Factors effecting share prices
External economic and political factors
- how is market affected and such as… (4)
- impact
Investor sentiment
- if enthusiastic about company is causes what
- overseas markets
Profit Expectations
- investors usually take into account what and current share price reflects what
- what will company do if profits lowers than forecasted and unexpected warnings cause what
External economic and political factors
- market affected by changes in economics such as inflation, productivity and governments fiscal and monetary stance.
- these have different impact on different sectors
Investor sentiment
- Investors can be optimistic or pessimistic about particular company, sector or market. If enthusiastic, share price will rise and will also attract more investors causing a further rise in price.
- Investors in LSE influenced by overseas markets (mainly USA).
Profit Expectations
- As above can grown or decline. Investors usually take into account long term trends and current share price may reflect on how well company is expected to perform for some time in the future.
- Company will usually warn LSE if profits will be significantly lower than forecasted otherwise unexpected warnings cause share price to fall due to investors selling.
Factors effecting share price (2) -
Dividend Expectations
- dividend increases and decreases and follow what trends
- investors prefer what and what can lead to drop in share price
Takeover activity
- may boost what over what term?
Quality & track record of management
- what is difficult to evaluate
- ability of management to recognise what is considered what
- influential member of management
Dividend Expectations
- company can reduce or increase dividends as amount paid is at discretion of the directors. Usually follow same trends as profits.
- Investors prefer steady growth and unexpected reduction is likely to lead to drop in share price.
Takeover activity
- Could boost their share price in the short term.
Quality & track record of management
- quality of management difficult to evaluate
- Ability of management to recognise changing circumstances and respond is considered a positive factor by investors, prompting them to buy.
- Appointment or departure of influential member can cause immediate change in share price.
Dealing in shares - buying and selling in secondary market affect on companies finances? Shares are first issued to LSE admitted to (2)
Official list or main market
- who make up main market
- becoming listed is what and regulated by who
- regulator aims to provide (2) and govern what (2, behaviour and reporting)
AIM
- launched to provide what for who and used as what stage
- listing requirements, formalities and costs
- objective of aim (accessibility and regulation)
- listed
Buying and selling shares in secondary market does not affect the finances of the companies whose shares are traded.
When shares are first issued on LSE they must be admitted to either the official list or main market or Alternative Investment Market (AIM).
Official list or main market
- companies listed on LSE make up main market
- Becoming listed in expensive and regulated by UKLA (FCA)
- UKLA aims to provide stable and orderly market. Govern ongoing behaviour of listed companies and they way they report to their shareholders.
AIM
- LSE launched this to provide primary and secondary market facilities for companies too small or too new to apply for a full stock market listing. Used as interim stage for full listing.
- Less listing requirements with fewer formalities and lower costs.
- Objective to provide wider accessibility for smaller companies that are seeking to sell shares while maintaining a regulated or orderly market.
- These shares should not be described as listed.
Costs of buying and selling shares - bought through who, costs involved with buying (3), spread between (2) and spread for larger and smaller companies.
Commission
- rules on rates and how set
- charges for purchase and sale
- how charge and online
SD&SDRT
- what is it and who’s not included
- when is SD charged (form and amount)
- SDRT charged when (system and amount)
- rate of tax is…
- paid by who, SD and SDRT rounded to nearest (2)
PTM
- rate for trades over?
- body that overseas what
Shares bought through stockbroker. Costs involved in buying and selling include;
- commission
- stamp duty (SD) and stamp duty reserve tax (SDRT)
- Panel on takeovers and mergers (PTM) levy
Will also be spread between;
- offer price (buying) and bid price (sold)
- larger company shares that are heavily traded will have narrow spreads whilst wider for smaller company reflecting their reduced liquidity and less market makers prepared to quote a price.
Commission
- no rules on rates and commercial decision to set their own rates.
- Charges same for purchase and sale.
- flat fee or % and usually lower if online
SD and SDRT
- Government taxes charged on transfer of UK registered shares (not AIM)
- SD charged if transfer effected by stock transfer form and over £1k
- SDRT charged on paperless transactions made through CREST and no £1k threshold.
- Rate of tax is 0.5% of purchase price
- paid by purchaser, SD rounded up to next multiple of £5 and SDRT to nearest penny.
PTM
- Flat rate charge of £1 applied to all trades over £10k.
- overseas all takeovers and mergers on LSE
Types of shares - two main classes and three areas they differ.
Preference shares
- rate of dividend how often and only paid if?
- priority of dividend payments compared to o shares but come after what payments have been made?
- voting right
- ranking in liquidation compared to o shares, loan capital and other creditors.
- yields
Types
Cumulative - insufficient profits and dividend and priority of payment
Non Cumulative - opposite of above
Participating - rate of dividend and profits + add what?
Redeemable - dividend paid for how long and then what
Convertible - convert to what
Two main classes - ordinary and preference - differ in three areas;
- receipt of dividends, control of company and return of capital on liquidation.
Preference shares;
- pay fixed rate dividend biannually and similar to loan stock. But dividend only paid if sufficient after tax profits.
- payment of dividends on p shares have priority over o shares but comes after all interest payments on debt have been made.
- no voting rights unless dividend payments have fallen into arrears.
- rank ahead of o shares in liquidation but after loan capital and other creditors.
- yields higher than bonds due to risk involved.
Types of preference shares
Cumulative - if insufficient profits to pay dividend, share dividend is carried over to next year. Dividend arrears must be paid before any dividend on o shares paid
Non-Cumulative - dividend lost if not paid at end of financial year.
Participating - pay fixed rate dividend and allow holder to participate in profits. Receive additional dividend.
Redeemable - Temp source of finance for company with dividend being paid for short period and then share repaid.
Convertible - right to convert to ordinary shares
Ordinary Shares
- form bulk of what and confer what?
- entitled to what after what paid (2)
- can attend and do what and share per vote
- entitled to what on liquidation after what
- risk and returns
Types of o shares
- Non-voting - what are they, why used and market price
- Deferred - dividend when (2) and how compensated (2)
- Alphabet shares - classed as and rights
Rights
- Form bulk of share capital and confer ownership stake.
- Entitled to profits that remain after tax and preference share dividends paid.
- Entitled to attend and vote at meetings. One share carries one vote.
- Represent risk capital. If liquidated, o shareholders are entitled to share of residual value of companies assets after debts settled and p shareholders have received dividends.
- greater risk but greater returns.
Other types;
- Non-voting - like usual but carry no voting rights. Used to keep control of company in hands of a few shareholders. Market price usually lower than usual o shares because of this.
- Deferred - do not qualify for dividend until dividend has reached certain level or period after issue. To compensate, may have greater voting rights or larger portion of profits after period.
- Alphabet shares - can be classed as A, B or C shares and have different rights.
Private equity - provides what in return for equity in what and how can it realise capital gain;
- selling shares to who (3) or stock market listing
How can an investment in this asset class be achieved (2)
Private equity funds;
- raise money for investment from who
- retain investment for how long and funds are structured as what for how long
- aims of investment
- how do retail investors gain access
Involves providing medium to long term finance in return for equity stake in potentially high growth, unquoted companies. A private equity firm is looking for its investments to be rewarded by company’s success and will seek to realise its capital gain through an exit which may involve;
- selling shares back to management
- selling shares to another investor
- trade sale (sale of shares to another company)
- company achieving stock market listing.
An investment in this asset class can be achieved through PE funds and listed private investment equity companies.
Private equity funds
- seek to raise money for investment from institutional investors such as pension funds and insurance companies.
- look to retain investment for between 5-7 years and many structured as limited partnerships that have fixed life of ten years.
- during this period, funds invest money and aim to return investors money + additional returns made.
- retail investors can gain access by using fund of funds
Private equity - Listed private equity firms
- two types of PEI companies (basically how they invest)
- hybrid
- CI, traded where and included on what savings vehicle.
Returns on private equities
- PE firm backed growth and due to?
- rationale for investing
- diversification
Risks
- fail and growth
- Liquidity and transaction cost
- volatility and why (volumes)
Listed private equity investments;
- two types of PEI companies - invest directly in unlisted companies and invest in funds that invest in unlisted companies.
- some do a hybrid of these approaches.
- form of CI, traded on LSE and can be included in S&S ISA.
Returns;
- Companies backed by private equity firms have been shown to grow faster due to capital and experience of personnel.
- rationale for investing is that superior returns can be generated but offer limited diversification.
Risks;
- High risk as some unlisted companies will fail or not grow quickly.
- PE securities are less liquid than other listed securities and cost of transaction is higher.
- Share price more volatile as trading volumes low.
Investment Ratios - why are they used by investors? Ratios allow (2, trends and comparisons)
Earning per share
- listed companies required to..
- allows investor to see what
- formula
Dividend yield
- can compare what (bond and deposits)
- formula
- yield fluctuates with what and makes yield appear what and why?
- not reliable predictor of what as what can change
- distributing fewer dividends
Used by investors when deciding if share should be bought, sold or held. Ratio’s allow;
- trends in companies performance to be identified
- comparisons against similar companies and industry average.
Earning per share
- all listed companies are required to publish EPS in their accounts
- EPS allows investor to see trend in companies profitability.
- Formula = profit to ordinary shareholders/number of o shares issued
Dividend Yield
- allows investors to compare current rate of return on a share with the return that could be obtained from bonds or deposits.
- Formula = dividend per share/current share price*100
- yield will fluctuate with share price and can look attractive simply because share price has slumped.
- not a reliable predictor of future income as level of dividend could change.
- some companies distribute fewer dividends to finance business activities. These will finance future profits and dividends but wont be considered in calc.
Investment ratios
Dividend cover
- indicates what (riskiness and safety)
- individual basis formula
- total profit basis formula
- the higher the figure, the more likely company will be able to…
- high dividend cover implies
Price earnings ratio
- measures what (investors and earnings)
- viewed as a reflection of market what about future growth in what?
- formula
- should only compare companies in same (2)
- if ratio higher than industry sector average, suggests what
Dividend cover
- Indicates riskiness of investment and margin of safety company has in paying the dividend.
- Individual basis = profit attributed to o shareholders/dividends paid to o share.
- Total profit basis = earning per share/dividend per share
- the higher the figure the more likely the company will be able to maintain dividends if profits fall.
- A high dividend cover implies they are retaining most of profits for reinv to bus.
Price earnings ration
- measures how highly investors value the earnings of the company.
- viewed as a reflection of market op or pes about potential for future growth in businesses earnings.
- formula = current market price of share/earnings per share
- should only be used to compare companies in same sector and type business.
- if ratio higher than industry sector average, suggests that the company shares are in great demand. Shares more expensive but higher rate of return.
Net Asset Value
- measure what if company were to what
- formula
- balance sheet value when liquidating (assets)
- less useful for what companies (valued on what and shares trade above what)
- NAV useful if what circumstances and why(takeover bid and amount received)
Net asset value
- attempts to measure the amount available to shareholders if company were to shut down and distribute remaining balance to shareholders.
- Formula = net assets attributable to ordinary shareholders/no of o shares in issue
- unlikely that assets would realise their balance sheet value of liquidating.
- less useful for companies that are valued on their earnings potential where shares would trade above NAV.
- NAV is useful valuation figure in key circumstances - if takeover bid made, shareholders can compare bid to NAV to check if assets are being given away too cheaply. - if liquidation is a possibility, the NAV provides shareholders with indication on amount they might receive.
Limitations of investment ratios
- accounting policies, changing accounting policies, historical data and high inflation periods
- different accounting policies can be used to calculate profits and value of assets which make comparisons difficult.
- management may change accounting policy over the years making comparisons over time misleading.
- Ratio’s calc’d using historical data and may not be best guide to future performance and investment potential.
- Periods of high inflation can produce misleading figures.
Indices - they bring together movements of what and show what, used to compare (performance of what against what x2)
FTSE Russell
- indices are weighted on what rather than what, bigger companies weighting and price movements effect on index
Constituent weighting’s are adjusted to reflect what from each company and as follows;
- what is the free float of a stock
- weighting’s for companies with less than 75% of shares available are what?
- FF adjustment is to cope with what situations (directors) and why (available supply and market capitalisation).
Stock market indices bring together movements of individual share price and show direction in which market has moved over period of time. Can be used to compare;
- performance of particular share against sector or market as a whole.
- performance of fund manager against market as a whole.
FTSE Russell
- indices are weighted on market capitalisation rather than share price i.e. bigger the company, the bigger its weighting in the index and any price movement will t4 have larger impact on index.
FTSE constituent weightings are adjusted to reflect the free float of shares for each company as follows;
- the free float of a stock is the proportion of shares that are available for trading on the stock market.
- the weighting’s of companies with less than 75% of their shares available for public trading are reduced to reflect this.
Free float adjustment is to cope with situations where limited stocks available due to directors owning a large % of company shares. This more accurately reflects available supply rather than just weighting by market capitalisation.
Main FTSE indices
All share index
- what does it track, represents performance of who, real time and companies review, how is it divided, designed to behave like what and used as an indicator of what, used as basis for what, moves slower than what
FTSE 100
- tracks what, membership revised when and changes prompted by (3), company movement effect on share value, updated when and represents what % of UK market capitalisation
FTSE 250
- tracks what, % of market capitalisation and when updated and reviewed.
FTSE 350
- tracks what, % of MC and updated and reviewed when
All-Share Index
- tracks market value of 100, 250 and smallcap.
- represents performance of all eligible companies listed on LSE
- calculated in real time and companies are reviewed quarterly with rebalance in June.
- is divided into sectors representing different market sectors
- designed to behave same as an actual portfolio and can be used as an indicator of London market’s long term performance.
- often used as basis for index-tracking funds
- moves slower than FTSE 100
FTSE 100
- tracks value of 100 biggest companies listed on LSE
- membership revised quarterly with changes being prompted by new listings, mergers and changes in market capitalisation.
- movement in and out of this can have large effect share value.
- updated constantly during trading hours
- represents 81% of total UK market capitalisation
FTSE 250
- next 250 companies below 100.
- represents 15% of market capitalisation.
- updated constantly during trading hours and reviewed quarterly.
FTSE 350
- combo of 100 and 250 and covers 96% of market capitalisation
- as above for updates and review
Limitations of indices
- larger companies effect
- fundamentally weighted indices as an alternative and take into account what
- if change on capital value alone it ignores what and effects what?
- do not include (cost and expenses)
- assumes not holding what
- Few larger companies can have a substantial effect on the market
- Fundamentally weighted indices can be used instead and this takes into account factors other than price such as revenue, earnings, number of employees and dividends.
- If an index changes on capital value alone it ignores reinvested dividend income which can effect long term performance. Most indices allow for this, however.
- indices do not include the cost of buying and selling, CGT or management expenses.
- assumes fully committed to market and not holding any cash
Yields of property - general rule, what can reduce yield significantly (2)
SDLT - buyer/tenant responsible for what tasks (forms, submit and tax)
SDLT rates - how charges and rates for
- up to 125k, 125k-250k, 250k-925k & 925k-1.5m & over 1.5m
first time buyer rates and no relief available when? And charge
How much extra charged for second home if over what amount? Does not apply if (main residence)
Yields - general rule is larger property lower yield. Level of ongoing expenses an void periods can reduce yield significantly.
SDLT - buyer or tenant responsible for the following tasks;
- completing relevant SDLT forms
- submitting them to HMRC
- paying tax and must be received by HMRC within 14 days of transaction.
SDLT rates for buying land or premises are and charged in tiers i.e. first 125k pays no tax;
- up to £125k - 0%
- 125k-250k - 2%
- 250k-925k - 5%
- 925k - 1.5m - 10%
- Over 1.5m - 12%
First time buyers pay no SDLT on first £300k but no relief available if over £500k. 5% between 300k-500k.
Additional 3% charged on top of purchases of second home if over £40k. Does not apply if property being purchased is replacing main residence which has already been sold.
SDLT - charge for properties over what amount that are bought by who?, not charged if used for what purpose. SLT rates for commercial property;
- up to 150k, 150k-250k and over 250k
What is rent-a-room relief and qualifying rules;
- occupy, tax threshold, exempt amount per resident?, sub letting, rent taken into account and if exceeds threshold (excess and expenses or gross and expenses)
Property income allowance;
- first what is exempt
- doesn’t apply to (2)
SDLT is charged at 15% for properties over £500k that have been bought by companies or CI schemes. Although not when property used for rental business. SDLT rates for commercial property are;
- up to £150k - 0%
- 150k-250k - 2%
- over 250k - 5%
If letting part of individuals main residence, then entitled to special tax exemption known as rent-a-room relief. The qualifying rules for exemption tax as follows;
- individual must occupy the property at same time as tenant.
- No tax payable if gross rent for tax year is below £7.5k
- One exempt amount per resident
- if two people receiving rent from same property then relief is 3.75k each (eg sub letting)
- Rent taken into account is payment for accommodation + for goods & services
- if rent exceeds 7.5k then can choose to either pay tax on excess with no expenses or be taxed on gross rent received less expenses with no rent-a-room relief.
Property income allowance;
- first £1k is exempt from tax and not declared on tax return.
- doesn’t apply for rent-a-room or when actual allowable expenses are deducted.
Commercial property - three main sectors and lowest + highest yielding sectors.
Past performance - demonstrate that returns are dependant on what?
Investment considerations
- diversifying, investors, lease length and why, maintenance and insurance, income, agreement flexibility and result on rent, rent review
Divided into three main sectors;
- retail, office buildings and industrial properties
Retail sector often lowest yielding whilst industrial property highest.
Past performance;
- demonstrates that commercial property returns are dependant on economic cycle and so display periods of growth and contraction.
Investment considerations
- investors usually look to diversify using props from three main sectors all over the UK + internationally.
- usually richest investors but others can get involved through CI
- owners prefer longer leases as they enhance property value.
- leases usually pass full responsibility for maintenance and insurance costs onto tenant so net income more than residential property.
- income more secure due to longer agreements
- agreements becoming more flexible with break options that allow tenants to leave but this means tenant may end up paying more as less security for LL.
- rent reviewed every three or five years and can have push up only option
Problems with investing in commercial property
- sale and purchase process
- additional costs
- rent increases
- sold as
- analysis
- demand and time
Drawbacks;
- sale and purchase is slow and complex process
- transaction and marketing costs add around 6% to purchase price + SDLT 5% if over £250k
- Rent increases take place after specific period 3-5 years
- Property can usually only be sold as a whole.
- CP market is difficult to analyse
- time lag in increasing the supply of property to meet extra demand which may cause over supply.
Alternative Investments - art and collectibles characteristics;
- income and returns, cost to keep (4), value dependant on, demand driven by…, experts and demand and authenticity
Performance of AI;
- overall performance has been…, basic economics for AI and risks (supply and interest and funds)
Art and collectibles - most investments in physical assets have characteristics as follows;
- do not generate any form of income or return
- cost money to keep and incur charges in form of insurance premiums, specialist storage charges, security or maintenance
- value dependant on limited supply and fluctuating demand
- demand driven by taste of collectors, number and wealth
- tastes can be conditioned by experts and can be responsible for increasing popularity for certain items
- authenticity is of importance
Performance
- has been variable, usually increase with inflation but not guaranteed
- basic economics behind AI = fixed or declining supply (eg old furniture) and increasing demand (private investors or museum)
- risk that supply is not fixed and buyers lose interest or funds to buy.
Art and collectibles - investment variability - when considering to buy an asset for investment must take into account;
- buying and selling price can be…
- state of repair and additional costs
- subjectiveness
- tastes
- dominated markets and prices
- enjoyment
- diversification
When considering whether to buy asset an investment, must take into account;
- buying and selling price can be much greater than conventional investments.
- State of repair can be important to value of object and restoration, storage and insurance can add to cost and risk.
- Genuineness and quality is subjective and mistakes can be made
- tastes change and therefore effects price
- some markets dominated by small number of dealers and when buying prices move rapidly upwards and vice versa.
- Collectors who know and enjoy the items they collect are more likely to invest successfully.
- difficult to diversify and requires specialist knowledge.
Alternative investments - commodities - two categories, correlation with other asset classes, why have commodity prices risen sharply, volatility and why (short term) which includes;
- Exploration, economy, climate and stocks
Higher chance that these will to what compared to stock market?
How to invest in commodities (3)
- companies, funds and other
Risks
- dominated by who and as a result they… which makes prices more
- politics
- timing
Raw materials that fall into two categories;
- hard commodities such as metals and gas
- soft commodities i.e. grown rather than mined (coffee etc)
Have a low correlation with other asset classes.
Commodity prices have risen sharply as demand for raw materials in developing countries has increased but prices can be volatile with short term supply and demand issues as well including;
- exploration and extraction activity, economic growth rates, climatic factors and stock levels.
- higher chance of sudden collapse compared to stock market.
Commodity investment can be through;
- investing in companies that produce commodities
- funds that invest in comms
- exchange traded commodities (ETC)
Risks;
- dominated by trading interests such as big metal companies and coffee traders which are more likely to learn latest info that’ll move prices quicker making prices more volatile.
- Political risk such as threatening supply of oil
- Whilst offer diversification, they are cyclical and timing is essential
Cryptocurrencies - what is it, why was bitcoin launched
Blockchain
- ledger that does what using what to keep…
- uniqueness
- once confirmed by miners
Mining;
- confirms what
- creates what and pays miners what and charged to who
Features;
- anon, back by who, regulation
Risks;
- crime, hacked and volatility
Digital currency produced by a computer. Bitcoin launched so money not managed by large banks.
Blockchain
- digital ledger that processes transactions using encryption technology to keep secure record of each transaction.
- unique to each user
- transaction is known immediately by whole network and once confirmed by miners it cannot be reversed.
Mining;
- confirms transaction is legitimate
- creates new digital currencies by paying the miners with a % of the transaction fee charged to the user.
Features of cryptocurrencies;
- transactions are anonymous
- not backed or influenced by Gov or central banks
- not regulated by FCA
Well suited for money-laundering and tax evasion and risks of wallets being hacked. Highly volatile.
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Chapter 1 - Cash Investments & Fixed Securities24
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Exam Extras5
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Chapter 11 - The Performance Of Investments10
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Chapter 10 - Principles Of Investment Planning11
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Chapter 9 - The Investment Advice Process5
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Chapter 8 - Other Indirect Investments36
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Chapter 7 - Unit Trusts, OEICs & Investment Trust Companies28
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Chapter 6 - Nature & Impact Of The Main Types Of Risk On Investment Performance6
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Chapter 5 - The Principles Of The Time Value Of Money8
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Chapter 4 - Merits & Limitations Of The Main Investment Theories14
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Chapter 3 - The Macro-Economic Environment & its Impact On Asset Classes17
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Chapter 2 - Equity, Property & Alternative Investments23
