Investment Institutions Flashcards
What are the two types of occupational pension scheme?
Necessary since the state pension scheme offers little more than subsistence, there are two types of occupational pension schemes: defined benefit schemes and defined contribution schemes.
What is a defined benefit scheme (pensions)?
Defined benefit schemes contract to pay employees a set sum based on their final salary. The employer is responsible for making up any shortfall in the fund.
What is a defined contribution scheme (pensions)?
The employee and the employer put in monthly contributions but the pension is entirely dependent on the investment performance of the fund.
What is an investment trust?
An investment trust is a public company like any other company except that its assets are not buildings and machinery but investments in other companies. Investors buy shares in the trust and rely on the expertise of the fund managers to earn a good return.
What restrictions are there on the way trusts can invest?
No more than 15% of the fund in a single holding. Capital gains must be reinvested in the business and not distributed to shareholders.
What is gearing? (investment trusts)
Gearing is where a trust borrows money to finance an investment and the interest on the borrowings can be offset against tax. This relies on the rate of the return of the investment being higher than the cost of borrowing.
What is a unit trust?
Like investment trusts, however rather than buying shares in a company, investors can buy units whose prices rise and fall with the value of the assets held by the trust. Unit trust managers make money from the spread between the buy and sell prices of the units and through a management charge.
As unit trusts are not quoted companies, they do not have the discount issue of investment trusts. Neither can they borrow money to invest making them less risky than investment trusts (however their charges tend to be higher).
What does it mean if shares of an investment fund stand at a discount to the net asset value?
The total value of the share capital is less than the value of the investments they hold. This is a feature of supply and demand since there are normally not enough investors to keep them trading at asset value.
What are exchange traded funds?
Like investment funds, they trade on the stock market but rather than being actively managed they follow an index such as the FTSE 100 or the Dow Jones Industrial Average. They tend to have very low costs and also have the advantage of not worrying about an investor choosing poor stocks.
What does it mean for an investment institution to underwrite a stock issue?
In return for a fee, they will agree to buy shares at a set price if nobody else will. Twenty years ago, it was mainly investment instutitions who were underwriters whereas now the investment banks have the capital to take on this role themselves. Thus the institutions now merely act as sub-underwriters (backup) for the banks.
What is the Dow Jones industrial average?
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
Often referred to as “the Dow,” the DJIA is one of the oldest, single most-watched indices in the world and includes companies such as General Electric Company, the Walt Disney Company, Exxon Mobil Corporation and Microsoft Corporation. When the TV networks (US) say “the market is up today,” they are generally referring to the Dow.
How is the Dow Jones Industrial Average calculated?
The Dow is a price-weighted index. This means stocks with higher share prices are given a greater weight in the index. At the Dow’s inception, Charles Dow calculated the average by adding the prices of the 12 Dow component stocks and dividing by 12. Over time, there have been additions and subtractions to the index, such as mergers and stock splits that had to be accounted for in the index. When one of these events occurs, the divisor for the Dow gets adjusted so the index’s value does not become affected. This is why the Dow can stand at 17,000 while the sum total of the components’ stock prices is nowhere near that number.
