Equities Flashcards
What factors affect Share Prices?
- Economic and political factors
- Investor sentiment
- Factors specific to the business:
- Profit expectations
- Dividend expectations
- Takeover Activity
- Quality of management
Who is the process of ‘floating a company’ regulated by?
United Kingdom Listing Authority - part of the FCA
Who is the AIM market regulated by?
London Stock Exchange
How do you describe shares on AIM
- Quoted or traded
- NOT Listed
How are shares bought and sold
- Through stockbroker
- Direct with SB or via bank/building society
What are the costs involved in buying/selling shares?
- Commission - to stockbroker
- Stamp Duty (0.5% rounded up to nearest £5)
- Stamp Duty Reserve Tax (0.5%)
- Panel on Takeover and Mergers (PTM) Levy (£1 on trades over £10,000)
What is the offer price
The price at which stocks can be bought
What is the bid price?
The price at which stocks can be sold
Explain the spread
- Difference between offer and bid price
- Large company shares have lower spread
When is Stamp duty charged
- If share bought using stock transfer form
- Transaction over £1,000
When is stamp duty reserve tax charged?
- If shares bough electronically through CREST
- No £1,000 threshold
Explain a Preference Share
- Fixed rate of dividend half-yearly - only paid if sufficient after tax profits.
- Payment of dividends has priority over ordinary shares.
- No voting rights.
- Rank above OS in liquidation.
5 types of preference share
- Cumulative PS - if dividends not paid, shortfall carries forward
- Non- Cumulative PS - unpaid dividends are lost
- Participating PS - additional dividend as a proportion of OS dividend.
- Redeemable PS - dividends paid for a time then shares are repaid, some at a predetermined date.
- Convertible PS - right to convert to OS at pre-set dates and terms.
Explain an Ordinary Share
- Entitled to share of profits after tax and preference shares
- Entitled to attend and vote at AGMs
- On liquidation entitled to share after debts and other shareholders
3 Types of Ordinary Share
- Non-Voting OS
- Deferred OS - Dont qualify for dividend until the OS has reached predetermined level or specific period
- Alphabet Shares - different rights for each class
Risks associated with Equities
- Capital Risk
- Dividend volatility
- Currency Risk
- Liquidity risk
- Counterparty Risk
- Regulatory Risk
Types of Equity Diversification
- Across individual shares.
- Across sectors.
- Across international markets.
Explain private equity in a sentence?
- taking a stake in or acquiring companies that are not publicly traded on a stock exchange
Explain possible exit strategies of Private Equity (4)
- sell back to management.
- sell to another investor.
- sale to another company (trade sale).
- company achieving market listing.
Alternative types of Private equity investment
- Private equity Funds
- Listed Private equity investment companies (direct or fund of funds)
Earning per share (explanation and equation)
- Enables investor to see the trend in companies profitability.
- Has to be included in company accounts
- profit attributable to ordinary shares / number of ordinary shares in issue
- Profit after tax, minority interests and preference shares
Dividend Yield (explanation and equation)
- dividend as a percentage of current share price
- helps compare return on share to those on bonds/deposits
- (dividend per share / current share price) x 100
Dividend Cover (explanation and equation)
- how many times the dividend could be paid out of the available current earnings.
- Individual basis:
EPS / Dividend per share - Total profit basis:
profit attributable to ordinary shares /
dividend paid to OS
Price Earnings Ratio (explanation and equation)
- measure of how highly investors value the earnings of a company
- current market price of share / EPS
Net Asset Value (explanation and equation)
- the value of the tangible assets that are
attributable to the ordinary shareholders - Net assets attributable to OS / no. OS in issue
Limitations of Investment Ratios
- Different Accounting Policies may be used between companies and between years
- Use historical data
- Years with high inflation can produce misleading figures
Explain what Indices are
- They bring together the movements of individual share prices and show the direction in which a market has moved over a period of time.
Types of indices
- Total Return
- Capital only - reflect price changes only
Limitations of Indices
- Few large companies can have large impact due to market capitalisation approach.
- Capital only - ignores reinvested dividend income
