5016 - Investment and Financial Analysis - Personal Investment - Physical & Financial Investments p344

5 Personal Finance Decisions

Financing / Debt
Pension Planning
House Purchase
Protection Via Insurance
Investment Decisions

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Events to plan for and factors to consider with Personal Finance

Present position - Income vs Expenditure
Illness/Death - is there sufficient cover
Retirement - sufficient pension/savings
Death - Wills & Inheritance & IHT
Other - School fees, wedding etc

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Hierarchy of Financial Needs

Top to bottom:

Growth Opportunities
Things you can control
Things you cannot control
Will/Power of attorney
Financial Plan

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Two types of investment

Physical / Real assets

Financial Assets

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Physical or Real Assets

Consists of physical objects such as property or items

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Financial Assets

Contracts that give the owner certain rights e.g. shares

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Examples of Physical or Real Assets

Art
Cars
Collectables
Gold
Property

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Property Investments

Can be done:

Indirectly - via shares, unit trust, investment trust

Directly - Buying and selling, renting

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Advantages of Buying and Selling Property

House prices have risen drastically (wealthy hedge funds buying houses and bumping up the price)
Tangible Benefit (you can live in it)
Tax efficient if not subject to capital gains
Active Market
Always going to be demand for houses

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Disadvantages of Buying and Selling Property

Can decrease in price
Capital gains if more than one home
Large investment needed, or high interest rates if mortgaging
Market may be depressed (Not ass depressed as people currently trying to get on the ladder tho :P)
Costs - Estate Agents, Legal, Stamp Duty, Moving, Maintenance and Insurance

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Advantages of Renting out a property

You own the property and benefit from increase in value
Tenants are effectively paying for the landlord to buy the house
Rental Income

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Disadvantages of Renting out a property

Can go down in price
Capital Gains Tax
Large Capital Investment / Interest Costs, borderline impossible
Difficult to sell with tenants
Costs - Estate Agents, Legal, Stamp Duty, Moving, Maintenance and Insurance
May not be able to find tenants

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Types of Financial Investment

Bank/Building Society accounts
Bonds
Commodities
Trusts (Tory thing)
Currency (personally F Fiat Currency Crypto all the way)
Derivatives
Gold
ISAs
Ordinary Shares
Penny Shares
Premium Bonds

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Savings are generally

Short term / Liquid
Low risk
Low return

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Investments are generally

Long term - Less liquid
Low to high risk
Potentially high return
Potential to loose everything

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Difference between Savings and Interest

Liquidity:
Savings are Liquid investments are less liquid

Risk:
Savings are low risk, investments are low to high

Return:
Savings offer low returns investments have the potential for high returns

3 Factors to Consider in investing and saving

Risk
Return
Liquidity

Investment Trade offs: Risk v Return

Low risk = Low return
Low risk investments offer low returns generally because they offer security
High risk investments entice with potentially high returns

Investment Trade Offs: Liquidity v Return v Risk

Long Term = High Return

- Need to compensate investors for forgoing their use of the funds and bearing the risk

Factors Influencing Investment Decisions

Availability of funds
Amount Required
Cashflow projections
Investment Opportunities
Existing Investments
Strategic issues
Personal Interest & Ethics
Transaction costs & insurance/maintenance
Market Expectations and influences

Factors Influencing Investment Decisions: Investment Opportunities

Physical - do you have the opportunity to invest in projects with a positive NPV

Factors Influencing Investment Decisions: Existing Investments

More of the same or diversify to reduce your risk

Factors Influencing Investment Decisions: Strategic Issues

Companies may buy controlling interest or merge/takeover a company for manufacturing benefits, economies of scale
Companies & individuals may look for liquidity and or growth, low/high risk and or return

Factors Influencing Investment Decisions: Personal Interest & Ethics

Your ethics may prevent you investing in certain ways e.g. Lush are not going to be investing in oil
Islamic banking prevents interest being charged or payed
May have a personal interest

Factors Influencing Investment Decisions: Transaction Costs & Insurance / Maintenance Costs

High transaction costs need to be considered as they need to be recovered in order to profit

Factors Influencing Investment Decisions: Market Expectations and Influences on Price Changes

- Inflation - Interest Rates - Exchange Rates - Oil Prices

What is the UK Government Target for interest?

List of Investment evaluation techniques that can be used to evaluate a share

- EPS - Earnings per share - Earnings Yield - DPS - Dividends per share - Dividend Yield - Dividend Pay out Ratio - Dividend Cover - PE Ratio - Beta - Standard Deviation

Earnings Per Share (EPS) Summary

Shows the amount of earnings per share (Shock) Calculated by taking earnings and dividing by the number of shares e.g. 100,000 in earnings divided by 50,000 shares = EPS of £2

Earnings Yield Summary

Shows the % return on the shares Calculated by taking EPS / Share Value x 100 expressed as a % e.g. EPS Earnings per share of 2, divided by the price of the share say £20, gives you and earnings Yield of 2%

Dividend Per Share (DPS) Summary

Shows the dividend per share Calculated by taking Total Ordinary Share Dividends / Number of ordinary shares e.g. 100,000 in dividends divided by 1,000,000 shares = 0.10p per share

Dividend Yield Summary

The Dividend Return as a % of the share price Calculated by taking the DPS and dividing it by the share price, x 100 expressed as a percentage e. g. 0. 10 dividend divided by 3.50 share price x 100 = 2.86% return

Dividend Cover Summary

Represents the number of times the dividend could be paid out of current profits Calculated by taking the EPS and dividing it by the DPS e.g. £3 earnings per share £1.50 Dividend = 2

What does Dividend Cover Show

- It helps assess the ability to maintain dividends in the future - Helps examine the dividend policy in regards to how much of profits are retained or invested

Dividend Pay-out Ratio Summary

Calculates the % of earnings attributable to shareholders, distributed as dividends Calculated by taking the Ordinary Share Dividend divided by Earnings of shareholders x 100, expressed as a percentage e.g. 300,000 given in dividends divided by 1,000,000 in earnings on those shares x 100 = 30%

Price Earnings Ratio (PE Ratio) Summary

Most important ratio in calculating the value of a share, shows how many years of earnings it would take to pay for the share at the current market value Calculated by taking the market price per share and dividing it by the EPS e.g. Market Value of the share is 3.50, the earnings on that share is 0.33p = 10.6

Factors to Evaluate Assets and Investments agains

- Risk - Expected Future Volatility - Regulation protecting your investment - Liquidity / Flexibility - Return - Potential for Growth - Buying and Selling Costs - Protection and Maintenance Costs - Tax implications - Ethics - Size - Divisibility

5016 - Investment and Financial Analysis - Personal Investment - Physical & Financial Investments p344 - 389 Flashcards