7) Other Direct Investments Flashcards
Equities 📃
Known as ordinary shares are the most important type of security issued by UK companies.
Can be bought by private investors, but most transactions in equities are made by institutions and by Life and pension funds.
Share holders are in effect owners of the company and have a right to:
- Receive a share of the distributed profits of the company as income (dividends) 💰
- Participate in decisions about how the company is run by voting 🗳 at shareholder meetings.
Article of Association
What rights are attached to particular shares.
Public document found at companies registered office or Companies House.
Factors affecting share price 📉
Company profitability 📈
Strengh of the market sector
Strength of UK and global economy 🌎
Supply of and demand for shares and other investments.
How are shares bought and sold?
The London Stock Exchange (LSE) has been the UK’s market for stocks and shares for 💯’s of years. Traded on this market are; shares issued by UK and overseas companies, gilts, corporate bonds and options.
Like most stock markets is a primary and secondary market.
- Main Market
- must confirm to the stringent requirements of Listings Rules outlined by FCA, acting in it’s capacity as the UK Listing Authority (UKLA)
- considerable amount of financial and other information must be disclosed.
- trading for atleast 3 years with atleast 25% of it’s issued share capital in the hands of the public.
- Alternative Investment Market (AIM)
- intended for new, small companies with growth potential.
- access to finance and wider public audience
- rules for joining are fewer and less rigorous
FTSE (Financial Times Stock Exchange)
Measures overall performance of shares.
FTSE 100 Index - top 100 companies
FTSE 250 Index - next 250 companies by market capitalisation.
FTSE 350 Index - 100 and 250 combined
FTSE All share Index - of around 600 shares
Market Capitalisation
The market value of a company:
No of shares in issue 📃 x the share price 📈
Assessing Performance of Shares
Earnings per Share (EPS) = Post tax net profit ÷ no of shares
Dividend cover - factor indicates how much of a companies profits will be paid out as dividends. If 50% of profits are paid in dividends the dividend is said to be covered twice. Profit is 2 times the pay out. Cover of 2.0 or more is considered acceptable by investors.
Price/ Earnings Ratio = share price ÷ earnings per share
Other ways of investing in companies
Rights Issues - when a company has already issued shares and issues more, they must first be offered to the existing shareholders - rights issue offering. Shareholders who do not wish to take up this right, can sell the right, in which case the sale proceeds compensate for any fall in value of the existing shares, due to the dilution of their holdings.
Scrip Issues - issue of additional shares FOC to existing shareholders. No additional capital is raised. Effect is to ⏫️ no of shares and ⏬️ share price proportionately.
Preference Shares - as with ordinary shares, shareholders are entitled to dividends payable from company profits. Different as generally paid at a fixed rate and eligible for any dividend payout ahead of ordinary shareholders. Many are cumulative preference Shares - if dividends are not paid, entitlement to dividends is accumulated until a time they can be paid. Do not normally carry voting rights, although some may aquire voting rights if their dividends are delayed.
+ Higher priority to be paid back if company is wound up. Ordinary shares are lowest priority.
Convertible Preference Shares - carry the right to be converted to ordinary shares.
Warrents - give the right to holder to buy shares at a fixed price at an agreed date.
Residential Property 🏠
+ Very acceptable form of security.
+ UK property market is highly developed and operates efficiently and professionally.
- Location is paramount
- Property market is affected by overall economic conditions - in times of recession letting may be difficult and property prices may fall.
- Less liquid form of investment than others.
Income less allowable expenses is subject to income tax. CGT may be liable, capital expenditure can be offset against taxable gains.
Buy to Let (BTL) 🏘
+ Regular and increasing income - inflation
+ Easy access to BTL mortgages
+ Well developed market
+ Easy access to ancillary services, letting and property agents
- Investment costs are high and additional costs arranging mortgage, legal fees and SDLT
- Illiquid
- Void periods when untenanted
- Risk of tenants damaging the property
- Legal fees to remove bad tenants
- Ongoing management and maintenance.
Furniture replacement relief
Surcharge on SDLT on second property
Commercial Property 🏢
Individual retail units
Shopping arcades/ Centres
Offices
Hotels and Leisure
Mixed use property
+ Regular rent reviews, every 5 years
+ Longer leases than residential property
+ More stable and longer term tenants
+ Typically lower refurbishment costs
- Spreading the risk is harder
- Does not generally have the spectacular growth that can sometimes be achieved with residential
- If funded by borrowing, interest rates may be ⏫️
Lenders often will do detailed investigations
Quality of land
Reputation of builders/ architects
Suitability of tenants
Money-Market Instruments
Forms of short-term debt.
- Treasury bills (T bills) - short-term redeemable securities issued by Debt Management Office (DMO) of the Treasury. Like gilts are fundraising instruments used by UK government.
- are short-term normally 91 days
- are zero coupon securities, no interest
- low risk securities.
- Certificate of deposits (CDs) - issued by banks and building societies - receipts to confirm deposit for a specified period at a fixed rate of interest. Interest paid with the capital at the end of the term. Typically 3 or 6 months but can obtain CDs that can be rolled over.
Are bearer securities - owned by whoever physically possesses the document.
- Commercial Paper - when businesses need to borrow for working capital purposes. Transactions are for very large amounts, most purchasers being institutions such as pension funds and insurance companies. Cheaper borrowing options for companies with good credit ratings. Unsecured. Short-term usually 30 days.
Working capital = current assets - current liabilities.
