Equities Flashcards
What is the attraction to investing in equities?
Equities, or shares, are effectively part ownership of the capital of a company. Investors buying shares are hoping that the company will make a profit and in turn will pay out this profit to the shareholders in the
form of a dividend. They are also hoping that company profits over time will increase its attraction to other investors and that demand will force up the price, giving them a capital gain
What can effect the share price of a company
Prices of shares can be influenced by all manner of factors, not least the profits that are expected from the company, the market in which the company operates, the state of the country, the management of the company and the way that the firm is seen by the market.
What companies are listed on the main market?
You may have heard the term “floating”
on the stock exchange. This means that a company is listed or has gone public on the main market (a company quoted/traded on the AIM cannot be referred to as “listed”
as they don’t meet the criteria for firms on the main market).
It is no easy task to become listed. There are many hurdles to navigate all of which is regulated and governed by a special part of the FCA called the United Kingdom Listing
Authority (UKLA).
What companies are listed on the AIM market?
This is regulated
by the LSE and is designed to provide access to a primary and secondary market for smaller, less established firms not yet able to meet the criteria to join the main market. There are also not as many barriers to entry and the costs are lower.
What are ordinary shares?
These will be the bulk of shares in a company. They will rank behind other shares, such as preference shares
(below) in receiving dividends from profits but will be entitled to whatever profits remain after these liabilities are settled. Not all profits will be distributed; companies will retain some profits for future business needs.
What tax credit is given on the distribution of shares?
Until April 2016, dividends were paid with a 10% tax credit to reflect the fact that the company has paid corporation tax on its profits prior to distribution. This is no longer the case and this is an important change.
Now, no tax credit is given and no tax is due on the first £1,000 of dividends received (known as the dividend allowance). After this, a basic rate taxpayer will have to pay 8.75% tax on the dividends received while a higher and additional rate taxpayer will pay 33.75% /39.35% respectively. This marks a significant increase in dividend taxation.
What are preference shares?
These will pay a fixed rate of return, similar to bonds, but only where the company has sufficient profits to warrant the payment. They are called preference shares as
payment of the dividend ranks ahead of dividends on ‘ordinary shares’ as does payment in the event of the company going bust
What are cumulative preference shares?
if a dividend is missed, it is carried
forward and will be paid in years of higher profits and must be paid before shareholdings of a lower class are paid, e.g. Ordinary Shareholders.
What are non-cumulative preference shares?
where a dividend is missed, it is lost.
What are participating preference shares?
as well as a fixed dividend, in good years a share of the company’s wider profits may be due
What are redeemable preference shares?
the firm may buy back the shares at a
pre-set date or when it chooses. In this way it is a source of temporary finance.
What are convertible preference shares?
can be exchanged for ordinary shares
if the investor wishes – perhaps because the price of ordinary shares has risen
