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
