Equities Flashcards
What five types of ‘Preference Shares’ are there?
- Cumulative - If a dividend is missed, it is carried forward.
- Non-Cumulative - If a dividend is missed, it is lost.
- Participating - as well as the fixed rate of return, in good years a share of the company’s wider profits may be due.
- Redeemable - The firm may buy back the shares at a pre-set date or when it chooses.
- Convertible - Can be exchanged for ordinary shares.
What are the 3 costs associated with dealing in equities?
- Commission to dealer
- Stamp duty 0.5% (not applicable for Unit Trusts & OEICs)
- PTM Levy - £1 on transactions over £10,000
What are the attractions of an Initial Public Offering (IPO) when buying shares?
- The price of the share is often set at a reasonable level to ensure all available shares are taken up.
- This price attracts corporate investors.
- In the short term, this demand can have an upward pressure in prices & can lead to short term gains.
What are the potential downsides to investing via an IPO?
- The short-term price movements aren’t always in an upwards direction! (Tech bubble!)
- The company is an unknown entity at first IPO.
- The timing of the IPO is set by the original owners, waiting for optimum conditions.
- Once listed, there are many regulatory checks & balances.
Why might a company offer a rights issue?
- Desire to raise capital to pay debt down.
- Seeking to invest in expansion plans.
- Planned acquisition of another company.
What 3 options does an investor have in respect of any rights issue?
- Exercise their rights in full.
- Ignore the right & let it lapse.
- Sell it on the market where this is permitted - not all rights can be transferred.
What is a scrip or bonus issue?
Similar to a rights issue but without the requirement to buy shares. Here the company’s reserves are converted into additional shares and issues to existing investors in proportion to their current holding.
They are usually in lieu of dividends therefore known as ‘scrip dividends’.
What are the four main risks associated with investing in shares?
- Volatility of income
- Capital loss
- Third party/counterparty failure
- Regulatory risk
State three ways of diversifying when investing in shares.
- Diversification between companies in different sectors.
- Geographical.
- Simply investing in lots of companies.
What are ‘Earnings per share’ & what is the formula?
This shows the amount of a firms profit per share in the firm:-
Net profits / No. shares
This shows the profit the company is making for each share in issue. The higher the figure, the higher the profitability.
What is the ‘dividend yield’ & the formula?
The net dividend as a % of the current share price. It shows the income return:-
Dividend per share / Current Share price x100
Why might one share have a higher dividend yield than another? State four.
- The market is viewing one Share negatively - it sees higher dividend but doesn’t want to buy that share (if demand increased, the price would increase & yield would fall).
- There could be expectations that the dividend level is too high & won’t be sustained.
- There could have been a sharp drop in the higher yielding company’s share price.
- The differential between the two shares could be due to currency conversion issues.
What is ‘Dividend Cover’ and how do you calculate it?
The number of times the dividend being paid could be covered by the earnings of the company:-
Net profits / Dividends paid
For a single share this is:-
Earnings per share / Dividend per share
What is the Price/Earnings Ratio (P/E) & what is the formula?
Shows how the share price relates to the earnings of the company:-
Market price of Share / Earnings per Share
What is the Net Asset Value (NAV) & its formula?
This shows the share of the assets of the company attributable to each share:-
Net assets / No. shares in issue
