10. Equity and property markets Flashcards
What is ordinary share
4
- Securities held by owners of organisation
- Right to receive all distributable profit (dividends)
- After debtholders and preference shareholders have been paid up
- attend and vote at the AGM of the company
Investment and risk characteristics of ordinary shares
13
- Security of capital depends on NAV, level of gearing and risk profile of the issuing company
- Expected return higher in long-term than gov bonds
- Volatile market values are possible
- Prices are determiened by demand and supply
- Term = no fixed redemption date, generally long term
- Expenses for dealing higher than conventional gov bonds
- Liability in other currency => Currency risk
- Marketability depends on issuing company and whether listed or not
- Less marketable than GB.
- Tax treatment depends on the territory
- Income = Dividends
- Capital gain may arise on sale of shares
- Quoted shares are easily divisible
What are the cashflows of an ordinary share from the perspective of the investor
3
- Share purchase - outflow of the market price of the share + dealing costs
- Divended payments - regular series of positive cashflows representing a share of the companies profits. Timing is generally known. The amount is unknown. Profits are expetced to increase in line with the GDP. Company may retain some profits for new projects expansion or subsidise dividends in poorer years
- Final payment - no redemption payment. Dividends assumed to continue indefinitely. There minght be a final value if:
1. The investor sells his holdings OR;
2. The company buys it back OR
3. The company winds up and there is residual funds to distribute
What are the advantages of listed shares to the investor over unlisted shares
5
- Greater marketability
- Easier to value
- Greater security (stock exchange regulation)
- More information is avaiable - disclosure information
- greater divisibility
Why does share analysts specialise within particular industries
4
- Most companies within an industry are affected by similar factors
- Information about these companies comes from a common source and are presented in a similar way
- No one can be an expert in all areas
- Adds structure to decision making process
Why are share price movements of companies in the same industry more correlated with each other than companies of other industry
3
- Resources - similar resources => similar input costs
- Markets - supply the same market => Impact similarly by changes in demand
- Structure - similar financial structure => similarly influenced by changes in interest rates
What are the problems with industry grouping
- Conglomerate companies - companies that operate in different sectors
- Heterogeneity of companies within particular sector - due to size, or operate in different market niches
What are other groupings other than industry
5
Any factor that influence profits
- Market capitilisation
- price earning ratio (dividend yield)
- financial structure (gearing)
- overseas earnings
- location
Why can a significant propoortion of price movements of many shares traded in a domestic equity market can be attributed to overall market movements rather than features of the specific companies
4
- Macro-economic + political climate => Affects companies in a similar way
- Company costs are affected by similar factors => tax, labour market, cost of borrowing and fuel
- Investors are interested in equities as a whole rather than individual shares because:
1. Equity market appears more attractive as a whole than other markets
2. Investors have real liabilites
3. Regulation + tax breaks favour equities
4. Diversification - Many investors invest passively in a broad range of equities rather than actively seeking out specific shares
1. Costs of active management are not compensated for by sufficient extra returns
2. Lack of expertise
Investment and risk characteristics of direct property
11
- Security - Tenant dependent. Risk of voids. Political interference
- Yield - DP is less marketable and less secure than GB. E(R) > return on government bonds. Running rental yield varies by type of property. Real return - no exact hedge against inflation
- Spread - Volatile capital values in long term, stable capital values in short term – Subjective, infrequent valuations, lack of information
- Term - any term is possib;e
- Expenses - high dealing and management costs
- Exchange rate - depends on liability matching
- Marketability - very unmarketable –depends on size, Unit size (indivisibility), uniqueness
- Tax - Capital gains tax may apply at sale
- Characteristics can be changed by owner - redevelopment
- Risk of obsolescence (useless) and need for refurbishment
- Income forms a ‘stepped’ pattern over time
Factors a prime property would score highly in.
CALL STreet
- Comparable properties for rent reviews and valuations
- Age, condition and flexibility of use
- Location
- Lease structure
- Size
- Tenant quality
What is freehold ownership of property and what are the rights (2) and restrictions (4) on the freeholder
- Freehold ownership - ownership in perpetity
- Rights of freeholder:
1. Occupy the building or let it out
2. Refurbish the property or develop it - Restrictions include:
1. Convetants (agreement/contact)
2. Easements - right of way
3. Planning and building regulations
4. Statutory requirements not to cause nuisance to others
What is a lease and how does a leasehold property differ from a freehold property from an investment perspective
- Lease - agreement where by a leaseholder has the right to use a specified portion of a building owned by another party for a specified period in return for a payment
- Payment – annual ground rent
- Leasehold differs from freehold:
1. Has fixed term
2. Involves a capital loss to the leaseholder at the end of the lease
3. Higher initial rental yield - Leases for 99 or 999 years can be treated as being close to freehold interests
Examples of indirect property investment
COS
Closed-ended schemes, such as property investment trust companies
Open-ended schemes, such as property unit trusts
Shares in property (development / Investment) companies
Advantages of direct property
DEFECT MUV
Diversification away from the stock exchange
Exposure to high-risk types of property is eliminated ( eg development sites)
Forced selling and the associated loss is less of an issue
Exposure to extra volatility caused by gearing or the discount to NAV changing is eliminated
Control
Tax advantages
Management fees to property share company advisors avoided
Utility value
Volatility of prices lower in the short term as valuations infrequent
Advantages of indirect property (property company shares)
MISDATED DEE Q
Marketability (possibly)
Index-tracking of a quoted investment index is possible
Suitability for small investors
Discount to NAV
Access to larger/more unusual investments
Tax advantages(possibly)
Economies of scale
Diversification
Divisibility
Expected return higher due to volatility associated with gearing and changes to the discount to NAV
Expertise of Investment managers
Quoted prices making valuation easier
