Chapter 7- Investing in equities, property and collective investments Flashcards
What are Equities?
-Part ownership of a company’s capital AKA shares
-Company must gain a listing on stock exchange to offer shares to the public
-investors buy shares to recieve income in form of dividends and achieve capital growth
-risky as share prices can fall and cause losses
What are the features of or Ordinary Shares?
Long-term capital pf the company
-Recieve a share in the profits that remain after tax and preference shares are paid out
-Can attend and vote at general meetings, have the right to elect directors who will control the business on a day-to-day basis ONE SHARE=ONE VOTE
-If company is in liquidation, shareholders are entitled to share residual value of company’s asset after payment of ALL debt and preference shares.
What are the type of ORD shares?
-Redeemable shares= company issues this type of share as part of a return of capital to shareholders AKA ‘B shares
-‘A’ ORD shares= profits and dividend same as ORD share BUT non-voting shares
-Deferred shares= only pay dividend after a certain period of years or once all other dividends are paid
What are PREFERENCE shares?
-Less risky than ORD shares but less profitable
-recieve fixed dividends
-Company pays PREF dividends before ORD dividends
What are the type of PREF shares?
-Non accumulative PREF shares= carry a fixed dividend but if it isn’t paid, the right is lost
-Cumulative preference shares= if company has low profit in one year, to pay the cumulative PREF share dividend, shortfall carries forward and company will pay the arrears before current years dividend and any ORD dividends
-Participating PREF shares= pay a fixed rate of dividends, allows holder to participate on company profits, is able to recieve additional dividend at a % of any ORD dividend declared
-Redeemable shares= some shares have a pre-determined date where company will pay NOMINAL VALUE
-Convertible shares= conversion rights allowing holder to convert PREF shares to ORD shares at pre-set dates
Taxation on Dividends?
Dividends are subject to INCOME TAX and gains subject to CGT
-Annual Allowance= £2,000 tax-free
-IF dividend income is the only source of income then= £14,570 tax free
tax rates for dividends
basic= 8.75%
Higher= 33.75%
Additional=39.35%
CGT on disposal= annual exempt amount- £12,300
Process of companies entering the Primary Market?
- When a company floats for the first time it will need approval from UK LIST AUTHORITY (UKLA) which is part of the FCA
-Then seek a listing on main market of London Stock Exchange
-If company is too small or new to apply for a full stock market listing= can be quoted on Alternative Investment Market (AIM)
What is the process on dealing?
Stockbroker executes trade on the investors behalf and charge commission from those trades:
- Charge flat rate or % of value of the trade
-Purchases of shares liable to (SDRT) at a rate of 0.5% on London Stock Exchange
-Panel on Takeovers and Mergers (PTM) levy of £1 on every trade over £10,000. The panel is the regulatory body that oversees all takeovers and mergers of companies listed on the London Stock Exchange
What are Stock Market Indices?
Bring together movement of prices of individual shares and which way the market is moving.
e.g. FTSE All Share Index and S&P 500 are MARKET-VALUE-WEIGHED INDICIES which are affected most by fluctuations on share-prices and profitability of huge companies.
What are the types of Stock Market Indices?
USA= Dow Jones Industrial Average (DJIA), NASDAQ Composite, S&P 500
EUROPE= FTSE 100 and FTSE All Share Index (UK), Europe
Germany=Xetra DAX Index
France= CAC40
ASIA= Nikkei 225 Japan
Hong Kong- Hang Seng Index
SINGAPORE= Straits Times Index
What are the different types of property?
Freehold= have the right to use or dispose of the property as they wish
Leasehold= tenant has the right to use the property for a specified period and subject to lease and payment of rent
Commonhold= Each unit owner owns a unit in the property. Also own a share of a Commonhold Management Association that is created at outset and manages the property and communal areas
What is Rental Yield?
Represents annual rental income a buy-to-let property has generated as a % of its current market value
If property prices rise, yield falls
if property prices fall, yield rises
-The larger the property the lower the yield
-Rental yields can very between different properties and locations
-important to factor into the calculation the cost of buying the property, high level of ongoing expenses and void periods, when there is no tenant and no rental income.
When having to buy a property- have to pay legal fees, Stamp Duty Land Tax
When having to rent a property- will incur general expenses such as cost of managing agents, maintenance and buildings insurance
Rental yield = Gross rent/
Market price
INCLUDING THE COSTS= Rental yield= rent net of expenses/
Market price+costs of buying
Features of Commercial property?
Commercial property market include 3 sectors:
-Retail shops= Lowest yield
-Office building
-Industrial properties (factories and warehouses) highest yield
-Insurance companies & pension funds own a large proportion of the Commercial Property Management Sector
-For commercial property= cost of maintenance is onto tenant
-The income is secure, review of the rent paid by the tenant every 3-5 years
-The sale and purchase of commercial property is a slow and complex process. Stamp duty land tax alone is 5% on purchases of properties valued at over £250,000.
-A few but large transactions in the commercial property market with restricted information regarding the prices and conditions involved.
-Diversify portfolio by using collective fund e.g. Real Estate Investment Trust (REITS)
What % is a sub-charge on Stamp Duty Land Tax and when must SDLT must be paid by?
There is a 3% sub-charge added to standard rates
and SDLT return must be sent to HMRC and must be paid in 14 DAYS of purchase
What are the property Investment Vehicles?
Listed property companies- investor owns shares in one of the property companies listed on London Stock Exchange
- company invest in a range of rental properties, investor will depend on quality of management and level of borrowings of the company
Insurance Company Property Funds- life assurance company offer funds that specialise in direct holdings of commercial and residential properties.
-These are available through regular and single premium assurance policies
-CANNOT use borrowings to enhance returns
Property Unit Trusts and OEICs- fund that invests in a range of residential and commercial properties which is managed by a professional fund manager
-many property funds have a clause which allows to defer the repayment of units in event of downturn (deferral period 6 months)
What is a Real Estate Investment Trust (REIT)?
Provided another investment vehicle for property
-investment company that invests in and owns assets in relation to real estate
-rather than buying you purchase via shares
REIT can raise money by selling shares in the stock market and use this go purchase a range of real estate assets/securities, company can also borrow to enhance performance (gearing)
Benefits of REIT?
Lower investment requirements
Diversification
Low maintenance and administration
Liquidity and ease of access
What is the structure of REIT?
Broken down into two structures
Ring-fenced property investment:
-Corp tax EXEMPT if 90% of profits go to investors
-there is income tax liability as it is taxed as savings income net of 20%
Higher rate is 20%
Additional rate is 25%
Property management- all profits and gains subject to Corp tax and CGT
What are Equity release products?
Lifetime mortgage-
-taking mortgage out in the property which helps the equity in the property to be released as a lump sum or series of income up to 60% can be borrowed)
-mortgage repayments aren’t made until individual DIES OR ENTERS CARE
Home reversion plan-
Individual sells all or part of their property to a home reversion plan provider in return for lump sum or income
What are the benefit and uses of Collective investments?
-effect way to invest small sums of money
-offers access to professional investment management
-diversification
-lower cost in pooling resources in different range of investments
What are the main types of collective investments?
Open ended funds= number of units issued can EXPAND depending on supply and demand of units
Closed ended funds= number of shares issued is FIXED and trade in the stock exchange
What are the two types of investment styles?
Active management-
an attempt to influence investment returns and outperform a certain index. Taking advantage of market opportunities comes at a HIGHER cost
Passive management-
Aim to deliver performance in line with an index or benchmark LOWER COST
What are the ESG investment strategies?
Negative screening= excluding investments
Positive screening= choosing best in class for ESG impact
General Impact= linking to investment theme
What is the role of unit trust manager and trustee?
Unit manager
- has to be FCA authorised
-decide which investments are included to meet investment objectives
-net asset value of investments is established
-manager provides market for the units
Trustee-
Companies are subjective to special regulation and are authorised by FCA
-protect interest of investors, monitoring actions of manager
-legal owner of assets in the trust
When an investor sells their units, manager cancels units and pays the proceeds
What is the role of Authorised Corporate Director in OEICs?
ACD is a company and requires authorisation from the FCA
Responsible in managing the funds
Can undertake activities themselves or delegate to 3rd PARTY
What is the role of Depository in OEICS?
Specialised company authorised by FCA holding OEICS investments and looking after them on shareholders behalf
Overseeing activities of ACD
What is the valuing investment portfolio?
Taking account of cash and expenses to establish funds NET ASSET VALUE
Nav/
Number of shares issued
What are the two features of pricing?
Dual pricing
-Bid price which is the lower of two prices, the price investor receives if they sell the unit
-offer price is the higher price which investor pays to buy unit from manager which includes INITIAL CHARGE
*common in Unit Trusts
Single pricing
Fund manager quotes single price
-If you wish to buy shares= pay the price AND initial charge
-if you want to sell= exit charges can apply
* common method used by OEICS
What are the different type of charges applied on UNIT TRUST and OEICS?
An initial charge when investing in a fund
Annual management charge= covers cost of management and administration of fund, a % charge in the value of asset
Ongoing charges figure= funds have to publish an OCF to provide investors a clear view on the total costs involved
Exit charge = some apply an exit charge when investor sells units and shares in the fund
Taxation on Unit Trusts and OEICS
-Income payments from unit trust and OEICS are known as distributions which is LIABLE to tax as savings income AND dividends
-funds that have more than 60% of assets invested in BONDS make INTEREST DISTRIBUTIONS which is liable to tax as bank interest
-authorised Unit Trust and OEICS pay no CGT on gains made WITHIN fund BUT investor is liable to CGT when SELLING units and shares
Tax treatment of Corp bonds vs Corp Bond Unit Trusts & OEICS
Corp bonds:
-Income tax is at investors savings rate of 0%, 20%, 40% or 45%
-Qualifying bonds EXEMPT from CGT
Corp bonds Unit Trusts & OEICS:
-Tax payable at investors savings rate , some providers pay income net of 20% income tax
-Subject to CGT on encashment
Difference between Investment Trust and other Funds?
-fixed capital base, only way to increase capital base is by issuing new shares
-can borrow funds long-term or issuing bonds for gearing
-the price investor pays or receive depend on demand and supply of shares= can be bought at premium or discount to its NAV
What is the document required by collective investments?
Have to keep up to date a PROSPECTUS (detailed +100 page document) which provides info to investors and advisers before investing in fund
What are Key Information Documents (KIDS)?
simple summary of key info on products and investments
What is a Key Investor Info document (KIID) and the publishing of reports?
Became an EU requirement in 2002 for funds to produce (KIID), must be clearly identifiable and follow a clear format
KIID= covers objectives and investment policy of the fund, risk and reward profile and charges
-must receive KIID In good time before investing in fund
-investors can receive annual reports on funds and its performance
-must prepare short report and long report, half yearly and annually
-must send short report to all shareholders and long report available upon request
-Authorised fund managers MUST publish ANNUAL REPORT and accounts WITHIN 4 MONTHS after the end of each annual accounting period
-HALF YEARLY reports should be published WITHIN 2 MONTHS after the interim accounting date
