2 - Equties, property and alternative investments Flashcards
What is an Equity
A share of company
What affects share prices long term
Fundamental economic and political factors
What affects share prices short term
Investor sentiment
What are some other factors affecting share prices
(6)
- External economic and political factors
- Investor sentiment
- Profit expectations
- Dividend expectation
- Takeover activity
- Quality and track record of management
Where are shares dealt with in the UK
London stock exchange
What must happen when shares are first issued to LSE
They must be admitted to the official list or main market or AIM
What is official list or main market
Who are they regulated by
Companies listed on LSE make up main market
Regulated by UKLA (United Kingdom Listing authority) (part of FCA)
What do the UKLA aim to do
Govern ongoing behaviour of listing companies and way in which they report to shareholders
What is AIM
LSE launched AIM to provide primary and secondary market facilities for companies too small or too new to apply to LSE (interim to ful listing)
Shares are not classified as listed (too small company)
Costs of buying and selling shares
4
Commission
Stamp duty
Stamp duty reserve tax
Panel on takeovers and mergers levy
What is commission generally for stockbrokers
tiered
When is stamp duty paid on shares
If shares transaction is > £1000
When is SDRT paid
Is there a limit?
shares bought electronically through certificateless for electronic share transfer (CREST) system
£1000 limit does not apply
What is the rate of tax for stamp duty and SDRT
0.5%
Who is stamp duty and SDRT paid by
How is it rounded
How is SDRT rounded
Paid by purchaser
Stamp duty rounded to next multiple of £5
SDRT rounded to nearest penny
What is the PTM levy
Flat rate charge of £1 applied to trade over £10,000
What is the PTM
Regulatory body that oversees all takeovers and mergers of companies listed on LSE
What are the two main classes of share capital
Ordinary shares
Preference shares
What are the features of preference shares
How is it paid? What is the priority over ordinary shares
Pay a fixed rate of dividend half yearly
Divendend is only paid if there are sufficient after tax profit
Payment of dividend on shares has priority over payments on ordinary shares
Do preference shares have voting rights?
No unless payment of dividends has fallen into arrereas
What are some types of preference shares
Cumulative preference shares
Non cumulative preference shares
Participating preference shares
Redeemable preference shares
Convertible preference shares
What is a cumulative preference share
If company has insufficient profits in one year to pay dividends, it carries forward. These shares have priority over all other shares
Non-cumulative preference shares
Lose the right to receive any unpaid divedend at financial year
Participating preference shares
Pay a fixed rate of divedend and allow holder to participate in profits of company
Redeemable preference shares
Represent a temporary source of finance for the company
Dividend will paid to shareholder for short period and share will then be repaid
Convertible preference shares
Carry right to be converted into ordinary shares at pre-set dates or times
Ordinary shares
Bulk share of capital and confer an ownership of stake in it
Where will additional classes of shares be written
Articles of Association
What are types of ordinary share
3
Non-voting ordinary shares
Deferred ordinary shares
Alphabet shares
What are the risks of shares
7
Equity Capital risk
Share divdend volatility
Currency risk
Liquidity risk
Counterparty risk
Fund managers and insurance companies
Regulatory risk
What does private equity do
Involves providing medium-long term finance in return for an equity stake in potentially high growth unequoted companies
Definition of private equity
Private equity is regarded as an asset class in its own right and involves either taking a stake in or acquiring companies that are not publicly traded on a stock exchange.
How do private equity firms work
selling its shares back to the management;
selling the shares to another investor, such as another private equity firm;
a trade sale, which is the sale of company shares to another company; or
the company achieving a stock market listing.
How can u invest in private equity
Private equity funds
Listed private equity investment companies
What are Private equity funds
Seek to raise money for investment
Look to retain investment between 3-7 years, many are structured for 10 years
Funds invest money and aim to return investors original money + Interest
What are listed private equity investment companies
Two types:
Those who directly invest in unlisted companies
Those who invest in funds that invest in unlisted companies
Earnings per share
Profit attributable to ordinarly shareholders/ number of ordinary shares in issue
Dividend yield
(Dividend per share / Current share price) * 100
Dividend per share
(Dividend/ Number of ordinary share in issue) * 100
Dividend cover (Individual basis)
Earnings per share/ Dividend per share
Dividend yield (Total profit Basis)
Formulae
(Profit attributable to ordinary shareholders / Dividend paid to ordinary shareholders)
Price Earnings ratio
Definition
Relationship between share price and EPS, measure of how investors value earnings of company
PE ratio formulae
Current market price of share / Earnings per share
Dividend cover
Definition
How many times dividend could be paid out of available current earnings
Dividend yield
Definition
Measures the dividend as a percentage return on current share price
Net asset value
Definition
Value of the tangible assets that are attributable to ordinary shareholders
Shareholders funds or shareholder interest in company - capital provided by shareholders + profit company has retained instead of paying dividends
Net Asset value formulae
Net assets attributable to ordinary shareholders/ Number of ordinary shares in issue
What is the nominal value of preference shares
£1
When is NAV less useful
For companies valued on earnings potential, where shares are traded above NAV
When is NAV useful
if takeover bid is made - shareholders can compare bid price to realistic NAV
Limitiations of investment ratios
Different calculations
Trends over years (inflation misleading figures)
Misleading trends if management changes
FTSE Russell
Owned by LSEG - providing wide range of stock market indicices.
How many countries does FTSE russell cover
80
What is the free-float adjustment used for
To help with situations where only a limited quantity of stock is available for public trading because directors own large percentage of share
What are the main FTSE indicices
FTSE ALL-share index - covers ftse 100, 250 and ftse small cap - 98% of LSEG
FTSE 100 - top 100 companies in UK, membership in march, june, september, december
FTSE 250 - next 250 largest companies- 15% of market cap
FTSE 350 - combination of ftse 100, 250. 96% of uk market
FTSE Small Cap
Comapnies in FTSE all-share that are too small to qualify for top 350
FTSE fledgling
Companies listed on LSEG which are eligible for FTSE uk series but too small for ftse all share
FTSE Aim index series
For young and growing companies
What is the eligibility requirement for indicides
Every stock has to be liquid and readily tradeable
Overseas indices
US - Dow Jones, snp 500, NasDAQ
Japan - Nikkei 225
Tokyo stock exchange index
German - DAX 40
HK - Hang seng index
World MSCI World index
FTSE ALL-world index
Limitation of indices
If index only reflects changes in capital values it ignores reinvested dividend income (long term performance)
FTSE All-share index include a total return index which is based on net reinvested income
What is stamp duty land tax on second properties
An additional 3% on top of SDLT
Rental yields
Gross rent/market price
General management expenses
((Gross rent - expenses)/market price + cost of buying))
What are the buyer or tenant responsible for in terms of SDLT
Completing forms
Submitting to HMRC
Paying tax within 14 days of transaction
What is the threshold for 0 SDLT
£250,000
At what price of home is 5% SDLT paid
£250,001 - £925,000
At what price of home is 10% SDLT paid
£925,001 - £1,500,000
At what price of home is 12% SDLT paid
> £1,500,000
What is the threshold for first time buyers on SDLT
£425,000
When is there no relief for SDLT first time buyers
> £625,000
What happens if a company or collective investment scheme purchase residential dwellings
SDLT CHARGED AT 15% (UNLESS FOR RENT, WHERE IT IS CHARGED AT CURRENT RATE AND BANDS)
How much is the supplement where a property is bought by a non-uk resident
2%
Commercial property SDLT rate
<£150,000 - 0
£150,001 - £250,000 - 2
<£250,000 - 5
How is SDLT charged under lease rent
On net present value of rent payable under lease
Multiply annual rent by term of lease
Apply discount (inflation)
Deducting threshold figure
Scotland - land and building transaction tax
<£145,000 - 0
£145,001 - £250,000 - 2
£250,001 - £325,000 - 5
£325,001 - £750,000 - 10
£750,000 + - 12
What is the rate of LBTT for second properties
An additional 6%
First time buyers scotland threshold LBTT
£175,000
Wales threshold for LTT (land transaction tax)
Up to £225,000 - 0
Qualyfing rules for exemption from income tax (rent a room relief)
Gross rent <£7,500
Individual occupies same time as tenant
Only one exempt amount per residence
If rent <7,5000 any excess u can either pay tax or be taxed on gross rent with no rent a room relief
What is the property income allowance
Up to £1,000 - property income is exempt from tax
When does property income allowance not take place
Rent a room relief is givem or where allowable expenses are deducted
