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R02 > 02. Equities, property & alternative investments > Flashcards

02. Equities, property & alternative investments Flashcards

1
Q

What 2 factors affect share prices in the long-term?

Examples?

A
  • Economic factors.
  • Political factors.

E.g. changes in inflation, productivity, growth.

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2
Q

What 4 factors affect share prices in the short-term?

A
  • Investor sentiment.
  • Profit/dividend expectations.
  • Takeover activity.
  • Quality of management.
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3
Q

What is the Primary market?

A

A market in which securities are sold for the first time to investors to raise money for businesses.

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4
Q

What is the Secondary market?

A

A market in which securities that have already been issued can be bought and sold between investors.

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5
Q

The AIM is an ___ market and the shares traded on the AIM are described as ___ or ___ but not ___.

A
  • unregulated
  • traded or quoted but not listed.
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6
Q

Who is the AIM designed for?

A

Companies too small and/or too new to apply for a full listing which is demanding and expensive.

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7
Q

Name 4 costs involved in buying and selling shares.

A
  • Commission.
  • Stamp duty.
  • SDRT.
  • PTM levy.
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8
Q

What is the spread?

A

The difference between the offer price (at which an investor can buy shares) and the bid price (at which they can be sold).

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9
Q

Will the spread on smaller company shares be narrower or wider and why?

A

Wider, reflecting their reduced liquidity and smaller number of market makers prepared to quote a price.

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10
Q

Name 2 ways commission will be charged.

A
  • Flat fee.
  • A % (potentially tiered).
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11
Q

When is stamp duty paid?

A

When shares are bought using a stock transfer paper form if the transaction is > £1,000.

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12
Q

When is SDRT paid?

A

When shares are bought electronically through the CREST system (no min £).

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13
Q

What is the rate of tax for stamp duty & SDRT and who pays this?

A
  • 0.5%.
  • The purchaser.
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14
Q

How is payment for stamp duty & SDRT rounded?

A
  • Stamp duty: rounded up to next multiple of £5.
  • SDRT: rounded to nearest penny.
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15
Q

What is the PTM levy charge and when does it apply?

A
  • £1 flat rate charge.
  • Applies to all trades of £10,000 or more.
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16
Q

What do preference shares usually pay?

A

A fixed rate of dividend half yearly, if sufficient after-tax profits.

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17
Q

Are there voting rights attached to preference shares?

A

Generally no, unless payment of dividends has fallen into arrears.

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18
Q

Where do preference shares rank in liquidations?

A

Ahead of ordinary share capital but after loan capital and all other creditors.

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19
Q

How do the yields of preference shares compare to those of bonds?

A

They are higher to compensate for their lower security & the risks involved.

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20
Q

Name 5 types of preference share.

A
  1. Cumulative.
  2. Non-cumulative.
  3. Participating.
  4. Redeemable.
  5. Convertible.
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21
Q

What are cumulative preference shares?

A

If company has insufficient profits in 1 year to pay the cumulative ps dividend, the shortfall must be carried forward & paid before other lower class shareholders can receive any payment even if that takes many years.

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22
Q

What are non-cumulative preference shares?

A

These lose the right to receive any unpaid dividend at the end of the financial year, & no arrears are due when dividend payments resume.

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23
Q

What are participating preference shares?

A

These pay a fixed rate of dividend & also allow the holder to participate in company profits. They receive an additional dividend that is usually a proportion of any ordinary dividend declared.

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24
Q

What are redeemable preference shares?

A

They represent a temporary source of finance for the company. Dividends will be paid to the shareholder for a short period and the share will then be repaid.

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25
Q

What are convertible preference shares?

A

These carry the right to be converted into ordinary shares at pre-set dates and on pre-set terms if the holder chooses to.

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26
Q

Ordinary shareholders are the ___ to be paid out in the event of liquidation.

A

last

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27
Q

What 2 things do ordinary shareholders have a right to?

A
  • To share in the profits of a company (after tax and preference share dividends have been paid out).
  • To attend and vote at company general meetings.
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28
Q

What is the usual ratio of ordinary shares to votes?

A

1 ordinary share = 1 vote.

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29
Q

Name 3 other types of ordinary share.

A
  • Non-voting.
  • Deferred.
  • Alphabet shares.
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30
Q

What can non-voting ordinary shares be used for & how does their market price compare to voting ones?

A
  • To keep the control of a company in the hands of a few shareholders whilst raising capital.
  • Usually lower.
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31
Q

What are deferred ordinary shares?

A

They don’t usually qualify for a dividend until the dividend on the ordinary shares has reached a pre-determined level, or until a specific period after their issue but
shareholders may have greater voting rights, or become entitled to a larger proportion of the profits after the deferred period.

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32
Q

What are alphabet shares?

A

Different classes each having different rights regarding voting, dividends & capital.

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33
Q

Name 7 risks from holding shares.

A
  1. Equity capital risk.
  2. Share dividend volatility.
  3. Currency risk.
  4. Liquidity risk.
  5. Counterparty risk.
  6. Fund managers & insurance companies.
  7. Regulatory risk.
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34
Q

Name 4 things that could lead to poor performance of shares.

A
  • Poor management.
  • State of the economy.
  • Geopolitical events e.g. war
  • Technology/fashion.
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35
Q

Name 2 factors that can affect liquidity.

A
  • Notice periods.
  • Penalties for early encashment.
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36
Q

What is counterparty risk?

A

The risk that the organisation with which an investment is placed will fail.

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37
Q

in which markets is regulatory risk greatest?

A

Developing or emerging markets.

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38
Q

Name 3 things regulatory risk can include.

A
  • Investors being misled.
  • Inefficient market mechanisms.
  • Market manipulation.
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39
Q

What does private equity involve?

A

Providing medium to long-term finance in return for an equity stake in or acquiring potentially high growth companies that are not publicly traded on a stock exchange.

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40
Q

List 4 potential exit strategies a private equity firm might consider.

A
  1. Selling its shares back to the management team.
  2. Selling its shares to another private equity firm.
  3. Selling shares to another company (trade sale).
  4. The company achieving a stock market listing.
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41
Q

Most UK private equity funds seek to raise money for investment from who?

A

Institutional investors e.g. pension funds & insurance companies.

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42
Q

Typically, private equity funds will aim to invest in the chosen company for between ___ and ___ before completing their exit.

A

3 and 7 years

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43
Q

How can retail investors gain access to private equity funds?

A

Via a fund of funds - a type of private equity company which invests in funds that invest in unlisted companies.

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44
Q

What are the 2 types of listed private equity investment companies?

A
  1. Those that invest directly in unlisted companies.
  2. Those that invest in funds that invest in unlisted companies (funds of funds).
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45
Q

Listed private equity investment companies are a form of collective investment where the investment company is established as a ___ vehicle so is a form of ___.

A
  • closed-ended
  • investment trust.
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46
Q

Listed private equity investment companies are traded on the ___ and are eligible for inclusion in ___.

A
  • LSE
  • Stocks & Shares ISAs.
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47
Q

Name 3 drawbacks of private equity securities.

A
  • Less liquid than other securities.
  • Can be sold less readily in large amounts.
  • Transaction costs are higher.
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48
Q

What trends does EPS enable investors to see?

A

Trends in a company’s profitability.

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49
Q

What is the formula for Earnings per share (EPS)?

A

PAOSH / No.ofordinaryshares in issue.

(*) = net profit left after tax, minority interests & preference dividends.

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50
Q

What does the dividend yield measure?

A

The dividend as a % return on the current share price.

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51
Q

What does the dividend yield enable investors to compare?

A

The current return on a share with the return that could be obtained from bonds or deposits, or from an alternative share.

52
Q

What is the formula for dividend yield?

A

Dividend per share
____________________ x 100

Current Share price

53
Q

What does the dividend cover measure?

A

How many times dividend could be paid out of the available current earnings.

54
Q

What does the dividend cover indicate?

A

The riskiness of the investment and the margin of safety the company has in paying the dividend.

55
Q

What are the 2 ways to measure dividend cover?

A
  1. On a per share basis:
         EPS / Dividend per share
  2. On a total profit basis:

PAOSH / Dividends paid to ordinary shareholders

56
Q

What is paying an uncovered dividend?

A

When a company pays a larger dividend than it has available profits for so is drawing on reserves.

57
Q

What does the Price Earnings (P/E) ratio measure?

A

How highly investors value the earnings of a company. It is a reflection of the market’s optimism or pessimism about the potential for future growth in earnings.

58
Q

How is the P/E ratio calculated?

A

Current share market price
_____________________________

                   EPS
59
Q

What is the net asset value (NAV) of a company?

A

The value of the tangible assets that are attributable to the ordinary shareholders.

60
Q

What does NAV attempt to measure?

A

The amount available to shareholders if the company
were to close down, sell all of its assets, pay all its bills, repay all of its borrowings and distribute the balance to the shareholders.

61
Q

How is the NAV calculated?

A

Net assets attributable to ordinary shareholders (*)
____________________________

Number of ordinary shares in issue

(*) = “Total capital employed in the business minus prior claims, such as secured and unsecured loans and preference shares. This amount represents the minimum value that the shares would beworth.

62
Q

When is the NAV a useful valuation figure? [2]

A
  • If a takeover bid is made, can compare bid price to realistic NAV.
  • Potential liquidation, gives shareholders indication of what they might receive.
63
Q

Name 3 limitations to using investor ratios.

A
  • Different accounting policies can make comparisons between companies in same industry difficult.
  • Changes to accounting policies over time can make comparisons over time misleading.
  • Investor ratio historical data may not be best guide to future performance.
64
Q

What can stock market indices be used to compare? [2]

A
  • a particular share vs its sector or with the market as a whole.
  • performances of a fund manager and the market as a whole.
65
Q

What is market capitalisation?

A

The stock market valuation of a company, calculation:

Number of shares in issue x their market price.

66
Q

What is the free float of a stock?

A

The proportion of shares that are available for trading on the stock market.

67
Q

The weightings of companies with less than ___% of their shares available for public trading are reduced to reflect the available free float.

A

75%

68
Q

What is the price index?

A

The sum of the market values (capitalisations) of all companies within the index, after the weightings have been adjusted to reflect the available free float of stock.

69
Q

What is the FTSE All-Share Index an aggregation of?

A

The FTSE 100, 250 and Small Cap indices.

70
Q

The FTSE All-Share Index consists of over ___ companies and represents about ___% of the LSE.

A
  • 600 companies
  • 98%
71
Q

The FTSE All-Share Index is calculated in ___, reviewed ___ with an annual liquidity test in June.

A
  • real time
  • quarterly
72
Q

What is the FTSE 100 index?

A

The index consists of the 100 largest companies by capitalisation listed on the LSE.

73
Q

How often is membership to the FTSE 100/250/350 reviewed?

A

Calculated in real time. Reviewed quarterly in Mar, Jun, Sep & Dec.

74
Q

What is the FTSE 250?

A

The next 250 largest companies by market capitalisation immediately below the FTSE 100 make up the FTSE 250. i.e. the companies are ranked from 101 to 350 by market cap.

75
Q

What is the FTSE 350?

A

A combination of the FTSE 100 & FTSE 250 indices.

76
Q

What is the FTSE SmallCap?

A

This is made up of the companies in the FTSE All-Share that are too small to qualify for thetop350.

77
Q

What is the FTSE Fledgling?

A

An index made up of companies listed on the main market of the London Stock Exchange, which are eligible for the FTSE UK series but are too small for the FTSE All-Share.

78
Q

What is the FTSE AIM index series?

A

An index series for young and growing companies traded on the AIM.

79
Q

What is the FTSE TMT index?

A

Reflects performance of companies in the technology, media & telecomms sectors.

80
Q

What is the FTSE4Good index?

A

Designed to measure performance of companies demonstrating specific ESG practices.

81
Q

What is the Dow Jones Industrial Average?

A

[US] It takes the share prices of 30 blue chip companies and measures their movements.

82
Q

What is the S&P 500?

A

[US] A composite index consisting of 500 companies listed on the New York Stock Exchange, generally regarded as a good guide to the US market.

83
Q

Stocks in the S&P 500 are weighted according ___.

A

to their market capitalisation.

84
Q

What is the NASDAQ?

A

[US] An index of small young companies, which operate in fast-growing sectors such as information technology and biotechnology, often used as a proxy for the performance of US tech stocks.

85
Q

What is the Nikkei 225?

A

[Jap] Not strictly an index but is based on the average of 225 stocks, on the Tokyo Stock Exchange.

86
Q

The Nikkei 225 is ___ weighted according to market capitalisation, so ___ firms can move the index as much as ___ ones.

A
  • not
  • smaller
  • bigger
87
Q

What is the Topix?

A

[Jap] A more comprehensive but less widely followed index than Nikkei 225, which provides a better guide to the overall market.

88
Q

What is the DAX 40?

A

[Ger] Consists of the 40 largest quoted German companies, calculated in real time, value weighted, and is the basis of futures and options traded on the Deutsche Börse.

89
Q

What does the DAX 40 include which is unusual for an index?

A

Reinvested income.

90
Q

What is the Hang Seng Index?

A

[HK] It is composed of a representative sample of Hong Kong stocks, and is value weighted.

91
Q

What is the CAC 40?

A

[Fra] A real-time value-weighted index of the largest stocks on the Euronext Paris.

92
Q

What is the FTSE All World Index?

A

Covers global equity markets and comprises just over 4,000 stocks from 49 countries.

93
Q

How does a fundamentally weighted index differ to a market weighted one?

A

The weight of each company is based on factors other than price, such as the company’s revenues, earnings, number of employees and dividends.

94
Q

Name 3 drawbacks of property investment.

A
  1. Lack of liquidity.
  2. Costs: both initial purchase & ongoing maintenance.
  3. Void periods.
95
Q

Name 4 relevant factors when choosing property suitable for letting.

A
  1. Location.
  2. Quality of tenant.
  3. Age/condition of property.
  4. Diversification.
96
Q

AST’s normally have ___ minimum period but are usually for ___ or ___.

A
  • no
  • 6
  • 12 months.
97
Q

Residential landlords often avoid long rental agreements, as they tend to what?

A

Depress property values.

98
Q

General expenses, such as the costs of managing agents, maintenance and buildings insurance, all impact on the overall yield on the investment, reducing it on average by around ___?

A

25%.

99
Q

When is SDLT due on property purchases?

A

Within 14 days of the date of the transaction.

100
Q

1st time buyers pay no SDLT on first £___ of purchase price.
No relief however on purchases more than £___.

A
  • £425,000
  • £625,000.
101
Q

SDLT is charged at ___% on residential dwellings costing more than £___ bought by bodies such as companies & investment schemes.

A
  • 15%
  • £500,000
102
Q

What is the supplement for properties over £40k bought by non-UK residents?

A

2%

103
Q

How is SDLT charged on leasing land?

A

On NPV of rent payable under lease:

  • annual rent x term of lease
  • discounted for inflation
  • deducting threshold figure
104
Q

SDLT on leasing land - what are thresholds for:

  • residential
  • commercial
A
  • £250,000
  • £150,000
105
Q

Where NPV of rent is above threshold, tax is chargeable at what rates?

A
  • At a rate of 1% on the amount of the NPV adjusted rent in excess of the threshold for residential leases,
  • and at a rate of 1% up to £5m and then 2% thereafter for commercial leases.
106
Q

Where does rent-a-room relief not apply? [2]

A
  • To self contained units.
  • To unfurnished accommodation.
107
Q

Name 5 qualifying rules for rent-a-room relief.

A
  1. Must occupy property as main residence at same time as tenant.
  2. Annual gross rent before deducting expenses must not exceed £7,500.
  3. Only 1 exempt amount per residence.
  4. Relief split to £3,750 if another individual receiving rent from same property.
  5. Rent taken into account is payment for accommodation plus any payment for related goods & services.
108
Q

For rent-a-room relief what are the 2 choices if rent exceeds £7,500?

A

Can either;
- choose to pay tax on the excess over £7,500 with no deduction for expenses; or
- be taxed on the gross rent received, less expenses, with no rent-a-room relief.

109
Q

What is the annual property income allowance?

A

£1,000. Does not have to be declared on a tax return.

110
Q

Where property income is in excess of £1,000, what is the choice?

A
  • Deducting allowance from gross income to calculate taxable profit; or
  • deducting actual allowable expenses.
111
Q

What are the 3 main sectors of the commercial property market and what are the lowest & highest yielding?

A
  1. Retail (shops).
  2. Office buildings.
  3. Industrial properties.
  • lowest: retail sector.
  • industrial (shorter lifespan)
112
Q

Commercial property values often move in a___ direction to equities and sometimes to residential property.

A

different

113
Q

How can less wealthy investors build diversified property portfolios?

A

Through collective funds including REITs.

114
Q

What do commercial property owners prefer regarding leases & why?

A

Long leases as they enhance their property values.

115
Q

What are 2 advantages of commercial property vs residential property?

A
  1. Net income is typically higher as tenant bears maintenance & insurance costs.
  2. Income is more secure as rental agreements are much longer.
116
Q

What are 5 drawbacks of investing in commercial property?

A
  1. Sale & purchase is often slow, costly & complex.
  2. Growth typically takes place in steps (3-5 years).
  3. Properties can usually only be sold whole, not segments.
  4. Commercial property market is hard to analyse.
  5. Can be a time lag in increasing property supply to meet extra demand.
117
Q

Name 5 common characteristics in alternative investment physical assets.

A
  1. Normally no income.
  2. Often cost money to keep.
  3. Value based on limited supply & rising demand.
  4. Collector taste important.
  5. Authenticity important.
118
Q

Name 3 risks to alternative investments.

A
  1. Supply not fixed because of manufacture or discovery of reproductions.
  2. Tastes change.
  3. May be hard to ascertain genuineness or quality.
119
Q

What are hard commodities?

A

The products of mining and other extractive processes – e.g. metals such as gold and silver, crude oil & natural gas.

120
Q

What are soft commodities?

A

Typically grown rather than mined – e.g. coffee, cocoa, sugar, corn, wheat, livestock.

121
Q

Commodities have a ___ correlation with other assets like equities, bonds.

A

low

122
Q

Commodity prices have done what in recent years and why?

A

Risen sharply as demand for raw materials in developing countries has increased.

123
Q

There is a ___ probability of sudden and unfavourable price changes in commodity prices versus a sudden collapse in share prices.

A

higher

124
Q

What is gold seen as?

A

A useful hedge against inflation.

125
Q

Name 3 ways to invest in commodities.

A
  1. Companies that produce commodities.
  2. Funds that invest in commodities.
  3. Exchange-traded commodities (ETCs).
126
Q

Name 3 features of cryptocurrencies.

A
  1. Transactions are anonymous.
  2. They are not backed or influenced by governments or central banks.
  3. They are not regulated under the FSMA 2000.
127
Q

What are scrip dividends?

A

New shares instead of cash.

R02 (11 decks)

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