5016 - Investment and Financial Analysis - Personal Investment - Physical & Financial Investments p344 - 389 Flashcards
5 Personal Finance Decisions
- Financing / Debt
- Pension Planning
- House Purchase
- Protection Via Insurance
- Investment Decisions
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
Hierarchy of Financial Needs
Top to bottom:
- Growth Opportunities
- Things you can control
- Things you cannot control
- Will/Power of attorney
- Financial Plan
Two types of investment
Physical / Real assets
Financial Assets
Physical or Real Assets
Consists of physical objects such as property or items
Financial Assets
Contracts that give the owner certain rights e.g. shares
Examples of Physical or Real Assets
- Art
- Cars
- Collectables
- Gold
- Property
Property Investments
Can be done:
Indirectly - via shares, unit trust, investment trust
Directly - Buying and selling, renting
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
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
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
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
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
Savings are generally
- Short term / Liquid
- Low risk
- Low return
Investments are generally
- Long term - Less liquid
- Low to high risk
- Potentially high return
- Potential to loose everything
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?
2%
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
