CH:10 Equity and property markets

Question 1

What are the advantages of listed shares over unlisted shares to the investor

Answer 1

• Greater marketability
• Greater divisibility
• More information is available, due to disclosure requirements
• Greater security, from stock exchange regulations
• Easier to value

Question 2

What are four practical reasons for analyzing shares by industry?

Answer 2

• Most companies within an industry are affected by similar factors
• The information about these companies tends to come from a common source and is presented in a similar way
• No-one can be an expert in all areas
• It adds structure to the decision-making process

Question 3

List three reasons for the correlation of investment performance within the same industry

Answer 3

Resources
* Companies in the same sector will use similar resources and will therefore have similar input costs

Markets
* Companies in the same sector supply the same markets, and will therefore be similarly affected by changes in demand

Structure
* Companies in the same sector often have similar financial structures and will therefore be similarly affected by changes in interest rates

Question 4

Why are market movements the biggest influence on a share’s price

Answer 4

1. Most companies are affected by macro-economic factors and the political climate in similar ways
2. Most companies’ costs are affected by similar factors, eg tax, labor markets, cost of borrowing and fuel
3. Many investors are interested in equities as a whole rather than in specific shares, because:
   * The equity market appears attractive compared to another market
   * Investors have real liabilities
   * Regulation and tax breaks tend to favor equities
4. Many investors invest passively in instruments covering a broad range of equities rather then actively seeking out specific shares, because:
   * They believe the costs of active management are not compensated for by sufficient extra return
   * They lack the expertise

Question 5

Outline the advantages of investment in direct property compared with investment in property company shares

Answer 5

• Control
• Diversification away from the stock exchange
• Forced selling and the associated loss is less of an issue
• Management fees to property share company advisors avoided
• Not exposed to high risk types of property
• Not exposed to extra volatility caused by gearing or the discount to NAV changing
• Tax advantages (possibly)
• Utility value
• Volatility of prices lower in the short term as valuations are infrequent

Question 6

What factors determine whether a property is prime

Answer 6

• location
• age and condition
• quality of tenant
• number of comparable properties available to determine rent and valuation
• lease structure
• size