Equities And Property Flashcards
What is an equity?
Part ownership of a company’s capital
Investors hope to receive income from dividends and capital growth
To offer shares to general public, usually needs to be listed on stock exchange
What could a share price be affected by?
Economic / political factors e.g. inflation, productivity, growth and government policy (fiscal and monetary)
Investor sentiment e.g. investors may be optimistic or pessimistic
Business specific factors: profit / dividend expectations, takeover activity and quality of management
When a company obtains a stock market listing, it is known as an initial public offering. What are the 3 main types of IPO?
Introductions (introduced to the exchange)
Placings (with big institutions)
Offers for sale (at a fixed price)
Describe AIM
Provide primary and secondary market functions to companies too small or new to have full stock market listing
Properly regulated but less onerous listing requirements
Costs of buying / selling shares
Commission charged on purchases and sales
Stamp duty / SDRT in transfer of UK shares
0.50% by purchases
Stamp duty rounded to nearest £5
SDRT rounded to nearest penny
No SDRT or stamp duty on shares on AIM
Panel on Takeovers & Mergers levy - flat charge of £1 on all trades over £10,000
Types of preference share (5)
Cumulative - will be cumulative unless specified and any dividend shortfall carried forward must be paid before dividend declared to ordinary shareholders
Non-cumulative - lose right to unpaid dividends at end of financial year
Participating - pays fixed rate of dividend and allowed to participate in profits of company
Redeemable - at specified predetermined date
Convertible - can be converted to ordinary shares
Types of ordinary shares
Non voting
Deferred - don’t usually qualify for dividend until dividends reach a predetermined level
Alphabet - A ordinary share vs B ordinary share vs C ordinary share - different rights regarding dividends, capital and voting rights (set out in Articles of Association)
Examples of corporate actions
Rights issues - to fund expansion plans / strengthen balance sheet / refinance company after crisis
Bonus shares / scrip issue - used to bring share capital more in line with real worth - reduces share price to make it more attractive
Share splits - achieves lower share price by increasing number of shares in issue by splitting par value
Risks of equity
Liquidity risk - potential inability to realise investment
Counterparty risk - organisation investment placed with fails
Volatility risk - value / dividends can fluctuate
Capital risk - share price depends on supply and demand
Currency risk - investments denominated in another country
Regulatory risk - inadequate regulation of markets
How to diversify equities
Across individual shares
Across sectors
Across international markets
What is an index and what is it used for?
Provides a means of measuring performance of a portfolio of shares over time
Indices used to:
Compare particular share to overall market
Compare fund managers performance to overall market performance
Eg FTSE 100, FTSE 250, FTSE AIM
Limitations of indices
Weighted by market capitalisation - a few companies can have substantial effects
Costs - no account for tax, buying/selling costs or management expenses
Disadvantages of direct property investment
Lack of liquidity
High costs
Self manage or use agent?
Void periods
Factors to take into account when choosing a property
Location
Tenant availability
Tenant quality
Age and condition - newer property preferable for renting
Diversification - if in same area, risks concentrated
Gross rental yield
Gross rent / market price
