Lecture 6 - Shares Flashcards
Shares
Called stocks
A form of investment that entitles the holder to a share or part ownership in a company
Depending on the type of share, this may entitle the shareholder to vote on how the company is run
Dividends
Paid by the company out of the profit that it makes
The dividend income element is relatively safe
The company may have to stop dividends to cope with an emergency - BP spill
Share prices
They fluctuate from minute to minute depending on the volume of shares traded on the stock markets
Rumours and rumours can trigger highly sophisticated and complex automated stock purchase and selling algorithms, which can further impact on share price volatility
There can be both capital gains and losses - a potentially highly uncertain environment
However, neither a gain nor a loss will crystallise until you sell
Spread the risk
Highly risky investing in one company
Safest way to double your money is to fold it in half
Spread your investments across a wide range as you you can afford
Diversification
Less likely for a whole portfolio to go up or down at the same time
Diversify away as much risk as you can
Build a portfolio
A mixture of shares, bonds and cash
Shares of different companies
Companies in different market sectors
Different market sectors in different countries
Private investors often start with their own house, with pension being the next significant asset
Limited funds
Instead of buying shares directly, we could buy into investment funds
They pool money from lots of investors and invest in different companies
Their fund can be broadly based
Or it can be quite narrow
E.g. Certain industries/countries (emerging market funds)
Or they might track a specific market sector
FTSE100
Designed to measure the performance of the 100 top companies traded on the London Stock Exchange
Comprise of different sectors, retail, oil and gas, banking, insurance, media
Less risky than investing in smaller companies - all FTSE100 companies are big, widely focused
Index is maintained by the FTSE group, a joint venture between the FinancialTimes and the LSE
Calculated in real time and is published every second that the market is open
Considered to be a gauge of prosperity of businesses regulated by the UK Company Law
The FTSE100 companies total share capital represents over 80% of all capital invested in all companies in the UK
Shareholder return
You purchase your shares for a sum of money, that is your investment cost
Over time, you receive dividends (hopefully)
You might also receive capital distributions and other cash distributions
So the total shareholder return is total income + total capital distributions + potential selling price - initial investment
Total shareholder return
Minus initial purchase price of shares
Plus income return: dividend from share ps - taxable
Plus capital return:
- increase in share price (pay tax when you sell)
- return of capital (tax free)
- share exchange on takeover (tax free)
- share exchange and cash on sale of subsidiary (cash can be treated as return of capital tax free)
-minus cash paid for rights issue
-minus cash paid for new shares
Equals total shareholder return
Time vs goals
How long have you got for your goal
Shares win long term
Very risky short term
As you approach your goal, adjust the portfolio
To lock in gains
To reduce risk by choosing less risky funds
To avoid unnecessary transaction costs
Historic data
Informative facts that can be gathered
Not a good indicator of future performance
Helps us to gauge the track record of a company when deciding to invest
If we want to be careful, we will do research on the company
Financial planning
How you manage and take control of your own personal financial situation. A common misconception is that only wealthy people should undertake financial planning, but in reality everyone should plan for their financial future if they want to achieve certain financial goals.
Steps of financial planning
Assess realistically where you are now. Prepare a net worth statement and a cash flow forecast. Investigate the details to identify bad debts from good debt
Plan a way forward. Start to develop and define financial goals
Get rid of any bad debts first.
Be smart and double check you are on the right track by identifying alternative courses of action
Triple check to see if there is anything better on offer
Act to create and implement a financial action plan, which will start with dealing with the bad stuff, before identifying an investment strategy to match the free cash flow you now have
Last step in financial planning
Monitor, re-evaluate and revise the plan continually, changing and adapting as necessary
