Topic 7 Flashcards
What are equities
An equity is a type of ownership in a company which is crucial for companies as it provides a way to gather a lot of capital in order to grown and pay off debts.
The majority of the purchasing of equities is done by large institution but private investors such as pension funds and life insurance companies will also invest into companies through equities.
What are the rights of a shareholder
There are two major rights of a shareholder the first being dividends. Not all companies offer dividends to their shareholder as it is down to the companies own policies, however the ones which offer dividends it may depend on other factors which affect the company such as the economic condition, profits and growth strategy as if the company find it fit to reinvest profits instead of dividends one year the investors may not benefit from this.
The second right of a shareholder would be voting rights which is often held through an annual meeting which can determine key directions of the company such as electing board members, the voting right depends on the amount of shares held therefore the more influential votes are by those with the most shares.
All the variants of these rights can be found in the article of association in each company as they differ.
What are the risks and mitigations
The risks of investing in shares are that they are not as safe as bonds due to the fact that it depends on the economy and the profitability of the company as well as this if shareholders are last in line to be payed when a company defaults.
diversification is a great way to spread the risk as a investor can share the risk of the investment by investing many different companies or by pooling the money of many investors to invest larger amounts into many different companies.
How are share bought and sold
In the UK the LSE (London stock exchange) is the main facilitator of shares bonds and derivatives. It has the job to look over the market and make efficient capital flow for all companies and investors.
There are two markets within the LSE the main market which is held for larger companies and investors and AIM (alternate investment market) which is held for smaller companies and investors.
What are the listing requirements to trade on the main market
The two major things needed are three years in the market to allow an insight to the previous history of the company and the company needs to be at least 25% public owned.
These attributes allows transparency and liquidity in the market allowing for the market to run smoothly.
Primary vs secondary market
The primary market is where shares are initially listed by companies or further released if already on the market in order to gain capital as well as build a history to gain capital in the future.
The secondary market is much larger and has a greater affect on the ishare prices as this is where daily buying and selling of shares occurs from investors to investors without company knowledge.
What is AIM ( alternative investor market)
AIM is for smaller companies and those who are just entering the stock markets as this is less rigorous in the requirements needed to trade in the main market allowing for companies to gain recognition and raise funds through investments but are know as a high risk investment as they are start ups and do not have stability just yet.
What are indices and what are the UK’s key indices
Indices are used as a gauge for investors and analyst to help guide investors to companies they would like to invest in through performance tracking and trends.
FTSE 100 is the first of the indices, this is the UK’s largest 100 companies with top performance and account for a significant part of the value of the stock market this is measured through market capitalisation.
FTSE 250 is the next benchmark thats is shown, this is the next 250 companies after the first 100 which are seen as medium sized companies with potential to grow.
FTSE 350 is after these two to give a larger perspective to investors as it combines the first two index’s.
Finally FTSE all share market is a combination of around 600 companies which gives a greater insight into the market itself and trends which show to investors analysing the market itself.
Market capitalisation- this is just the calculation of share price times by the share issued to show the size of a company and its value.
name the participants in the markets
- individual and institutional investors- The market includes private individuals and institutions such as pension funs to drive capital to companies normally looking at long term investments from the institutions.
2.Banks and other traders- Banks usually act as market makers by issuing, buying or selling shares and derivatives meaning that there will always be someone to buy and sell of in the market keep its liquidity as well as acting on other behalf’s and investing for clients.
- Gov, public institutions and corporations- these act in the market mainly with bonds and gilts to raise capital for spending gilts used by Gov and bonds used by corporations.
4.Investment banks- These play crucial roles in the market as they offer new securities such as IPO and secondary offerings as well as advising companies on market conditions and investments to be made.
What are the risks and expectations with shareholders of a limited company
A limited company is a separate legal entity from their shareholders therefore the risk of debt collection or responsibility of any debt coming to the shareholder is mitigated, meaning that if the company goes bankrupt the shareholder does not get affected other than losing their entire investment.
This is the risk the share holder caries as they can lose everything they put into the company or make a net loss if fluctuations in the market are severe, however as this is seen as a high risk high reward compared to saving accounts due to the lack of protection of capital the attraction is the high reward through either equity or dividends making it appealing to those willing to inherit the risk.
Historically, the trends of shareholders have seen greater returns from equity and dividends long term compared to saving account when compared to inflation rates.
What is Over the counter (OTC) trading
Over the counter trading is common among large institutions such as pension funds as there is less transparency in these transactions to the public, this is due to the absence of a LSE or governing body as these trades are done in private.
This is referred to as the dark pool occasionally as the companies will not show volume nor the price in order to avoid a major price swing in the market.
What is ex dividend shares
This is when a share is sold after the snapshot which companies will take of their shareholders which will allow them to distribute their dividends normally around twice a year therefore a price drop to roughly the amount of the dividend will be seen when selling the share and now being known as a ex dividend share.
A cum-dividend share is one where the price may raise on account the upcoming share as dividend focus traders may look to by before the snapshot entitling them to the dividend.
What are the ways shareholders receive financial returns and how are they assessed
There are a two ways in which financial returns are expended one is through dividends paid out by the company as a steady tare of income and the second being capital growth which is the profiting of the share price increasing/inflating from the price at which it was bought.
One way to assess shares is earning per share, this is the calculation of the net profit of the company after taxes dividend by the number of shares showing the profit per share, however this will not be a direct reflection of dividends received as the company may retain profits for debt payments and growth.
The second assessment would be dividend cover this can be seen as 2.0 or 1.5 this number represents the companies profits compared to the dividend payed for example 2.0 would mean that the companies profits are twice the dividends payment, generally speaking a higher number (2.0/1.5) would be seen as more stable as a number like 1.0 may be an indicator that the company is using retained profits from previous years to pay shareholders.
The final assessment would be P/E ratio this is calculated by taking the earning per share and dividing by the current share price, a higher P/E ratio is seen as greater potential growth however this should be compared to other in the industry to better gauge the market as well as not being guaranteed as it is more optimistic.
What is the ruling on tax for dividends and Capital gains tax
If an investors makes over £500 which is the dividends allowance in the UK then they will be taxed in the same bracket as their earned income.
Whereas if the investor is to sell their shares they can have an exemption until a certain amount in capital gains tax each year but anything exceeding this will be taxed only their profit not the net sales.
What is rights issues
This is another way for companies to gain capital as they can offer new share to existing shareholders allowing them to keep their ownership stake these share are normally offered at a discounted rates to the shareholders to encourage them to buy more share however if they are not wanting to buy anymore then they can sell their rights to another investors also helping dilution of their shares. The share when offered to existing shareholders from the company are usually done in proportion to existing shares for example 1 new share to every 3 owned.
what are scrip issues
This is when a company offers new share to exciting shareholder at no extra cost to increase the number of share in circulation. this will in turn lower the price of each share as there are more in circulation but this is usually a good sign for companies as it shows that their balance sheets are healthy and strong as they will turn the company reserves into shares.
What are preference shares
Preference shares are shares which have privileges over other shares/shareholders as they have a fixed dividend rate which does not rely on the performance of the company and have priority when handing out dividends meaning they will get paid first before the other shareholders get paid even if this mean that other shareholders do not get paid due to their payment.
However these shares can be limited in the way of voting as usually they will come with little to no voting rights due to the higher priority in dividends, more benefits would include the cumulative preferred share which is when these dividends will be compounded if a company cannot pay for a year even if others do not get paid due to this as well as in liquidation these shareholders have priority over the assets of the company meaning they will get their full amount due before anyone.
What are convertible preference shares
These are exactly like the preference shares that are described however there is an option in the future after a certain period or after conditions are met to change into ordinary shares this would allow the holder to benefit from the fixed dividends rates and the potential capital growth.
However these shares are usually offered at lower fixed dividends rates compared to normal preference shares.
What are warrants
This is the agreement between a buyer and the company to buy a share at a specific price at a certain time which can raise capital for the company but also potentially gain profits for the holder in the future if there is confidence in the company to grow.
Fore example if a warrent is issued at £10 and then in two years time when the warrant expires the share price is £15 then the holder can buy in or sell at £10 instantly gaining profits. these are usally paired with preference shares and bonds.
What are the benefits and drawbacks of property ownership
Property ownerships is seen as a stable investment as there is a steady stream of income through rent as well as the ability to have the best collateral for loans making it easier to secure loans by leveraging the house, on top of this property demand in developed countries such as the UK are always in high demand and are slowly appreciating each year.
The drawbacks to ownership of property as an investment is that the liquidity is not great compared to shares and bonds as it takes a while for houses to be bought and rented at a profitable fair price as well as this the market is very volatile to shifts in the economy making it much harder to find clients or to sell in a deflated economy, finally the location can play a major part in the success as buyers may not be looking for areas that are run down or have no potential for future development making it hard to find renters and buyers.
What are the benefits and drawbacks of buy to let properties
Buy to let properties is the investment made with the intention of renting the property and benefitting from long term appreciation.
The benefits of this is that there is a steady rate of income which is guaranteed for the investor each month which provides stability as well as specialised mortgages for buy to let individuals to help put down less capital i order to leverage monthly income of rent to the mortgages and finally there is amazing infrastructure in the uk for buy to let investors to allow them to make the process seamless such as letting agencies and property managers.
The drawbacks of this investment is that the initial investment cost is quite high which can see a while before returns are seen on the invest and could also price out those interested in the investment. Along with this there are major liquidity issues which can be seen as very troublesome for those in need of access to funds and do not have the capital to put down a large investment initially and not see return in the short term. Tenants are also seen as an issue which can arise as it can be difficult to meet the ever increasing standards and rights of the tents causing increasing expenditure paired with new taxes and laws put in place by the government the buy to let investment looks more and more unappealing to new investors.
What are the government measures for buy to let properties
The government have put in place measures such as the wear and tear allowance which has now been capped compared to previous law where there was a flat rate now everything has to be calculated to them be claimed accurately as well as this the gov have reduced the tax relief as where before the investor was able to leverage the mortgage payments effectively writing off the interest payments now there is a basic rate. finally the gov have introduced the stamp tax on second homes which will increase costs of accusation.
What are commercial properties and the different types
Commercial properties are different from personal properties as they are rented and sold to commercial companies for commercial use.
Types include:
office spaces- used for those needing a space for employees to work as a unit in the same environment.
industrial properties- areas such as warehouses and storage units.
retail properties- used for shops and other commercial retail shops in well populated places.
hotels and leisure properties- such as gyms and hotels if places in busy tourist areas can be very profitable.
mixed use development- used for both residency and commercial benefits such as a ground floor retail space with flats above.
What are the advantages of investing in commercial properties
- Regular rent reviews- there are different types of rent reviews one being market based, this is the ability for investors to align their rent with the market through inflation or the market.
There are different type of rent reviews that are used in the market such as open market rent reviews based on the current market, inflation adjustments and fixed percentage increases. each serves its purpose to help protect the landlord such as the inflation adjustments to help keep the true cost of the profits. this way the landlords will have greater stability.
2.Longer leases- usually these properties will have longer lease conntracts ranging from 5-25 years as this will allow both parties to benefit through having stability and a constant long term income as well as a secure place without the relocation costs along with this it will allow flexibility for both involved as after certain amount of year it can be contracted to have exit clauses or renegotiations.
- stable tenants- this is the idea that businesses will invest significantly into locations as they will add their branding and machinery to incentivise them to stay longer due to their investment, along with this corporation will also be very stable as they will have more finances and will have a less likeliness to default and creating stability especially certain sectors such as banks will be very attractive to landlords.
4.Lower initial refurbishment costs this means that the company that rents the space from the landlord usually is in need of specialised equipment which they will provide themselves as well their own branding ect therefore the landlord does not have to spend a lot in refurbishment along with the long tenancy all of the upkeep is down to the company as well as this the company is usually responsible for tax, insurance and the maintenance lowering the costs significantly for the landlords.
What are the disadvantages of investing in commercial properties
- there is a higher investment risk when looking into this investment as the loans are usually higher in interest than personal properties and a lot more capital is needed to start as there will be higher deposits and refurbishment costs meaning the investors could have their assets locked into a portfolio which isn’t very diverse or liquid.
2.Compared to personal properties which have may ways to appreciate in value along with the potential rapid growth and big returns commercial properties are more likely to be very slow and steady as the property doesn’t rely on location and potentials in the environment but more looks at the income and the productions success as a primary source as well as this the property.
3.There are higher interest costs and due dilligence when it come to investing in commercial properties as this is a large investment the banks are hesitant to lend along with many many obligation that need to be fulfilled for both tenant and landlord in order to facilitate the loan and agree to the bank loans leading to more issues in deals being secured due to the pedantic nature of the checks and the hesitancy to lend.
highlight key points about agricultural property
Agricultural property if run by the owner of the land makes their profits from the selling of crops ect which is a specialised so a lot of knowledge is needed, if intended for rent then the landlord can see steady rent and appreciation especially in high agricultural areas but demand is not as high therefore liquidity can be low. Another way to make an income could be through diversification of energy (solar panels and wind turbines).
The agricultural property can see very slow and steady rates of growth in the market as it is specialised but if re zoned can be very highly sort after from commercial or residential properties which will increase the value and demand.
Inheritance tax on lands can 100% relief if the owner of the land is the one who run the farm appealing to the next generation however if the farm is rented then up to 50% is relieved protecting the asset. The property and the market can see liquidity issues as well as location and weather discrimination as this determines the yield.
Types of money market instruments
Treasury bills- theses are issued by the gov making them one of the safest investments that someone can make and they are issued at a discounted priced compared to face value and then redeemed at face value after 91 days to help the gov reach immediate cash flow. They can also be sold on the secondary market for a profit by investors.
Certificates of deposits-These are issued by banks to large investors or corporations which allow the bank short term funds ata fixed rate of interest, they can be redeemed before their maturity date but this will come with a penalty of some sort however they are also available to sell on the secondary market allowing investors to make quick cash flows.
Commercial paper- this is issues by companies with good credit rates if not they will have to be supported by the bank to offer a fixed rate of interest to fix their short term liquidity issues, these papers will usually be bought by financial institutions such as pension funds or insurance companies due to the high min purchase. they will also offer a rollover as well which will issue a new paper to existing holders at maturity to manipulate the new interest rates and cash flow this makes the papers more flexible than fixed term loans.
