Equities, Property & Alternative Investments Flashcards
Define Equity
A part ownership of a company’s capital (alternative name for a share)
Factors that affect share prices
- Long term: fundamental economic and political factors
- Short term: Market movements affect investor sentiment
- Business profit/dividend expectations
- Takeover activity
- Quality/track record of management
Costs involved in buying/selling shares
- Commission
- Stamp duty (SD)
- Stamp duty reserve tax (SDRT)
- Panel on Takeovers and Mergers (PTM) levy
Panel on Takeovers and Mergers
A regulatory body that oversees all takeovers and mergers of companies listed on the London Stock Exchange
Types of shares
- Ordinary Shares
- Preference Shares
Preference shares
- Usually pay a fixed rate of dividend half-yearly (only paid if there are sufficient after-tax profits)
- Dividend payment has priority over the payment of dividends on ordinary shares (but paid after interest payments on debt have been made)
- Generally no voting rights (unless payments have fallen into arrears)
- Rank ahead of ordinary shares for liquidation but after loan capital/creditors
- Higher yields than bonds
Types:
- Cumulative
- Non-cumulative
- Participating
- Redeemable
- Convertible
Cumulative preference shares
- Unless stated otherwise - cumulative
- If a company has insufficient funds to pay dividend, shortfall must be carried forward
- Dividends must be paid in full before lower share classes receive payment (regardless of how many years in arrears dividend payments are)
Non-cumulative preference shares
- Lose the right to receive any unpaid dividend at the end of the financial year
- No arrears are due when payments resume
Participating preference shares
- Pay a fixed rate of dividend
- Allow holders to participate in profits of the company
- Receive an additional dividend (a proportion of any ordinary dividend declared)
Redeemable preference shares
- Represent a temporary source of finance for the company
- Dividends paid to holder for a short period then share will be repaid
- Most undated but some redeemable at a pre-determined date/at the option of the company
Convertible preference shares
- Carry the right to be converted into ordinary shares at pre-set dates and on pre-set terms (holder discretion)
- Prices respond to both fixed payment and convertible element
- If ordinary share price increases, convertible preference shares track price
Ordinary shares
- Form bulk of the share capital of a company
- Confer an ownership stake in it
- Represent the risk of capital of the company
- Rights to profits (dividend) and attend/vote at company meetings
- Entitled to share residual value of the company’s assets after all debts/owes are paid
- Bear the greatest risk - receive higher rate of return than more secure forms of investment
Types of Ordinary shares
- Non-voting: Identical except carry restricted/no voting rights
- Deferred ordinary shares: Do not qualify for a dividend until the dividend of ordinary shares has reached a specific level/specific period after issue
- Alphabet shares: Different letter classes with different rights
Dividends
- Can only be paid out of profits
- Amount determined by directors
Tax treatment:
- First £2000 is tax free
- Tax paid after depends on investors income tax band
Investment ratios
Used by investors to decide whether to buy, sell or hold a share
Use allows:
- Trends in the company’s performance over a number of years to be identified
- Comparisons to be made with similar companies and/or the industry’s average
Earnings per share
Enables an investor to see the trend in a company’s profitability:
Profit attributable to ordinary shareholders / Number of ordinary shares in issue
Dividend Yield
Measures the dividend as a percentage return on current share price:
(Dividend per share / Current Share Price) x 100
Dividend Cover
Measures how many times the dividend could be paid out of the available current earnings.
Indicates the riskiness of an investment and the margin of safety the company has in paying the dividend
Individual basis:
Earnings per share / Dividend per share
Total Profit Basis:
Profit attributable to shareholders / Dividends paid to ordinary shareholders
Price earnings (P/E) ratio
Measure of how highly investors value the earning of a company:
Current market price of share / Earnings per share
Net Asset Value
Value of tangible assets that are attributable to the ordinary shareholders.
Measures amount shareholders receive after a company closes down and pays all necessary amounts.
Net assets attributable to ordinary shareholders / Number of ordinary shares in issue
Limitations of investment ratios
- Different accounting policies can be used to calculate profits/value assets - makes comparisons between companies in the same industry difficult
- Changes in accounting policy of a company - causes misleading comparisons
- Ratios calculated with historical data - not a good guide to future performance
- Periods of high inflation cause misleading figures - gives upward trends when may in fact be losing in real terms
FTSE All-Share Index
- Tracks the market value of the FTSE 100, FTSE 250, FTSE Small cap
- 600 Companies
- Represents 98% of the London Stock Exchange
FTSE 100
- UK’s best known market index
- Tracks the value of the 100 biggest companies listed on LSE
- Real time index
- Represents approximately 81% of the total UK market capitalisation
- Constituents reviewed quarterly
FTSE 250
- 101-350 Biggest companies on LSE
- Represents 15% of market capitalisation
- Real time index
- Constituents reviewed quarterly
