Topic 7

Question 1

What are equities

Answer 1

Equities also known as ordinary shares there are the most important type of security that are issued by uk companies they can be and are bought by private investors but most transactions in equities are made by institutions and by life and pension funds

Question 2

What 2 main rights Do holders of ordinary shares (shareholders) have

Answer 2

Receive a share of the distributed profits of the company as income in the form of dividends

Participate in decisions about how the company is run by voting at shareholders meetings

Question 3

What does the term securities mean

Answer 3

Financial assets that can be traded they can be divided into 2 broad classes those that represent ownership equities, and those that represent debt such as guilts and corporate bonds

Question 4

What 4 factors Effect share prices

Answer 4

Company profitability
Strength of the market sector
Strength of the global and uk economy
Supply and demand for shares and other investments

Question 5

How are shares bought and sold

Answer 5

On the London stock exchange

Question 6

What 2 markets are available to buy and sell shares on

Answer 6

The main market
Alternative investment market

Question 7

What must companies conform to to be listed on the main market

Answer 7

A considerable amount of accurate financial and other information must be disclosed

The applicant company must have been trading for at least 3 years

At least 25% of its issued share capital must be in the hands of the public

Question 8

Define the primary market and the secondary market

Answer 8

The primary market is where companies and financial organisations can runatural organisations can raise finance by selling securities to investors they will either be coming to the market for the 1st time through the process of going public or flotation or flotation or issue in more shares to the market

The secondary market is where investors buy and sell existing securities it is much bigger than the primary market in terms of the number of securities traded each day

Question 9

What is the purpose of the alternative investment market

Answer 9

To enable suitable companies to raise capital by issuing shares and it allows those shares to be traded in addition to the benefit of access to public finance companies will enjoy the wider public audience and enhance their profiles by joining the alternative investment market

Rules for joining the alternative investment market are fewer and less rigorous than those for joining the official list the main market and were designed with smaller companies in mind

Question 10

What 2 financial returns do shareholders hope to receive from their shares

Answer 10

The growth in the share price
The dividends are received as a share of the company’s distributable profits

Question 11

What is earnings per share

Answer 11

This is equal to the company’s post tax net profit divided by the number of shares

(This is not normally the amount of dividends paid as a company may hold profit back)

Question 12

What is dividend cover

Answer 12

This factor indicates how much of a company’s profits are paid out as dividends in a particular distribution

If for example 50% of the profits are paid in dividends the dividend is set to be covered twice cover of 2.0 or more is generally considerably considered to be acceptable by investors

Question 13

What is the price/earnings ratio

Answer 13

The price/earnings ratio is calculated as the share price divided by the earnings per share

Question 14

Why should a price/earnings ratio only be compared to another price/earnings ratio in the same market sector?

Answer 14

Price/earnings ratios vary between market sectors

Question 15

What tax is applicable to gains realised on the sale of shares

Answer 15

Capital gains tax

Question 16

What is a rights issue

Answer 16

When an existing company that already has shareholders wishes to raise further capital by issuing more shares those shares must 1st be offered to existing shareholders this is done by means of a rights issue.

For example one new share per 3 shares already held generally at a discount to the price at which the new shares are expected to commence trading

Shareholders who do not wish to take up this right can sell the the right to someone else in which case the sale proceeds from selling the rights compensate for any fall in value of the existing shares due to the dilution of their holding as a proportion of the total shareholding

Question 17

What is a scrip issue

Answer 17

A script issue also known as a bonus issue or capitalization issue is an issue of additional shares free of charge to existing shareholders no additional capital is raised by this action

The effect is to increase the number of shares and reduce the share price proportionately

Question 18

What are preference shares

Answer 18

As with ordinary shares, holders of preference shares are entitled to dividends payable from the company’s profits they differ from ordinary shares in that they are genuinely paid at a fixed rate and holders of preference shares are eligible for any dividend payout ahead of ordinary share holders.

Preference shares do not normally carry voting rights you voting rights although in some cases in some cases holders may acquire voting rights if they right if their dividend payments have been delayed

Preference shares have a higher claim than holders of ordinary shares in the event of insolvency

Question 19

What are convertible preference shares

Answer 19

Convertibles are securities that carry the right to be converted at some later date to ordinary shares of the issuing company

Question 20

What is a warrant

Answer 20

Warrants give the holder the right to buy shares at a fixed price at an agreed future date the attraction is that they give the holder rights a fraction of the cost of the shares themselves

At the date the warrant can be exercised it ll be exercised if the share price is above the price at which the shares can be bought under the terms of the warrant if the share price is at or below the terms offered by the warrant it will not be worth exercising the warrant and it will lapse

Question 21

What are 2 benefits or advantages from property investment

Answer 21

Property is a very acceptable form of security for borrowing purposes

The uk property market is highly developed and operates efficiently and professionally

Question 22

What are 3 pitfalls or disadvantages of investing in property

Answer 22

Location is of Paramount importance and a badly sighted development may prove a problem

The property market is affected by overall economic conditions in times of recession letting properties may be difficult and property prices may fall

Property is a less liquid form of investment than most others

Question 23

What type of tax is income from property subject to

Answer 23

Income tax
It is treated as non savings income for tax purposes

Question 24

What 4 things make buy to let properties attractive to investors

Answer 24

Regular and increasing income stream can provide a hedge against the inflation

Easy access to buy to let mortgages

Easy access to ancillary services e.g. Letting and property management agents

Well developed market

Question 25

What risks or disadvantages are there to buy to let investments

Answer 25

Access in the market can be difficult as investment costs are high and there are additional costs associated with arranging a mortgage legal fees and stamp duty land tax

Property is an illiquid investmentMeaning that it may be difficult to generate funds if they are required at short notice

There may be void periods when the property is untenanted meaning the income is reduced or ceases

There is the risk that tenants made damage to property leading to additional costs

Legal fees may be incurred to remove unsatisfactory tenants

The property will require ongoing management and maintenance these services can be outsourced but the costs would reduce overall yield

Question 26

What measures were put in place by the government to slow down the growth of the buy to let sector

Answer 26

Text relief Previously a vital outlandlord could deduct the full costs of mortgage interests from their vital income when calculating profits Changes were faced in from April 2017 which mean that tax relief is limited to a tax credit at the basic rate only

Wear and tear Landlords were able to claim annual wear and tear allowance on the cost of furnishings in the property this has been replaced by a furniture replacement relief that only allows the actual cost of replacing furnishings to be offset against profits

Stamp duty land text 2nd properties are now subject to an additional stamp duty land tax surcharge

Question 27

What are the main advantages of investing in commercial property

Answer 27

Regular rent reviews with typically no more than 5 years between each

Longer leases than for residential property

More stable and longer term tenants

Typically lower initial refurbishment costs

Question 28

What are the main drawbacks to commercial property investment

Answer 28

The higher average value means that spreading the risk is more difficult

Commercial property does not generally show the spectacular growth in value that can sometimes be achieved in residential property

If the investment is to be funded by borrowing interest rates may be higher than for residential loans

Question 29

Lenders often carry out detailed investigation often carry out detailed investigations before lending for the purchase of commercial property what are the 3 main points they check

Answer 29

Quality of the land
Reputation of builders architects and other professionals involved
Suitability of likely tenants

Question 30

What are Treasury bills

Answer 30

They are short term redeemable securities issued by the debt mansion office of the Treasury

Question 31

How do Treasury bills differ from gilts

Answer 31

Treasury bills are short term normally being issued for a period of 91 days whereas guilts can be long term or even undated

Treasury bills are zero coupon securities i.e. They do not pay interest instead they are issued instead at a discount to their face value or par value

Question 32

What is a certificate of deposit

Answer 32

A receipt confirming that a substantial deposit has been made with a bank or building society for a fixed period of time at A fixed rate of interest.

Normally deposits of £50,000 or more

Question 33

What is the typical term For a certificate of deposit

Answer 33

Typically terms are between 3 and 6 months although depositors who require longer term can often obtain certificate of the deposits that can be rolled over for a further 3 or 6 months on specified terms

Question 34

What are bearer securities?

Answer 34

Securities that are deemed to be owned by whoever physically posses the document that confers ownership rather than ownership being determined by an entry on a register etc

Question 35

What is a commercial paper

Answer 35

An unsecured promissory note
For example a promise to repay the funds that have been received in exchange for the paper

Question 36

What is the average issue period For commercial papers

Answer 36

Normally issue periods of between 5 and 45 days with an average of around 30 to 35 days

Question 37

What is roll over commercial paper And what are 2 advantages of doing so

Answer 37

Firms that need to retain funds for longer than longer than 45 days can roll over thick can roll rover their commercial paper

Flexibility is one advantage
The fact that the rate of interest is not fixed for a long period

Question 38

What is a reason companies or institutions issue a commercial paper

Answer 38

Normally when they wish to borrow for working capital purposes

The transactions offer very large amounts with most purchases being institutions such as pension funds and insurance companies