Chapter 10 - Equity and Property Markets Flashcards

1
Q

Equity SYSTEM T

A

S - security
- depends on issuing company , in particular
- stability of company profits and ratio of earnings to dividends
Y - Yield
- long term real yield
- higher expected return vs bonds and money market , lower vs property
S - Spread
- both equity prices and dividends are volatile
T - Term
- can usually be held in perpetuity
E - Expenses & Exchange Rate risk
- cost of dealing in equities linked to marketability of equity itself
- generally higher vs bonds
- currency risk exists if equities in foreign companies purchased as mismatching liabilities can occur
M - Marketability
- varies greatly between companies
- in general , more marketability for a large company
- depends also if company is listed or not
T - Tax
- Income and capital gains from quoted (and unquoted) shares may be taxed differently
- different investors will often pay differing tax rates upon these

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2
Q

Equity Categorisation by 3 main features:

  1. Industrial Sector
  2. Expected Profits Growth
  3. Size of company
A

Categorisation by industry due to :
- practicality
- correlation of investment performance

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3
Q

Why specialise in a specific investment sector ?

A
  • factors affecting one company within an industry are likely to be relevant to other companies in the same industry.
  • Info for companies within a sector usually come from common source and presented in similar manner
  • No single analyst can expect to be an expert in all areas, so specialisation is appropriate.
  • The grouping of equities according to a common factor gives structure to the decision-making process.
  • It assists in portfolio classification and management
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4
Q

Why divide equities by industry ?

A
  • share price movements of companies within industrial groupings tend to correlate more closely with each other than with companies in other industries.
  • The share price movements reflect the changes that have occurred in the operating environment. These changes affect companies in individual industries in similar ways.
  • For this reason, listings of share prices are often sub-divided by business sector, and major markets have separate indices for the different sectors
  • similar input resources so similar input costs
  • similar markets supplied to so similarly affected by changes in demand
  • similar financial structures so similarly affected by interest rate changes
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5
Q

What defines prime property ?

A
  • Location
  • Age and condition
  • tenant quality
  • lease structure
  • size
  • number of comparable properties available to compare rent at rent review and for valuation purposes
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6
Q

Property SYSTEM T

A

S - security
- risky
- very much depends on tenant quality
- risk of voids ( periods with no tenant )
- obselescence
- government intervention through rent and planning controls
Y - yield (nomina/real vs expected )
- long term real yield
- hedge against inflation
- expected return higher than all other asset classes due to high risk
S - spread
- can be volatile over the long term
- stable over short term due to infrequent valuations and stable valuation methods
T - Term
- long term
E - expenses
- high dealing and handling expenses
M - marketability
- unmarketable due to :
- indivisible unit size
- valuations
- uniqueness

T - Tax

Investor has ability to change investment characteristics

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7
Q

Indirect Property Investment

A

Property disadvantages include:
- Size , too big for most investors to afford
- Valuation, values never known till sale and estimating values/obtaining these estimates can be expensive
- Lack of Marketability
- Expenses , high dealing and management costs
- Diversification , hard to achieve diversified portfolio without many properties
- Expertise Needed , often lacking and lack of knowledge compared to investment specialist

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8
Q

How to invest in property indirectly ?

A
  • Pooled property funds
  • investment in property companies such as property developers
  • Listed JSE REITS (Real Estate Investment Trusts) which are companies that manage, operate and own a real estate portfolio consisting of income-producing property
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