Topic 7 (Other direct Investments) Flashcards
What are equities?
Ordinary shares
What do you holders of ordinary shares have the right to do?
- Receive a share of distributed profits in the form of dividends
- Vote at shareholder meetings
What is the main attraction of direct investment in ordinary shares?
There is potential capital growth in the medium to long-term
What are securities?
Financial assets that can be traded. They can be divided into two broad classes those that represent ownership and those that represent debt
What is a dividend?
A portion of the companies profits that is distributed to shareholders
Why is direct investment in shares considered high risk?
Because the failure of the company can result in the loss of all capital invested however it is not a risk for individual investors
What factors affect the prices at which shares are traded?
- Company profitability
- strength of the market sector
- strength of the UK and global economy
- Supply and demand
Who buys and sells on the stock exchange?
Government gilts, shares, overseas shares and options
Name the two main markets which determine how shares are bought and sold?
- The main market
2. The alternative investment market
Why are bank deposit account suitable for long-term investment?
They are suitable because they have proven unattractive when compared with asset-backed investments
To obtain full listing in the main market it is necessary…
- For the company to have been trading for at least three years
- For at least 25% of the issue share capital to be in public hands
The London stock exchange is both primary and secondary market, describe both
Primary Market = Where companies and financial organisations can raise finance by selling securities to investors
Secondary Market = Where investors buy and sell existing securities
What is the alternative investment market intended for?
It is intended for new small companies with growth potential
What is market capitalisation?
The market value of the company is calculated by multiplying number of shares in issue by the share price
Name some participants in the market
- governments
- investment banks
- banks and small traders
- investors
When does over-the-counter trading take place?
It is common between institutions that trade large blocks of securities with little publicity about the price paid or the company shares are traded (known as dark pools)
Describe the returns from shares with risk and reward
- Shareholders in a limited company do not have liability for the debts
- Company is a separate legal entity
- investment and loss can be reduced in the event of liquidation
Describe the returns from the shares with ex dividend shares
- paid half yearly
- Anyone who purchases shares between then and the dividend date won’t receive next dividend
What happens when I share is said to be ex dividended?
Share price falls by the dividend amount
Shareholders hope to see you two types of return what are they?
i- the growth in capital
ii- dividends payable as their share of company profits
How can an investor assess the companies potential?
Earnings per share is equal to =
Net profits / number of shares
How is price earnings ratio calculated
Share price / earnings per share
How does a high or low P/E ratio affect the demand?
- A high PE ratio means the shares are more expensive and the share is in demand
- A low PE ration means the shares are less expensive and not in high demand
How are dividends taxed?
Paid without deduction of tax but are subject to income tax
What is a rights issue?
Where a company can raise more capital by issuing shares at a discount to the price at which they can be traded
What is a script issue?
An issue of additional shares, free of charge to existing shareholders
What are preference shares?
- are a part of the share capital of a company
- are entitled to dividends and are payable at a fixed rate
Preference shares are cumulative which means…
There is ensured certainty regarding future dividend payment
What are convertibles?
Securities issued by companies to raise capital
What is meant by Divertification?
When something can reduce the risk of investment fluctuations
What does a warrant give the holder the right to buy?
Shares at a fixed price at an agreed future date
Why would an investor be interested in holding warrants issued by the company?
- if the share price of shares has increased at the time the warrant is exercisable the holder will make more profit on their sale
Investment in real estate fall into 3 categories, what are they?
- residential
- agricultural
- commercial and industrial property
Give advantages of residential property investment
- acceptable security for lenders
- highly developed property market
- Rental income and capital growth tend to provide a good hedge against inflation
Give disadvantages of residential property investment
- risk for not finding suitable tenants
- is a less liquid form of investment
- economy could affect property values
- initial costs are high
What taxes property subject to?
Purchase of property is subject to stamp duty land tax
What are the benefits of the buy to let market?
- Income stream can provide a hedge against inflation
- Easy access to BTL mortgages
- Well developed market
- Easy access to services
What are some risks of BTL market?
- investment costs are high
- difficult to generate funds if they are required at short notice (this is illiquid)
- there may be void periods
- Property will require management and maintenance
What measures were put in place to reduce BTL as an attractive investment?
- Tax relief
- Wear and tear (replaced by a furniture replacement relief)
- Stamp and duty land tax (3% when purchased)
What does commercial property cover?
Anything defined as wholly residential
What does commercial property offer?
It offers reasonably high rental income with steady growth in capital
How can an investor buy and run agricultural property?
They can run the farm themselves or give it to a third party providing rental income
What is a major concern for agricultural property?
Liquidity
What is a benefit for agricultural property?
There is a relief from inheritance tax
What are treasury bills?
Short term redeemable securities issued at a discount to their face value
How are treasury bills different from gilts?
- Short term- issued for a period of 91 days
2. Zero-coupon securities and no interest
What is a commercial paper?
An unsecured promissory note
What is meant by ‘working capital’?
Funds available for the day to day running of a business, calculated as current assets - current liabilities
