Topic 7 Other Direct Investments Flashcards
Define equities.
Equities are also known as ordinary shares.
What are the two main rights of shareholders?
- they receive a share of the distributed profits as income in the form of dividends
- they can vote at shareholders meetings
Define securities.
Financial assets that can be traded
What are dividends?
A portion of the company’s profits
Distributed to shareholders
Why is it more beneficial to invest in a range of shares in different companies?
To lower the risk. The failure of a company can result in the loss of all invested capital.
What are the 4 factors affecting share prices?
- company profitability
- strength of the market sector
- supply and demand for shares/ investments
- strength of the UK & global economy
How are shares bought and sold?
Via the London Stock Exchange
What is the ‘Main Market’?
Companies must conform to FCA requirements
must have been trading for 3 years
25% of issued shared capital must be public
Within the main market, explain the primary and secondary market.
The primary market is where companies can raise finance by selling securities to investors for the first time (flotation) or issuing more shares to the market
The secondary market is where investors buy and sell existing securities
What is the Alternative Investment Market?
- the AIM started in 1995
- intended for new, small companies with potential for growth
- designed for smaller companies
What is the FTSE 100 Index?
This is one way to measure the overall performance of shares
An index of the top 100 companies in capitalisation terms
What is market capitalisation?
the market value of a company =
number of shares in issue x share price
What are the measures to assess the success of share investments?
- earnings per share
- dividend cover
- price/earnings ratio
Explain earnings per share
earnings per share (EPS) =
post-tax net profit/ number of shares
What is dividend cover?
How much of company profits are paid as dividends
How do you work out the price/ earnings ratio?
P/E ratio = share price/ earnings per share
How are dividends taxed?
Dividends are paid without education of tax
Subject to income tax
After dividend allowance (£2000)
Subject to capital gains tax
What are the other ways of investing in companies?
-rights issues (shareholders have first choice over additional shares sold)
–scrip issues (bonus shares given to increase number of shares overall)
preference shares (paid at a fixed rate, ahead of ordinary shareholders)
What are convertible preference shares?
Preference shares that can be converted at some point to ordinary shares within the company
What is a warrant?
Gives the holder the right to buy shares at a fixed price at an agreed future date
What is the stamp duty land tax for additional properties owned?
Stamp duty + 3% premium
What are 4 reasons why investors choose BTL?
- regular & increasing income stream
- well-developed market
- easy access to BTL mortgages
- easy access to letting agents/ support services
Name some risks associated with BTL properties
- costs are high
- not a liquid investment
- tenants may damage property
- empty periods
- ongoing management & maintenance costs
What is a commercial property?
- retail units
- shopping arcades/centres
- offices
- industrial units
- hotels/ leisure facilities
- mixed-used properties
Name some advantages of investing in commercial property.
- regular rent reviews
- longer leases
- more stable/ longer term tenants
- lower initial refurbishment costs
What is agricultural relief for inheritance tax?
This applies to land, growing crops and farm buildings
Available for up to 100% of inheritance tax liability for owner-occupied farms
OR
50% where the owner has let out the land
Name three types of ‘Money Market Ins
truments’
(short-term debt)
- treasury bills (like gilts but short term/ zero coupon)
- certificates of deposit (3-6 months/ £50,000 or more)
- commercial paper (an unsecured promissory note for very large amounts eg. pension funds/ insurance companies, usually 30-35 days, can be rolled over)
