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R02 Investment Principles & Risk > 2 Equities, property & alternative investments > Flashcards

2 Equities, property & alternative investments Flashcards

1
Q

When shares are issued on the London Stock Exchange, they must either be admitted to:

A
  1. The official list/main market, or
  2. Alternative Investment Market (AIM)
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2
Q

Who regulates the process of floating companies?

A

The UK Listing Authority (UKLA), part of the FCA

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3
Q

Is AIM a primary or secondary market?

A

Both

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4
Q

What is the main difference between AIM and the main market?

A

AIM = easier & cheaper to get quoted

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5
Q

Why can’t AIM companies be described as ‘listed’?

A

They aren’t technically listed on a recognised stock exchange

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6
Q

What are the costs involved in buying & selling shares?

A
  1. Commission
  2. Stamp duty / SDRT
  3. PTM levy
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7
Q

What are the bid & offer price?

A

Bid = lower selling price
Offer = higher buying price

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8
Q

How does company size affect a share’s bid-offer spread?

A

Large company = shares more liquid = narrower spread

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9
Q

In share dealing, what is commission?

A

The stockbroker’s fee for executing the deal

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10
Q

What rules govern stockbroker commission?

A

None; it’s a commercial decision for the firm

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11
Q

Which carries greater commission, buying or selling shares?

A

They carry the same rate

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12
Q

What are the main ways to calculate commission?

A
  1. Flat
  2. Tiered
  3. %
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13
Q

Is commission typically lower or higher for online dealing?

A

Lower

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14
Q

How much stamp duty/SDRT applies to AIM stocks?

A

None

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15
Q

When is stamp duty applied?

A

When shares are bought using a stock transfer form

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16
Q

When is SDRT applied?

A

When shares are bought electronically using the CREST system

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17
Q

What is the CREST system?

A

A computerised register of shares/shareholders

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18
Q

What is the minimum value for SDRT to be applied?

A

None

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19
Q

What is the minimum value for stamp duty to be applied?

A

£1,000

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20
Q

What is the stamp duty/SDRT rate?

A

0.5% of purchase price

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21
Q

Who pays stamp duty/SDRT – the seller or the purchaser?

A

The purchaser

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22
Q

How is stamp duty rounded?

A

Up to the nearest £5

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23
Q

How is SDRT rounded?

A

To the nearest penny

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24
Q

What is the PTM levy?

A

A flat £1 charge on all trades over £10k

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25
Q

What does PTM stand for?

A

Panel on Takeovers & Mergers

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26
Q

What are the two main categories of shares?

A
  1. Ordinary shares
  2. Preference shares
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27
Q

How are preference shares similar to bonds?

A

They pay half-yearly fixed dividends

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28
Q

Do preference shares generally have voting rights?

A

No, unless the payment of dividends has fallen into arrears

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29
Q

Where do preference shares rank for payment of dividends?

A
  1. After interest payments on debt
  2. Before dividends on ordinary shares
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30
Q

Where do preference shares rank in a liquidation?

A
  1. After all creditors
  2. Before ordinary shares
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31
Q

How do preference shares differ from bonds?

A

Less secure = higher yield

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32
Q

By default are preference shares cumulative or non-cumulative?

A

Cumulative

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33
Q

What does it mean if a preference share is cumulative?

A

Any shortfall in dividends is carried forward indefinitely

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34
Q

What is a participating preference share?

A

Receives fixed dividend + % of ordinary dividend

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35
Q

What is a redeemable preference share?

A

The company can buy it back (undated or on a pre-set date)

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36
Q

What is a convertible preference share?

A

Holder can convert to ordinary share on a pre-set date

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37
Q

Typically, how much power do holders of ordinary shares have?

A

1 ordinary share = 1 vote

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38
Q

How do non-voting ordinary shares compare to voting ordinary shares?

A

Same dividend + no vote = lower market price

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39
Q

What is a deferred ordinary share?

A

Receives no dividend until dividend reaches certain level OR certain time has passed

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40
Q

What are the benefits of deferred ordinary shares?

A

Greater voting rights and/or greater dividend entitlement once deferral ends

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41
Q

What are alphabet shares?

A

Custom classes of ordinary shares with different voting/dividend/capital rights

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42
Q

True or false: dividends can only be paid out of profit

A

True

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43
Q

Who decides whether to pay dividends & how much?

A

Board of directors

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44
Q

What tax is applied to profit before dividends can be paid?

A

Corporation tax

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45
Q

What is the tax-free dividend amount per year?

A

£2,000

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46
Q

Who do private equity funds target?

A

Institutional investors e.g. pension funds & insurance companies

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47
Q

How long do private equity funds typically stay invested in a company?

A

3-7 years

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48
Q

What is one common structure for private equity funds?

A

Limited partnership with fixed life of 10 years

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49
Q

What is a listed private equity investment company?

A

A closed-ended company & type of investment trust

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50
Q

Are private equity investment companies eligible for stocks & shares ISAs?

A

Yes

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51
Q

How can retail investors access private equity funds?

A

Via private equity investment companies

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52
Q

How do private equity returns compare to quoted shares?

A

Around 2-4% higher

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53
Q

Why is EPS so widely quoted?

A
  1. All listed companies are required to publish it
  2. Shows profitability trends
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54
Q

What is the formula for EPS?

A

ordinary profit / # of ordinary shares

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55
Q

For EPS purposes, what is ordinary profit?

A

Profit left after tax, minority interests, & preference shares

56
Q

Why might EPS differ from dividend per share?

A

Companies retain some profits to fund future development

57
Q

What does dividend yield measure?

A

Dividend as a % return on the current share price

58
Q

What is the formula for dividend yield?

A

(dividend per share / current share price) x 100

59
Q

What is the formula for dividend cover?

A

(earnings per share / dividend per share) OR (ordinary profit / total ordinary dividend)

60
Q

What is an uncovered dividend?

A

Total dividends > total available profits

61
Q

What is the formula for P/E ratio?

A

share price / EPS

62
Q

What does P/E ratio reflect?

A

Market sentiment about company’s potential

63
Q

What investment ratio should never be used to compare companies across different sectors?

A

P/E ratio

64
Q

What is the formula for NAV per share?

A

net assets attributable to ordinary shareholders / number of ordinary shares

65
Q

When calculating NAV, how are preference shares accounted for?

A

Using their nominal value (usually £1)

66
Q

When is NAV most useful?

A

Takeovers and liquidations

67
Q

What are some limitations of investment ratios in general?

A
  1. Different accounting practices make comparisons hard
  2. Past performance != future
  3. Inflation can produce misleading high figures
68
Q

What are the key investment ratios?

A
  1. Earnings per share (EPS)
  2. Dividend yield
  3. Dividend cover
  4. Price/earnings (P/E) ratio
  5. NAV per share
69
Q

True or false: all FTSE Russell indices are market cap weighted

A

True

70
Q

How is market capitalisation calculated?

A

share price x number of shares in issue

71
Q

What is the free float of a stock?

A

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

72
Q

How does free float affect FTSE weightings?

A

Companies with free float under 75% have their weighting reduced

73
Q

What is the price index?

A

Sum of all market values/capitalisations, after free-float adjustment

74
Q

What are the main FTSE indices?

A
  1. All-Share
  2. 100
  3. 250
  4. 350
75
Q

What is included in FTSE All-Share?

A
  1. FTSE 100
  2. FTSE 250
  3. FTSE SmallCap
76
Q

How many companies are covered by FTSE All-Share?

A

Over 600

77
Q

What proportion of the London Stock Exchange is covered by FTSE All-Share?

A

About 98%

78
Q

How often is membership of FTSE 100 revised?

A

Quarterly

79
Q

What is FTSE 350?

A

All the companies in FTSE 100 + FTSE 250

80
Q

True or false: all FTSE indices are real-time

A

True

81
Q

What FTSE indices cover smaller companies?

A
  1. SmallCap (too small for 350)
  2. Fledgling (too small for All-Share)
  3. AIM index series
82
Q

What is the FTSE AIM index series?

A
  1. AIM 50
  2. AIM 100
  3. AIM All-Share
  4. AIM All-Share Supersector Indices
83
Q

Does FTSE AIM 100 cover the largest AIM companies 1-100 or 51-151?

A

1-100 (it includes AIM 50 within it)

84
Q

What are some area-specific FTSE indices?

A
  1. FTSE TMT (tech, media & telecom)
  2. FTSE techMARK All-Share (innovative tech)
  3. FTSE4Good (socially responsible companies)
85
Q

What are some FTSE non-equity indices?

A
  1. FTSE Actuaries UK Conventional Gilts All Stocks Index
  2. FTSE Sterling Corporate Bond Index
86
Q

Does the FTSE Sterling Corporate Bond Index include all sterling corporate bonds?

A

No, only investment grade

87
Q

What are some US equity indices?

A
  1. Dow Jones Industrial Average
  2. S&P Composite
  3. NASDAQ Composite
88
Q

What does the Dow Jones Industrial Average cover?

A

30 blue chip companies

89
Q

What does the S&P Composite cover?

A

500 companies, around 75% of the NY Stock Exchange

90
Q

What does the NASDAQ Composite cover?

A

Smaller, newer companies in fast-growing sectors like tech

91
Q

What are some Japanese equity indices?

A
  1. Nikkei 225
  2. Nikkei 300
  3. Tokyo Stock Exchange Index (Topix)
92
Q

What index covers the largest quoted German companies?

A

DAX 40

93
Q

What index covers the Hong Kong stock index?

A

Hang Seng Index

94
Q

What index covers the largest stocks on the Euronext Paris?

A

CAC 40

95
Q

What are some world equity indices?

A
  1. MSCI World Index
  2. FTSE All-World Index
96
Q

What does the FTSE All-World Index include?

A

Over 4,000 stocks from 49 countries

97
Q

Why does property provide long-term protection against inflation?

A

It’s an asset-backed investment

98
Q

What are some of the costs involved in buying investment property?

A
  1. Increased SDLT for 2nd properties
  2. Legal costs
  3. Estate agent fees
99
Q

What are some important considerations when choosing an investment property?

A
  1. Location
  2. Age & condition of building
100
Q

How can property investment risks be reduced?

A

Diversify across different locations

101
Q

How should property owners let?

A

Under assured shorthold leases for defined periods

102
Q

How long do assured shorthold leases typically last?

A

6-12 months

103
Q

Generally, what is the relationship between rental yields and size of property?

A

Larger property = lower yield

104
Q

By how much do expenses (management, insurance etc.) generally reduce rental yield?

A

Around 25%

105
Q

When is SDLT paid?

A

When buying or leasing land/property in England & Northern Ireland

106
Q

How is SDLT applied?

A

The part of the price within each band has its own rate

107
Q

What is the first-time buyer SDLT relief?

A

No SDLT on the first £300k and the rest at 5%

108
Q

What is the purchase price limit on first-time buyer SDLT relief?

A

£500k

109
Q

What is the 2nd home SDLT surchage?

A

3% is added to the normal rates

110
Q

What is an exception to the 2nd home SDLT surchage?

A

If you’re replacing a main residence which you’ve already sold

111
Q

What is the SDLT rate on commercial bodies buying residential dwellings?

A

15% on purchases over £500k

112
Q

What is one exception to the SDLT commercial rate?

A

Regular rates apply if dwelling is used for property rental business

113
Q

What is the non-UK resident SDLT surcharge?

A

2% is added to the normal rates on purchases over £40k

114
Q

How is SDLT applied when leasing?

A

On the NPV (net present value) of rent payable

115
Q

How is NPV calculated?

A
  1. Multiply annual rent by term of lease
  2. Apply discount to account for inflation
  3. Deduct threshold figure
116
Q

How much SDLT is charged on leases?

A
  1. Residential: 1%
  2. Commercial: 1% up to £5m, then 2%
117
Q

What is the Scottish equivalent of SDLT?

A

Land & buildings transaction tax (LBTT)

118
Q

What is the Welsh equivalent of SDLT?

A

Land transaction tax (LTT)

119
Q

What is rent-a-room relief?

A

Income tax exemption for owners letting furnished rooms in their main homes

120
Q

What is the maximum gross annual rent to qualify for rent-a-room relief?

A

£7,500

121
Q

How much is the annual tax-free property income allowance?

A

£1,000

122
Q

True or false: property income allowance can be added to rent-a-room relief

A

False, you can only benefit from one or the other

123
Q

What are the three main commercial property sectors, from lowest to highest yield?

A
  1. Retail
  2. Office buildings
  3. Industrial
124
Q

What is the relationship between residential & commercial property values?

A

Low correlation, sometimes opposite

125
Q

Is the net income for commercial property typically higher than residential?

A

Yes, as commercial leases usually make tenants responsible for maintenance & insurance

126
Q

Is commercial rental income more or less secure than residential?

A

More, as commercial rental agreements last for much longer

127
Q

What are some drawbacks of commercial property investment?

A
  1. Low liquidity
  2. Dealing costs
  3. Limited market info
  4. Lag in meeting demand can cause over-supply
128
Q

What are some drawbacks of investing in art/collectibles?

A
  1. Inconsistent demand
  2. Low liquidity
  3. High storage & dealing costs
  4. Needs specialist knowledge
129
Q

What are the two broad types of commodities?

A
  1. Hard (e.g gold, oil)
  2. Soft (e.g. sugar, livestock)
130
Q

How can ordinary investors gain exposure to commodities?

A
  1. Companies that produce them
  2. Funds that invest in them
  3. ETCs
131
Q

Name one benefit and one drawback of commodity investment

A
  1. Benefit: low correlation with other classes
  2. Drawback: volatile prices
132
Q

Name three features of cryptocurrencies

A
  1. Anonymous
  2. Not backed by govts or central banks
  3. Not regulated by FCA
133
Q

Does rent-a-room relief apply to payment for goods & services, or rent only?

A

Payment for goods & services is included in the rent taken into account

134
Q

If using rent-a-room relief, can you deduct expenses from your taxable rent?

A

No

135
Q

How do preference shares differ from corporate bonds?

A

Preference share dividends, while fixed, will only be paid if the company makes a profit

136
Q

Do stamp duty and SDRT apply to AIM stocks?

A

No

R02 Investment Principles & Risk (11 decks)

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