1 - The characteristics, inherent risks, behaviour and correlation of asset classes. Part 2 - Equities, property and alternative investments Flashcards
Who governs the ongoing behaviour of companies listed on the stock exchange?
UKLA (united kingdom listing authority)
What is the purpose of AIM (alternative investment market)
Provide wider accessibility to smaller companies who are young and developing, without the onerous requirements of the LSE
They cannot be described as listed, however the shares can be bought and sold.
What are the costs involved in buying and selling shares?
Commission
Stamp duty reserve tax
Panel on Takeovers and mergers levy
What is the difference between an offer price and an bid price?
Offer - price bought at
Bid - price sold at
When is SD and SDRT charged?
SD - charged if the transfer is effected by a stock transfer form, over £1K
SDRT - charged on paperless share transactions effected by the electronic CREST system. The rate is 0.5% for both
Who pays the SD and SDRT?
Paid by the purchaser, rounded up to the nearest £5 (SD), rounded up to the nearest 1p (SDRT)
When is PTM levy charged?
Applied to all trades of £10k or more. flat rate of £1. The panel overseas all takeovers and mergers on LSE companies
What are the key features of preference shares?
Pay a fixed rate of dividend, half yearly if there is sufficinet profit
Payment of dividends takes priority over ordinary shares (but after any interest payments on debt)
They have no voting rights
Following liquidation, rank before ordinary share capital (after creditors)
Yields are higher than bonds, due to the higher risk involved.
What are the different types of preference share?
Cummulative - if there is insufficient funds to pay one year, the shortfall can be carried forward and paid before other share classes
Non-cummulative - no arrears paid and no carry forward
Participating - pay a fixed rate of dividend and participate in profits. Also may receive an additional dividend as a proportion of ordinary share dividend declared
Redeemable - Dividends paid to the shareholder for a period of time & then repaid. Most are undated, some are redeemable on a set date
Convertible - convert into ordinary shares at a set date or terms. If ordinary shares increase in value, its likely conversion rights will be taken up.
What is the tax free amount for dividends across a tax year?
£2,000
What are the main risks associated with holding shares?
Equity capital risk - price depends on supply and demand, previous and future performace of the company, wider economic or technological change, geopolitical events, beneficiaries of fashion - i.e. tech shares
Share dividend volatility - can fluctuate based on profits of the company
Currency risk - out of country investments can fluctuabte in line with currency markets vs sterling
Liquidity risk - potential inability to realise investments when required, smaller company shares (AIM) may be more difficuly to sell. Property funds are particuarly subject to deferred periods and redemption blocks
Counterparty risk - organisation will fail, non disclosure of potential risks to company
Fund Managers and insurance companies - events leading to failure (however greatly reduced due to regulation.
Regulatory risk - inadequate regulation of markets, government influence particularly in emgering/developing economies. Investors being misled, inefficient market mechanisms leading to dealing difficulties, market manipulation
What three elements of diversification could help reduce risk to an investor in equities?
Diversifying from individual shares
Diversifying across sectors
Diversifying across international markets
What is the general view of the financial services press of long term performance of equities vs other main asset types?
They have delivered superior returns over the long term to all other asset classes.
What are the characteristics of Private Equity investment?
Provide medium to long terms funds in exchange for an equity stake and therefore rewarded ultimately by a company’s success
How would a private equity investor realise their asset?
Selling its shares back to the company
Selling to another investor, such as another private equity firm
A trade sale - sale of company shares to another company
The company acheives a stock market listing
What are the two types of Private Equity companies?
Invest directly in unlisted companies
Invest in funds that invest in unlisted companies (fund of funds)
What is the attraction of investing in private equity and what is the risk?
They are shown to grow faster than other types of companies as a result of capital and experience personel input by the private equity firm
Outperform other investments by 2%-4%
Some companies will fail, others will not grow quickly. One product firms are more vunerable and all are vunerable in an economic downturn.
As the majority of shares of those which are listed are often held in private hands, the price can be volatile.
Why is ‘earnings per share’ an important consideration in investment decisions?
All companies listed are required to publish EPS in their accounts
EPS enables an investor to see the trend in a companies profitability
What does the dividen yield demonstrate?
Allows the investor to compare the return on a share to the returns on other investments or other shares.
If a share price slumps, what impact could it have on the yield that could be a concern?
The yield may be inflated and look more attractive if a sudden drop in share price has occured.
