
Value Stocks
- Companies that are "undervalued" by the market
- Low P/E ratios, high dividend yields
- Often in mature industries
Cyclical vs. Defensive Stocks
| Type | Behavior | Examples |
|---|---|---|
| Cyclical | Performance moves with the economy | Auto manufacturers, Resources, Housing |
| Defensive | Stable regardless of economy | Utilities, Consumer Staples, Healthcare |
Order Types - Critical for RSE
Market Order
- Purpose: Immediate execution at best available current price
- Certainty of Execution: High
- Price Certainty: Low
- Risk: Slippage in fast-moving or illiquid markets
Limit Order
- Purpose: Price control - "Buy at $50 or less" or "Sell at $60 or more"
- Certainty of Execution: Low (might never hit your price)
- Price Certainty: High
Stop-Loss Order
- Purpose: Protect a profit or limit a loss - "If the stock drops to $X, sell it"
- Sits dormant until "Trigger Price" is touched, then becomes a Market Order
- Risk: In a fast-crashing market, price might gap down. Set stop at $50, execute at $42.
Stop-Limit Order
- Once triggered, becomes a Limit Order (not Market)
- Risk: If price gaps through your limit, order may not fill
Bid-Ask Spread
- Bid: Highest price a buyer is willing to pay (the price you sell at)
- Ask (Offer): Lowest price a seller will accept (the price you buy at)
- Spread: The difference. Smaller spread = Higher Liquidity
Short Selling
The Mechanism:
- Borrow shares
- Sell them high
- Wait for price to drop
- Buy them back low
- Return shares to lender
Risk: Unlimited. If the stock price goes to infinity, your losses are infinite.
Requirement: Must be done in a Margin Account.
Margin Accounts
Using borrowed money to buy stocks.
Buying Power Example: If you have $10,000 cash and the margin requirement is 50%, you can buy $20,000 worth of stock ($10k yours + $10k loan).
Margin Calls
If the stock price drops, your equity drops. If it drops below a set threshold, the firm issues a margin call requiring you to deposit cash immediately.
Trigger Price Formula: Loan Amount ÷ (1 - Maintenance Margin %)
Rights vs. Warrants
| Feature | Rights | Warrants |
|---|---|---|
| Offered To | Existing shareholders | Attached to new bond/stock issue |
| Term | Short (4-6 weeks) | Long (3-5 years) |
| Exercise Price | Below market (discount) | Above market |
| Purpose | Raise cash, prevent dilution | "Sweetener" to make issue attractive |
RSE Exam Tips for Equities
- Market orders = certain execution, uncertain price
- Limit orders = certain price, uncertain execution
- Short selling has unlimited risk and requires margin account
- Ex-dividend date is the critical date for dividend entitlement
- Cyclical stocks move with economy; Defensive stocks are stable