What are equities?
An equity represents a part ownership of a company’s capital and is an alternative name for a share.
Investors buy shares in a company because they expect to receive income in the form of dividends, and to achieve capital growth. They hope that rising company profits will lead to increasing dividends and/or growth in the value of the shares.
What factors affect share prices?
- In the long-term, fundamental economic and political factors cause movements in the whole market (i.e changes with inflation, productivity, growth and govs fiscal and monetary stances)
- In the short-term, market movements can eb affected by investor sentiment (investors being optimistic or pessimistic about a particular company, sector or market)
- Profit expectations: expectations that a company’s profits will either grow or decline.
- Dividend expectations: companies may increase or reduce dividends, since amounts paid is at the discretion of the directors of the company. Investors prefer steady growth.
- Takeover activity: company may be considered a takeover target, which could boost share price, atleast in short-term.
- Quality and track record of management: quality of management
What is the difference between primary market and secondary market?
The primary market is securities that are sold for the first time to investors whereas secondary market is securities that have already been issued that can eb bought and sold between investors.
What are the costs of buying and selling shares?
- Commission
- Stamp duty (0.50%)
- Stamp duty reserve tax (0.50%)
- Panel on Takeovers and Mergers levy (£1 applied to all trades of £10,000)
ALWAYS ROUND STAMP DUTY TO THE CLOSEST MULTIPLE OF 5.
What are the two main classes of shares?
Ordinary and preference shares
What are the features of a preference share?
- Usually pays a fixed rate of dividend half-yearly (similar to loan stock however, dividend is only paid if there are sufficient after-tax profits, whereas with loan stock, it must be paid whether the company has made a profit or not)
- Preference shares have priority over the payment of dividends on ordinary shares
- Generally have no voting rights unless dividends have fallen into arrears
- Yields are higher to compensate for the risks involved.
What are the features of ordinary shares?
- Last to be paid out in the event of liquidation
- Have a right to share in the profits of the company through dividend payments
- Have a right to attend and vote at company meetings
- Bear the greatest risks and therefore should receive a higher rate of return
What other types of ordinary shares can a company have?
- Non voting ordinary shares
- Deferred ordinary shares (do not qualify for dividends until reached a pre-determined level or specific period after their issue
- Alphabet shares (divided into different classes, with each having different rights to voting etc)
What are dividends and what is the tax treatment?
Dividends are paid out to shareholders based on the profits that a company has made. It is up to the board of directors to determine whether a dividend will be paid and the amount.
The tax treatment is:
- investors do not pay any tax on the first £1,000 of dividends received in a tax year.
- tax paid depends on the investors income tax band
What are the main risks to holding shares? (name atleast 4)
- equity capital risk
- share dividend volatility
- currency risk
- liquidity risk
- counterparty risk
- fund managers and insurance companies
- regulatory risk
How do you lower the risk with equities?
Diversification by:
- Diversifying from individual shares: diversifying over a range of shares in different sectors of the market - Investor reduces the risk of poor performance by one share.
- Across sectors: reduces non-systemic risk.
- Across international markets: spread across different market sectors is diversification.
What is private equity?
Regarded as an asset class in its own right and involves either taking a stake in or acquiring companies that are not publicly traded on a stock exchange.
What are the characteristics of private equity?
- Provides medium-to-long term finance in return for an equity stake in a potentially high-growth, unquoted companies
- Investments in this asset class can be achieved through private equity funds and through EIS, SEIS or VCTs
What are the risks for private equity?
- Private equity can deliver high returns because companies generally grow fastest when they are young.
- High risk of losses since some unlisted companies will fail and others will not grow quickly.
- Some unlisted companies are one-product firms, which makes them more vulnerable to a domestic downturn or recession.
What is an investment ratio?
Investment ratios are used by investors when deciding whether a share should be bought, sold or held. The factors that are of most concern to the average investor relate to the returns that they are receiving on their investments & risks they are facing.
- this allows for trends in the company’s performance over a number of years to be identified and comparisons to be made with similar companies and/or with the industry’s average.
What is dividend yield and what is the formula for it?
Formula: Dividend per share divided by current share price x 100
Measures the dividend as a percentage return on the current share price. Allows an investor to compare the current return on a share with the return that could be obtained from bonds/deposits.
What is earnings per share and what is the formula?
Formula: profit attributable to ordinary shareholders divided by number of ordinary shares in issue
EPS enables an investor to see the trend in a company’s profitability.
What is dividend cover and what is the formulas?
Two formulas:
Individual basis: Earnings per share divided by dividend per share
Total profit basis: profit attributable to ordinary shareholders divided by dividends paid to ordinary shareholders
Dividend cover measures how many times the dividend could be paid out of the available current earnings. It indicates the riskiness of the investment and the margin of safety a company has in paying the dividend.
What is price earnings ratio and what is the formula?
Formula: Current market price of share divided by earnings per share
P/E ratio is based on the relationship between the share price and the EPS. It is a measure of how highly investors value the earnings of a company. It can be viewed as a reflection of the market’s optimism or pessimism about the potential for future growth in earnings.
What is net asset value and what is the formula?
Formula: Net assets attributable to ordinary shareholders divided by number of ordinary shares in issue
The NAV of a company is the value of the tangible assets that are attributable to the ordinary shareholders. It attempts to message the amount available to shareholders if the company were to close down, sell all of its assets, pay all its bills, repay all of its borrowings and distribute the balance to the shareholders.
Effectively the capital provided by the shareholders plus all of the profits the company has retained in the business, rather than paying out as dividends.
What are the limitations of investment ratios?
- different accounting policies can be used to calculate profits and value assets. Making comparisons between companies in same industry difficult.
- Management may decide to change the accounting policy of a company over the years. Comparisons become misleading.
- May use historical data which is not best guide to future performance and investment potential.
- Periods where there has been high inflation can produce misleading figures. The reported figures may show an upward trend, but in real terms, they could be static or even declining.
What are stock market indices?
Indices that bring together the movements of individual share prices and show the direction in which a market has moved over a period of time.
Purpose: compare performance of a particular share or compare the performance of a fund manager.
What is the FTSE Russell?
- Owned subsidiary of the LSEG providing a wide range of stock market indices and associated data services.
- Maintains indices that are widely used and quoted, helping investors make informed investment decisions and benchmark the performance of their investments.
What is market capitalisation?
is the stock market valuation of a company, which is calculated by multiplying the number of shares in issue by their market price.
