Topic 7 Other Direct Investments

Question 1

Define equities.

Answer 1

Equities are also known as ordinary shares.

Question 2

What are the two main rights of shareholders?

Answer 2

1. they receive a share of the distributed profits as income in the form of dividends
2. they can vote at shareholders meetings

Question 3

Define securities.

Answer 3

Financial assets that can be traded

Question 4

What are dividends?

Answer 4

A portion of the company’s profits

Distributed to shareholders

Question 5

Why is it more beneficial to invest in a range of shares in different companies?

Answer 5

To lower the risk. The failure of a company can result in the loss of all invested capital.

Question 6

What are the 4 factors affecting share prices?

Answer 6

1. company profitability
2. strength of the market sector
3. supply and demand for shares/ investments
4. strength of the UK & global economy

Question 7

How are shares bought and sold?

Answer 7

Via the London Stock Exchange

Question 8

What is the ‘Main Market’?

Answer 8

Companies must conform to FCA requirements
must have been trading for 3 years
25% of issued shared capital must be public

Question 9

Within the main market, explain the primary and secondary market.

Answer 9

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

Question 10

What is the Alternative Investment Market?

Answer 10

• the AIM started in 1995
• intended for new, small companies with potential for growth
• designed for smaller companies

Question 11

What is the FTSE 100 Index?

Answer 11

This is one way to measure the overall performance of shares

An index of the top 100 companies in capitalisation terms

Question 12

What is market capitalisation?

Answer 12

the market value of a company =

number of shares in issue x share price

Question 13

What are the measures to assess the success of share investments?

Answer 13

• earnings per share
• dividend cover
• price/earnings ratio

Question 14

Explain earnings per share

Answer 14

earnings per share (EPS) =

post-tax net profit/ number of shares

Question 15

What is dividend cover?

Answer 15

How much of company profits are paid as dividends

Question 16

How do you work out the price/ earnings ratio?

Answer 16

P/E ratio = share price/ earnings per share

Question 17

How are dividends taxed?

Answer 17

Dividends are paid without education of tax

Subject to income tax

After dividend allowance (£2000)

Subject to capital gains tax

Question 18

What are the other ways of investing in companies?

Answer 18

-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)

Question 19

What are convertible preference shares?

Answer 19

Preference shares that can be converted at some point to ordinary shares within the company

Question 20

What is a warrant?

Answer 20

Gives the holder the right to buy shares at a fixed price at an agreed future date

Question 21

What is the stamp duty land tax for additional properties owned?

Answer 21

Stamp duty + 3% premium

Question 22

What are 4 reasons why investors choose BTL?

Answer 22

• regular & increasing income stream
• well-developed market
• easy access to BTL mortgages
• easy access to letting agents/ support services

Question 23

Name some risks associated with BTL properties

Answer 23

• costs are high
• not a liquid investment
• tenants may damage property
• empty periods
• ongoing management & maintenance costs

Question 24

What is a commercial property?

Answer 24

• retail units
• shopping arcades/centres
• offices
• industrial units
• hotels/ leisure facilities
• mixed-used properties

Question 25

Name some advantages of investing in commercial property.

Answer 25

• regular rent reviews
• longer leases
• more stable/ longer term tenants
• lower initial refurbishment costs

Question 26

What is agricultural relief for inheritance tax?

Answer 26

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

Question 27

Name three types of ‘Money Market Ins
truments’
(short-term debt)

Answer 27

1. treasury bills (like gilts but short term/ zero coupon)
2. certificates of deposit (3-6 months/ £50,000 or more)
3. commercial paper (an unsecured promissory note for very large amounts eg. pension funds/ insurance companies, usually 30-35 days, can be rolled over)