Chapter 10: Equity and property markets Flashcards
Ordinary Share
share in the ownership of a company
Investment and risk characteristics of equities
- Security depends on profitability of the company
- Provide a long-term real yield as companies grow in
line with inflation, dividends tend to grow in line with
GDP - Higher expected returns than government bonds
over the long term - Income and capital values can be volatile
- Equities can generally be held in perpetuity
- Dealing expenses are linked to marketability
- Marketability depends on the size of the company
Quoted shares
Listed on a stock exchange and make up the majority of available equity investment.
Investment characteristics of quoted shares
- more marketable
- more secure
- easier to value than non-quoted shares.
Why are shares grouped by industry sectors
- practical for analysts to specialise in one area
- share prices of companies in the same sector tend to be correlated
It is practical for analysts to specialise in one area of industry because
- Factors affecting one company within an industry are likely to be relevant to other companies in the same industry
- Information for companies in the same industry will come from a common source and be presented similarly.
- No one analyst can expect to be an expert in all areas, so specialisation is appropriate.
- The grouping of equities according to some common factor gives structure to the decision-making process. Assists in portfolio classification & management
Shares of companies in the same sector are correlated because… (3)
- Use the same resources, have similar input costs
- supply to the same market, similarly affected by demand
- Similar financial structures, ie influenced by changes in interest rates.
Preference share
A particular class of share that generally ranks ahead of ordinary shares. Normally entitled to a specified rate of dividend, and, unlike ordinary shareholders, not to residual profits.
Typical features of preference shares
- dividend on a preference share is usually a fixed percentage of the par value and is always paid before any distribution to ordinary shareholders.
- dividend on preference shares is normally treated in the same way as ordinary shares for tax purposes
- Dividend rate is quoted net of tax
- Dividends don’t have to be paid if profits are insufficient
- Generally cumulative
- Mostly no final redemption date
- Normally don’t carry voting rights
Cumulative property of preference shares
If a dividend is unpaid, the arrears must be paid off before any payment is made to ordinary shareholders
Payout Ratio
Dividends per share/Earnings per share
Reasons for buying back shares
- Excess cash that cannot be used profitably and is
returned to shareholders - Excess cash may only earn deposit rate of interest,
thus improves earning per share for remaining shares - May be more tax-efficient than dividends
- Company may wish to change capital structure from
equity financing to debt financing
SYSTEM T
Security Yield Spread Term Expenses and Exchange rate Marketability
Tax
Property
A legal title to the use of land and buildings.
Direct property investment
Involves the purchase and management of tangible assets.
- Are large and indivisible.