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CeMAP 1 (Unit one) > Topic 7 (Other direct Investments) > Flashcards

Topic 7 (Other direct Investments) Flashcards

1
Q

What are equities?

A

Ordinary shares

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2
Q

What do you holders of ordinary shares have the right to do?

A
  1. Receive a share of distributed profits in the form of dividends
  2. Vote at shareholder meetings
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3
Q

What is the main attraction of direct investment in ordinary shares?

A

There is potential capital growth in the medium to long-term

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4
Q

What are securities?

A

Financial assets that can be traded. They can be divided into two broad classes those that represent ownership and those that represent debt

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5
Q

What is a dividend?

A

A portion of the companies profits that is distributed to shareholders

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6
Q

Why is direct investment in shares considered high risk?

A

Because the failure of the company can result in the loss of all capital invested however it is not a risk for individual investors

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7
Q

What factors affect the prices at which shares are traded?

A
  • Company profitability
  • strength of the market sector
  • strength of the UK and global economy
  • Supply and demand
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8
Q

Who buys and sells on the stock exchange?

A

Government gilts, shares, overseas shares and options

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9
Q

Name the two main markets which determine how shares are bought and sold?

A
  1. The main market

2. The alternative investment market

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10
Q

Why are bank deposit account suitable for long-term investment?

A

They are suitable because they have proven unattractive when compared with asset-backed investments

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11
Q

To obtain full listing in the main market it is necessary…

A
  • 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
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12
Q

The London stock exchange is both primary and secondary market, describe both

A

Primary Market = Where companies and financial organisations can raise finance by selling securities to investors

Secondary Market = Where investors buy and sell existing securities

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13
Q

What is the alternative investment market intended for?

A

It is intended for new small companies with growth potential

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14
Q

What is market capitalisation?

A

The market value of the company is calculated by multiplying number of shares in issue by the share price

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15
Q

Name some participants in the market

A
  • governments
  • investment banks
  • banks and small traders
  • investors
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16
Q

When does over-the-counter trading take place?

A

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)

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17
Q

Describe the returns from shares with risk and reward

A
  • 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
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18
Q

Describe the returns from the shares with ex dividend shares

A
  • paid half yearly

- Anyone who purchases shares between then and the dividend date won’t receive next dividend

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19
Q

What happens when I share is said to be ex dividended?

A

Share price falls by the dividend amount

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20
Q

Shareholders hope to see you two types of return what are they?

A

i- the growth in capital

ii- dividends payable as their share of company profits

21
Q

How can an investor assess the companies potential?

A

Earnings per share is equal to =

Net profits / number of shares

22
Q

How is price earnings ratio calculated

A

Share price / earnings per share

23
Q

How does a high or low P/E ratio affect the demand?

A
  • 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
24
Q

How are dividends taxed?

A

Paid without deduction of tax but are subject to income tax

25
Q

What is a rights issue?

A

Where a company can raise more capital by issuing shares at a discount to the price at which they can be traded

26
Q

What is a script issue?

A

An issue of additional shares, free of charge to existing shareholders

27
Q

What are preference shares?

A
  • are a part of the share capital of a company

- are entitled to dividends and are payable at a fixed rate

28
Q

Preference shares are cumulative which means…

A

There is ensured certainty regarding future dividend payment

29
Q

What are convertibles?

A

Securities issued by companies to raise capital

30
Q

What is meant by Divertification?

A

When something can reduce the risk of investment fluctuations

31
Q

What does a warrant give the holder the right to buy?

A

Shares at a fixed price at an agreed future date

32
Q

Why would an investor be interested in holding warrants issued by the company?

A
  • if the share price of shares has increased at the time the warrant is exercisable the holder will make more profit on their sale
33
Q

Investment in real estate fall into 3 categories, what are they?

A
  • residential
  • agricultural
  • commercial and industrial property
34
Q

Give advantages of residential property investment

A
  • acceptable security for lenders
  • highly developed property market
  • Rental income and capital growth tend to provide a good hedge against inflation
35
Q

Give disadvantages of residential property investment

A
  • risk for not finding suitable tenants
  • is a less liquid form of investment
  • economy could affect property values
  • initial costs are high
36
Q

What taxes property subject to?

A

Purchase of property is subject to stamp duty land tax

37
Q

What are the benefits of the buy to let market?

A
  • Income stream can provide a hedge against inflation
  • Easy access to BTL mortgages
  • Well developed market
  • Easy access to services
38
Q

What are some risks of BTL market?

A
  • 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
39
Q

What measures were put in place to reduce BTL as an attractive investment?

A
  1. Tax relief
  2. Wear and tear (replaced by a furniture replacement relief)
  3. Stamp and duty land tax (3% when purchased)
40
Q

What does commercial property cover?

A

Anything defined as wholly residential

41
Q

What does commercial property offer?

A

It offers reasonably high rental income with steady growth in capital

42
Q

How can an investor buy and run agricultural property?

A

They can run the farm themselves or give it to a third party providing rental income

43
Q

What is a major concern for agricultural property?

A

Liquidity

44
Q

What is a benefit for agricultural property?

A

There is a relief from inheritance tax

45
Q

What are treasury bills?

A

Short term redeemable securities issued at a discount to their face value

46
Q

How are treasury bills different from gilts?

A
  1. Short term- issued for a period of 91 days

2. Zero-coupon securities and no interest

47
Q

What is a commercial paper?

A

An unsecured promissory note

48
Q

What is meant by ‘working capital’?

A

Funds available for the day to day running of a business, calculated as current assets - current liabilities

CeMAP 1 (Unit one) (16 decks)

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