Chapter 10 - Equity and property market Flashcards
(19 cards)
Define the term ordinary share
Ordinary shares are securities held by the owners of an organisation
Ordinary shareholders have the right to receive all distributable profits of a company after debtholders and preference shareholders have been paid.
They also have the right to attend and vote at general meetings of a company.
Investment and risk characteristics of ordinary shares (equity)
Security: The security of the dividend income will depend on the company issuing the shares (dividend cover)
Yield (real vs nominal): Expected to provide a real return over the long term
Yield (Expected return relative to other assets): More risky than bonds, so higher expected return
Spread: Potential for volatile markets and dividents (supply & demand)
Term: no fixed redemption date, generally considered to be long-term
Expenses: Dealing costs higher than for conventional government bonds
Exchange rate - currency risk: equities avialable overseas
Marketability: depends on the issuing company and whether listed or not (generally worse than for government bonds)
Tax: depends on the territory
Describe the cashflows on an ordinary share from the prespective of the investor
Share purchase:
-Initial lump sum negative cashflow equal to the price paid for the share plus dealing expenses
Dividend payments:
* Regular series of positive cashflows representing a share in the company’s profits
* The timing of these payments is generally known
* The amount is unknown and variable
* Over time profits and hence dividends are expected to increase broadly in line with growth in GDP
* The company may choose not to distribute all of its profits but to retain some for new projects, expansins or subsidize dividents in poorer years
Final payment:
There is no redemption payment - dividends can be assumed to continue indefinetly
* However, there will be a final positive cashflow, which is unknown in amount and timing if:
1. The investor sells the share or company buys it back
2. The company winds up and there is residual funds to distribute
What are the advantages of listed shares over unlisted shares to the investor
Greater marketability
Greater divisibility
More information is avialable, due to disclosure documents
Greater security, from stock exchange regulations
Easier to value
It is practical for analysts to specialise in one area of industry because
Factors affecting one company within an industry are llikely to be relevant to other companies in the same industry
Information for companies in the same industry will come from a common source an be presented similarly
No one analyst can expect to be an expert in all areas, so specialisation is appropriate
The grouping of equities according to some common factor gives structure to decision-making process. Assisits in portfolio classification & management
List 3 reasons for the correlation of investment performance within the same insustry
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
Define what a quoted shares is
Listed on a stock exchange and make up the majority of avialable equity investment
Investment characteristcs of quoted shares
more marketable
more secure
easier to value than non-quoted shares
Preference share
A particular class of share that generally ranks ahead of ordinary shares.
Normally entitled to a specified rate of dividend and, unlike ordinary shareholders, not to residual profits
Typical features of preference shares
dividend on a preference share is usually a fixed percentage of the par value and is always paid before any distribution to ordinary shareholders
dividend on preference shares is usually treated in the same way as ordinary shares for tax purposes
Dividend rate is quoted net of tax
Dividends don’t have to be paid if profits are insufficient
Generally cumulative
Mostly no final redemption date
Normally don’t carry voting rights
Investment and risk characteristics of direct property
Security:
-Risks of voids and tenant defaults
-Risk of political interference
-Risk of obsolescence and need for refurbishment
Yield (real vs nominal): Real return, broad hedge for inflation. Income forms a stepped pattern over time
Yield (expected return relative to other assets): Higher expected return than for government bonds (less marketable and less secure)
Spread: Capital values of buildings can be volatile over the long term, but land is indestructible so always will have some value
Expenses: High dealing costs and management costs
Marketability: very unmarketable (Unit size, uniqueness, valuation)
Characteristics can be changed by owner, e.g. redevelopment
On what factors would a prime property score highly?
CALL ST
* Comparable properties for rent reviews and valuation
* Age, condition and flexibility of use
* Location
* Lease structure
* Size
* Tenant quality
Define freehold ownership of a property and outline the rights and restrictions of the freeholder
Freehold ownership is ownership in perpetuity.
Rights:
* To occupy the building or lent it out
* To refurbish the property or develop it
Restrictions:
* Covenants
* Easements such as right of way
* Planning and building regulations
* Statutory requirements not to cause nuisance to others
Give 3 examples of indirect property investment
Open ended schemes, such as property unit trusts
Closed ended schemes such as property investment trust companies
Shares in property (development / investment) companies
What to consider when comparing direct to indirect property investments:
CEDE MEET VVGF
Control
Expenses
Diversification
Expertise
Marketability
Exposure to other sectors
Equity correlation for instance
Taxation
Volatility
Valuation
Gearing
Forced Sales
Running yield for Property
Running yield= rental income (net of all management expenses) / Cost of purchase (gross of all purchase costs)
What are the additional risk posed by property development?
Time delay on completion
Overrun on building cost
Getting tenants into the building upon on completion
Deine what a REITs is
Real Estate Investment Trusts are companies that manage, operate and own real estate portfolio consisting of income producing property
