Equities

Question 1

What factors affect Share Prices?

Answer 1

1. Economic and political factors
2. Investor sentiment
3. Factors specific to the business:
   
   • Profit expectations
   • Dividend expectations
   • Takeover Activity
   • Quality of management

Question 2

Who is the process of ‘floating a company regulated by?

Answer 2

United Kingdom Listing Authority - part of the FCA

Question 3

Who is the AIM market regulated by?

Answer 3

London Stock Exchange

Question 4

How do you describe shares on AIM

Answer 4

1. Quoted or traded
2. NOT Listed

Question 5

How are shares bought and sold

Answer 5

1. Through stockbroker
2. Direct with SB or via bank/building society

Question 6

What are the costs involved in buying/selling shares?

Answer 6

1. Commission - to stockbroker
2. Stamp Duty (0.5% rounded up to nearest £5)
3. Stamp Duty Reserve Tax (0.5%)
4. Panel on Takeover and Mergers (PTM) Levy (£1 on trades over £10,000)

Question 7

What is the offer price

Answer 7

The price at which stocks can be bought

Question 8

What is the bid price?

Answer 8

The price at which stocks can be sold

Question 9

Explain the spread

Answer 9

1. Difference between offer and bid price
2. Large company shares have lower spread

Question 10

When is Stamp duty charged

Answer 10

1. If share bought using stock transfer form
2. Transaction over £1,000

Question 11

When is stamp duty reserve tax charged?

Answer 11

1. If shares bough electronically through CREST
2. No £1,000 threshold

Question 12

Explain a Preference Share

Answer 12

1. Fixed rate of dividend half-yearly - only paid if sufficient after tax profits.
2. Payment of dividends has priority over ordinary shares.
3. No voting rights.
4. Rank above OS in liquidation.

Question 13

5 types of preference share

Answer 13

1. Cumulative PS - if dividends not paid, shortfall carries forward
2. Non- Cumulative PS - unpaid dividends are lost
3. Participating PS - additional dividend as a proportion of OS dividend.
4. Redeemable PS - dividends paid for a time then shares are repaid, some at a predetermined date.
5. Convertible PS - right to convert to OS at pre-set dates and terms.

Question 14

Explain an Ordinary Share

Answer 14

1. Entitled to share of profits after tax and preference shares
2. Entitled to attend and vote at AGMs
3. On liquidation entitled to share after debts and other shareholders

Question 15

3 Types of Ordinary Share

Answer 15

1. Non-Voting OS
2. Deferred OS - Dont qualify for dividend until the OS has reached predetermined level or specific period
3. Alphabet Shares - different rights for each class

Question 16

Risks associated with Equities

Answer 16

1. Equity Capital Risk
2. Share dividend volatility
3. Currency Risk
4. Liquidity risk
5. Counterparty Risk
6. Regulatory Risk

Question 17

Types of Equity Diversification

Answer 17

1. Across individual shares.
2. Across sectors.
3. Across international markets.

Question 18

Explain private equity in a sentence?

Answer 18

1. taking a stake in or acquiring companies that are not publicly traded on a stock exchange

Question 19

Explain possible exit strategies of Private Equity (4)

Answer 19

1. sell back to management.
2. sell to another investor.
3. sale to another company (trade sale).
4. company achieving market listing.

Question 20

Alternative types of Private equity investment

Answer 20

1. Private equity Funds
2. Listed Private equity investment companies (direct or fund of funds)

Question 21

Earning per share (explanation and equation)

Answer 21

1. Enables investor to see the trend in companies profitability.
2. Has to be included in company accounts
3. profit attributable to ordinary shares / number of ordinary shares in issue
4. Profit after tax, minority interests and preference shares

Question 22

Dividend Yield (explanation and equation)

Answer 22

1. dividend as a percentage of current share price
2. helps compare return on share to those on bonds/deposits
3. (dividend per share / current share price) x 100

Question 23

Dividend Cover (explanation and equation)

Answer 23

1. how many times the dividend could be paid out of the available current earnings.
2. Individual basis:
   EPS / Dividend per share
3. Total profit basis:
   profit attributable to ordinary shares /
   dividend paid to OS

Question 24

Price Earnings Ratio (explanation and equation)

Answer 24

1. measure of how highly investors value the earnings of a company
2. current market price of share / EPS

Question 25

Net Asset Value (explanation and equation)

Answer 25

1. the value of the tangible assets that are
   attributable to the ordinary shareholders
2. Net assets attributable to OS / no. OS in issue

Question 26

Limitations of Investment Ratios

Answer 26

1. Different Accounting Policies may be used between companies and between years
2. Use historical data
3. Years with high inflation can produce misleading figures

Question 27

Explain what Indices are

Answer 27

1. They bring together the movements of individual share prices and show the
   direction in which a market has moved over a period of time.

Question 28

Types of indices

Answer 28

1. Total Return
2. Capital only - reflect price changes only

Question 29

Limitations of Indices

Answer 29

1. Few large companies can have large impact due to market capitalisation approach.
2. Capital only - ignores reinvested dividend income