Risks of investing in equities Flashcards
What is volatility of income when looking at dividends from a company
because the level of dividend is
dependent on the profits of the company, the amount paid out will change with the fortunes of the company. Different shares
will have different levels of volatility. Otherwise known as Share Dividend Volatility.
What is Equity Capital risk?
companies can perform badly (reduced
profits etc) or in some circumstances, fail. Where an investment is made and the above happens, the demand for that share will fall and the share price will need to fall to secure a buyer – if indeed it is even possible to do so. Otherwise known as Equity Capital Risk
What risks can effect share prices?
Short term market risks that can affect share price could be; economic downturn, changes in technology within that industry, political events, wars and general market trends (investors believing the “hype” and the next best thing!)
What is an example of third party failure?
the risk that the investment taker will
fail, for example failure of an investment house. In such cases, the FSCS may compensate the investor up to the value of
£85,000 for investments. These third parties are often known as ‘counterparties’. It is a difficult risk to understand and the regulator has asked firms to disclose these risks to potential investors.
What is currency risk?
if the investment is made in another
currency it will involve a level of currency risk. So, in relation to Sterling, an investment made in US Dollars by a UK investor will be subject to the volatility of the exchange rate and therefore value of US dollars in Sterling terms.
What is Liquidity risk?
Being able to access their investment can
be important to some investors. Investing in smaller companies can mean it is difficult to sell when they need to.
Some funds (e.g. property funds) have notice periods to redeem the investment with some funds blocking redemptions
for a period of time or imposing penalties for doing so.
What is regulatory risk?
the risk that the regulators do not
properly police companies allowing bad practice to jeopardise the investor’s interests
What are the benefits of investing globally
investing in companies in different countries to benefit from differing fortunes of different nations or regions and not all stock
markets throughout the world move in the same direction as each other. There may also be potential to gain exposure to sectors and markets that are not available in your own country.
A classic example here is car manufacturing (which is pretty much all done outside of the UK now). There’s an argument to suggest that globalisation has reduce the benefits of this level of diversification but the concept remains solid.
What does EPS demonstrate
This shows the amount of a firm’s profits per share in the firm:
profit distributed to ordinary shareholders is profit after tax, minority interests and preference share dividends. So, if the question gives you these figures, deduct them from profit to arrive at profit that would be distributed to ordinary
shareholders.
Net Profits attributable to O/S / no of shares in issue
This simply shows the profit that the company is making for each share in issue. The higher this figure, the higher the relatively profitability of the company.
