Unit 1 Topic 7 Flashcards
What is equity ?
Equities, also known as ordinary shares, are the most common type of security issued by UK companies to raise funds from investors. When you purchase shares in a company, you become a shareholder. This gives you two key rights:
- The right to receive a portion of the company’s profits distributed to shareholders in the form of dividend income.
The right to vote on important company decisions by participating in shareholder meetings and voting
Direct investment in individual company shares is considered higher risk since failure could mean a total loss.
However, this risk can be balanced via diversification - holding shares in a range of companies across sectors. In the short term, share prices tend to fluctuate. But historically, equity investment has provided strong returns over the long run.
how exactly are shares bought and sold?
This primarily happens on stock exchanges .
The London Stock Exchange is the major exchange for trading shares of UK companies. It serves both primary and secondary market functions:
In the primary market, companies and institutions can raise investment funds by issuing and selling new shares to investors. They may be joining the market for the first time, or existing listed companies raising additional capital.
- The secondary market allows trading of existing shares between investors. This is where most everyday share transactions occur.
What are the main two markets
Main market where companies must meet rigorous listing requirements set by the Financial Conduct Authority on aspects like financials, trading history, and minimum public shares.
The Alternative Investment Market (AIM) has fewer requirements, making it more accessible for newer, small companies seeking finance and public exposure.
What are the main participants of the market
-Companies themselves issuing new shares.
- Institutional investors like pension funds and insurance companies.
- Private individuals buying shares for their personal portfolio.
- Market makers who provide liquidity by constantly being ready to buy or sell shares.
What is over the counter
trading between large institutions. This often involves large share blocks with little publicity.
Returnes come into 2 forms :
Dividends - as we covered earlier, these are portions of company profits distributed to shareholders as income, typically paid twice a year.
- Capital gains - shareholders may see the market value of their shares appreciate over time, allowing them to sell at a profit.
What is ex-dividend
shares are those that no longer qualify for the upcoming dividend payout. A snapshot is taken of eligible shareholders before pay date.
What is earning per share
Earnings per share (EPS) - net profit after tax divided by number of shares. Shows profit attributable to each share.
What is dividend cover
indicates what percentage of earnings is paid out as dividends rather than retained.
What is price to earning ratio
current share price divided by EPS. High P/E suggests high expected growth but share may be expensive.
Dividend income is taxed if it exceeds an individual’s tax-free allowance. Capital gains on share sales are subject to CGT, but the annual exemption can offset this.
What is right issues
when new shares are offered first to existing shareholders to avoid diluting their ownership percentage. Shareholders can also trade these rights.
What is script issues
similar to rights issues, but new shares are issued free of charge to existing shareholders. Increases number of shares and reduces price.
What are preference shares
pay fixed priority dividends ahead of ordinary shares, limited voting rights but higher insolvency claim.
What are convertibles
corporate bonds or preference shares that give the holder the option to convert into ordinary shares later on.
What are Warrants
give the holder the right to buy company shares at a preset price by a certain future date. Gain if share price rises, but warrants lapse unexercised if not.
Property as an investment …
Residential property is increasingly popular, especially buy-to-let, but there are risks like voids, tenant damages, and legal costs. Income after expenses is taxable, and CGT applies on sale. Recent government policy has reduced buy-to-let tax advantages by capping interest deductions, replacing furnishings relief, and adding stamp duty surcharge.
For commercial property, advantages include higher rents, longer leases, and more stable tenants. However, entry investments are larger, hard to diversify, and lending rates can be higher.
What are treasury bills
short term government debt sold at a discount. Very low risk but limited upside.
What are certificates of deposit
receipt confirming fixed term deposit at a bank. Early withdrawal penalties but can be sold.
What are commercial paper
short term notes issued by companies to borrow from institutions. Cheaper than bonds, but must be rolled over frequently.
