Topic 7 Flashcards
(214 cards)
1
Q
What are equities?
A
Equities, also known as ordinary shares, are securities issued by companies, representing ownership in the company.
2
Q
What are the two main rights of equity holders?
A
- Equity holders have the right to receive dividends (a share of the company’s profits)
AND
- To vote on decisions about how the company is run.
3
Q
Why is direct investment in shares considered high risk?
A
Direct investment in shares is high risk because if the company fails, shareholders can lose all the capital invested.
4
Q
Why might an investor want to invest across a range of shares instead of just one?
A
Investing across a range of shares reduces risk by diversifying across different companies and sectors, helping to mitigate the impact of any single company’s failure.
5
Q
How do share prices fluctuate in the short term, and what factors influence these fluctuations?
A
Share prices can fluctuate due to factors like:
- Company profitability
- Supply and demand for shares
- The strength of the UK and global economy
- Market sector performance.
6
Q
What long-term advantage do equities provide over deposit-based savings?
A
In the long term, equities generally offer higher growth than deposits and outpace inflation, despite short-term price volatility.
7
Q
Where can investors find the rights associated with a particular share?
A
The rights are set out in the company’s articles of association, which can be examined at the company’s registered office or Companies House.
8
Q
How does investing in equities compare with deposit-based savings over the long term?
A
In the long term, equities tend to provide higher growth than deposit-based savings and outperform inflation, although they are subject to greater short-term volatility.
9
Q
Why is it important for investors to understand the rights attached to a particular share before investing?
A
Different shares may have varying rights, and understanding these helps investors know their entitlements, such as dividend payments and voting rights, which can impact their investment returns.
10
Q
What are some products that help investors diversify their equity investments to reduce risk?
A
Products like unit trusts allow investors to spread risk by investing across a range of companies and sectors, reducing the impact of poor performance from any single company.
11
Q
What is the London Stock Exchange (LSE)?
A
The LSE is the UK’s market for trading stocks, shares, gilts, corporate bonds, and options, and it has existed for hundreds of years.
12
Q
What are the two markets for shares on the LSE?
A
The two markets are the main market and AIM (Alternative Investment Market).
13
Q
What are the requirements for a company to be listed on the main market?
A
To be listed, a company must conform to the FCA’s Listing Rules, including having traded for at least three years and ensuring that 25% of its issued share capital is held by the public.
14
Q
What is the primary market on the LSE?
A
The primary market is where companies raise finance by selling securities to investors, either by going public or issuing more shares.
15
Q
What is the secondary market on the LSE?
A
The secondary market is where investors buy and sell existing securities, and it is larger in terms of daily traded securities than the primary market.
16
Q
Why might a company choose to list on the main market of the LSE?
A
Listing on the main market offers advantages such as greater liquidity, which makes it easier for investors to buy and sell shares;
and,
Greater access to capital, allowing companies to raise additional funds more easily.
17
Q
What role does the FCA play in the listing of companies on the LSE?
A
The FCA, as the UK Listing Authority (UKLA), ensures that companies meet stringent requirements under the Listing Rules, including financial disclosures and public shareholding thresholds.
18
Q
What is the main difference between the primary and secondary markets on the LSE?
A
The primary market is where companies issue new securities to raise funds, while the secondary market is where investors trade existing securities.
19
Q
What advantages do companies gain by conforming to the LSE’s main market requirements?
A
Companies gain access to a larger pool of investors, improved visibility, and the ability to raise funds more easily due to the increased credibility and transparency associated with a listing on the main market.
20
Q
Who oversees the Listing Rules for companies on the LSE?
A
The Financial Conduct Authority (FCA), acting as the UK Listing Authority (UKLA), oversees the Listing Rules for companies on the LSE.
21
Q
How long must a company have been trading to qualify for a full listing on the LSE?
A
A company must have been trading for at least three years
22
Q
What percentage of a company’s issued share capital must be in public hands to be listed on the main market of the LSE?
A
At least 25% of the company’s issued share capital must be in the hands of the public.
23
Q
Why might investors prefer the secondary market over the primary market?
A
Investors may prefer the secondary market because it allows them to buy and sell existing securities more frequently, offering greater liquidity and flexibility compared to the primary market.
24
Q
What are the advantages for a company of going public on the LSE’s primary market?
A
The main advantages include raising capital by selling shares;
and,
Increased visibility in the financial market, which can attract more investors and create better liquidity for the company’s shares.
25
What is the main purpose of AIM?
AIM's main purpose is to enable new and small companies with growth potential to raise capital by issuing shares and allowing those shares to be traded.
26
What types of companies are AIM primarily intended for?
AIM is primarily intended for new, small companies with the potential for growth.
27
How do the rules for joining AIM compare to the official list?
The rules for joining AIM are fewer and less rigorous compared to those for joining the official list, making it easier for smaller companies to join.
28
What are two key benefits for companies joining AIM?
The two key benefits are:
1. Access to public finance.
and
2. An enhanced public profile.
29
Why might smaller companies prefer AIM over the main market?
Smaller companies might prefer AIM because the requirements are less rigorous, making it easier and more affordable for them to raise capital and gain public exposure.
30
What advantage does joining AIM provide besides raising capital?
Besides raising capital, joining AIM allows companies to enhance their public profile and reach a wider audience.
31
How does AIM support small companies in their growth?
AIM supports small companies by giving them access to public finance through share issuance and providing a platform for their shares to be traded.
32
What is the FTSE 100 Index?
The FTSE 100 Index, commonly known as the Footsie, is an index of the top 100 companies in the UK by market capitalisation, where each company is weighted according to its market value.
33
What companies are included in the FTSE 250 Index?
The FTSE 250 Index includes the next 250 companies by market capitalisation, following the top 100 companies listed in the FTSE 100.
34
How are companies weighted in the FTSE 100 Index?
Companies in the FTSE 100 are weighted according to their market value or capitalisation.
35
What is the FTSE 350 Index?
The FTSE 350 Index combines the companies listed in the FTSE 100 and FTSE 250 indices, covering the top 350 UK companies by market capitalisation.
36
How many companies are included in the FTSE All-Share Index?
The FTSE All-Share Index includes around 600 companies, split into different sectors.
37
What does the FTSE All-Share Index measure?
The FTSE All-Share Index measures price movements of shares across various sectors.
38
Why might investors choose to track the FTSE All-Share Index?
Investors might track the FTSE All-Share Index to get a broad overview of the entire UK stock market, as it represents a wide range of sectors and company sizes, giving a more comprehensive picture than narrower indices like the FTSE 100 or 250.
39
What is meant by 'Market Capitalisation'?
The market value of a company, calculated by multiplying the number of
shares in issue by the share price.
40
Who are the individual and institutional investors in the financial market?
Individual and institutional investors include entities such as pension funds and life assurance companies that invest money in the market.
41
What role do banks and other traders play in the financial market?
Banks and other traders issue, buy, or sell shares or derivatives.
42
What type of securities can governments and corporations issue in the market?
Governments, public institutions, and corporations issue securities such as gilts, corporate bonds, and local authority bonds.
43
What is the role of investment banks in the market?
Investment banks facilitate the issue of new securities.
44
What type of investors might invest in pension funds and life assurance companies, and how do they participate in the financial markets?
Institutional investors such as pension funds and life assurance companies invest on behalf of individuals, pooling large sums of money to invest in stocks, bonds, and other financial products, contributing significantly to market liquidity.
45
Why are banks and traders key participants in the issuance and trading of shares and derivatives?
Banks and traders provide the necessary infrastructure for the issuance and trading of shares and derivatives, creating liquidity and enabling price discovery in financial markets.
46
How do governments and corporations use bonds and gilts in the market, and what purpose do these securities serve?
Governments and corporations issue bonds and gilts to raise funds for various projects or operational needs, offering investors a fixed income and a relatively low-risk investment.
47
Why might institutions prefer to engage in OTC trading rather than on a formal exchange?
Institutions may prefer OTC trading because it allows them to trade large blocks of securities with little publicity, avoiding significant market movements that might result from public trades.
48
What is OTC trading?
OTC trading refers to the trading of large blocks of securities between institutions, often outside of formal exchanges, with limited publicity about the price or the companies involved.
49
Is OTC trading common among individual private investors?
No, OTC trading is not very common among individual private investors but is more common between institutions.
50
What is another term used to describe OTC trading involving large blocks of securities?
OTC trading involving large blocks of securities is sometimes referred to as ‘dark pools’.
51
How does OTC trading differ from traditional exchange trading in terms of transparency?
OTC trading is generally less transparent than exchange trading, as the details of the trades (such as the price and the companies involved) are not as widely publicized, making it more difficult for outsiders to assess market conditions.
52
What might be the advantage for institutions trading in ‘dark pools’?
Trading in ‘dark pools’ allows institutions to execute large trades without significantly affecting the market price of the securities, which could happen if the trades were made in a more public forum like a traditional stock exchange.
53
What risk do shareholders in a limited liability company face?
Shareholders risk losing the value of their investment if the company goes into liquidation, though they are not liable for the company's debts.
54
Why might investors expect higher returns from shares compared to deposit-based investments?
Investors expect higher returns from shares because equities are riskier, with the potential to lose all their investment, unlike deposit-based investments where capital is protected.
55
What does 'ex-dividend' mean?
'Ex-dividend' refers to shares that are traded without the entitlement to the next dividend because the administrative process of paying dividends has already begun.
56
What happens to the share price when it becomes ex-dividend?
The share price typically falls by approximately the dividend amount when it becomes ex-dividend.
57
What does 'cum-dividend' mean?
'Cum-dividend' means the shares are purchased before they go ex-dividend, and the purchaser is entitled to the next dividend payment.
58
Why would an investor prefer to buy shares cum-dividend?
An investor might prefer to buy shares cum-dividend because they will receive the upcoming dividend, providing additional income from their investment.
59
What could cause the price of a share to drop on the day it becomes ex-dividend?
The price drop is due to the fact that new buyers of ex-dividend shares are not entitled to the upcoming dividend, so the share price typically falls by approximately the dividend amount to reflect this.
60
In what situation might an investor choose to invest in equities despite the risk of losing their entire investment?
An investor might choose to invest in equities because, over the long term, equity markets have generally provided higher returns than safer, deposit-based investments.
61
What happens if an investor purchases shares after the ex-dividend date?
The investor will not receive the upcoming dividend payment; it will go to the previous owner of the shares.
62
Why do equity investors run the risk of losing their entire investment?
If a company goes into liquidation, shareholders may lose all their invested capital, as they rank last in terms of repayment.
63
How does the risk level of equity investments compare to that of deposit-based investments?
Equity investments are generally riskier because the company’s performance can fluctuate, potentially leading to losses, while deposit-based investments provide more security for capital.
64
Why might equity markets provide higher returns over the long term compared to other investments?
Equity markets tend to grow with the overall economy, leading to potential capital appreciation and dividends over time, whereas deposit-based investments offer lower returns but more security.
65
What are the two primary rights of a shareholder in a limited company?
Shareholders have the right to receive dividends;
and,
The right to participate in company decisions, typically by voting in shareholder meetings.
66
What is the formula for Earnings Per Share (EPS)?
EPS = Net profit / Number of shares
67
What is Dividend Cover?
How much of a company profits are paid as dividend
68
What is the formula for Price to Earnings ratio (P/E ratio)?
Share price / earnings per share
69
What are the two primary forms of financial returns shareholders seek from their shares?
The two forms are capital growth (increase in the share price) and dividends (income from distributable profits).
70
How does a company’s decision to retain profits rather than distribute them as dividends affect shareholders?
When a company retains profits for expansion, shareholders may not receive higher dividends immediately, but it could lead to long-term capital growth if the business expands successfully.
71
What is earnings per share (EPS), and how is it calculated?
EPS is the company’s post-tax profit divided by the number of shares. It shows how much profit each share contributes but is not necessarily the dividend amount paid to shareholders.
72
What does dividend cover measure, and why is it important to investors?
Dividend cover measures how many times a company’s earnings can cover its dividend payments.
A dividend cover of 2.0 or more is generally seen as healthy, indicating that the company is not paying all its profits as dividends, which allows it to retain profits for future growth.
73
What would it mean for investors if a company’s dividend cover is below 1.0?
If dividend cover is below 1.0, it means the company is paying more in dividends than it earned in profits, potentially using retained earnings from previous years.
This may signal financial instability.
74
How is the price/earnings (P/E) ratio calculated, and what does it signify?
The P/E ratio is calculated by dividing the share price by earnings per share.
It indicates the market’s expectations for a company’s future earnings growth.
75
Why is it not always a good idea to buy a share with a high P/E ratio?
A high P/E ratio could mean that future earnings expectations are already factored into the share price, meaning the stock might be overvalued.
It is essential to consider other indicators before investing.
76
What does a low P/E ratio suggest about a company’s shares?
A low P/E ratio indicates that the share may be undervalued or not in high demand, but this doesn’t necessarily mean it's a bad investment.
It could signal an opportunity if the company’s prospects improve.
77
How are dividends taxed?
Dividends are paid without the deduction of tax but are subject to income tax if they exceed the individual’s dividend allowance (DA). The tax rate depends on the tax band into which the dividend income falls.
78
What is the dividend allowance (DA)?
The dividend allowance (DA) is the amount of dividend income that is exempt from tax. If total dividends are within this allowance, no tax is payable.
79
How are gains from the sale of shares taxed?
Gains realized on the sale of shares are subject to capital gains tax (CGT).
However, the gain may be offset against the annual CGT exempt amount, reducing the taxable amount.
80
What happens if an individual’s dividend income exceeds the dividend allowance?
If dividend income exceeds the dividend allowance, the excess is taxed at rates that depend on the individual's tax band, which may be basic, higher, or additional rate.
81
Can an individual avoid paying tax on dividends altogether?
If the total dividend income falls within the dividend allowance for that tax year, no tax is payable. Any amount exceeding the allowance is taxable.
82
What role does the capital gains tax exempt amount play in the taxation of shares?
The capital gains tax exempt amount allows individuals to offset gains made from the sale of shares, reducing the amount of gain that is subject to capital gains tax.
83
Does dividend income covered by the dividend allowance still affect the basic-rate band?
Yes
Even if dividend income is covered by the dividend allowance and not taxed, it still reduces the portion of the basic-rate band available.
84
Why might more dividend income be taxed at the higher rate despite the dividend allowance?
The dividend allowance uses part of the basic-rate band, meaning any remaining dividend income above the allowance could fall into the higher-rate band and be taxed at a higher rate.
85
What do Stock Exchange rules require when a company with existing shareholders wants to raise further capital?
Stock Exchange rules require that the company must first offer any new shares to existing shareholders.
86
What is a rights issue offering?
A rights issue offering is a method by which a company offers new shares to its existing shareholders, usually at a ratio relative to the shares already held, and often at a discount.
87
At what price are new shares typically offered to shareholders in a rights issue?
New shares are generally offered at a discount to the price at which the new shares are expected to commence trading.
88
What can shareholders do if they do not wish to take up their right in a rights issue?
Shareholders who do not wish to participate can sell their rights to someone else.
89
How are shareholders compensated if they sell their rights in a rights issue?
The sale proceeds from selling the rights compensate for any fall in the value of their existing shares due to the dilution of their holding.
90
Could you explain what is required by Stock Exchange rules when a company needs to raise more capital?
When a company needs to raise more capital, Stock Exchange rules mandate that new shares must be initially offered to the existing shareholders.
91
Can you describe what happens during a rights issue offering?
During a rights issue offering, a company issues new shares to its current shareholders at a ratio related to their existing shares, typically at a discounted price.
92
What is typically the pricing strategy for new shares in a rights issue?
In a rights issue, new shares are usually priced below the anticipated market price once they begin trading.
93
What options do shareholders have if they decide not to purchase additional shares in a rights issue?
Shareholders who choose not to buy additional shares have the option to sell their rights to acquire these shares to another party.
94
How do shareholders mitigate the impact of dilution on their holdings when they sell their rights?
Shareholders mitigate the impact of dilution by receiving the proceeds from the sale of their rights, which compensates for the potential decrease in the value of their existing shares.
95
What is a scrip issue?
A scrip issue, also known as a bonus issue or a capitalisation issue, is an issuance of additional shares free of charge to existing shareholders.
96
Is additional capital raised in a scrip issue?
No, no additional capital is raised in a scrip issue.
97
How is a scrip issue achieved?
A scrip issue is achieved by transferring reserves into the company’s share account.
98
What is the effect of a scrip issue on the number of shares and the share price?
The effect of a scrip issue is to increase the number of shares while reducing the share price proportionately.
99
Could you explain what a scrip issue involves?
A scrip issue involves issuing additional shares to existing shareholders at no cost, without raising additional capital, by reallocating company reserves to the share account.
100
Does a scrip issue lead to an increase in capital for the company?
No, a scrip issue does not lead to an increase in capital as it merely involves reallocating existing reserves.
101
Can you describe how a company executes a scrip issue?
A company executes a scrip issue by transferring funds from its reserves to the share capital account, allowing the issuance of free shares to shareholders.
102
What are the implications of a scrip issue for share distribution and pricing?
The implications of a scrip issue include an increase in the total number of outstanding shares and a corresponding decrease in the share price, maintaining the overall market value of the company.
103
What are preference shares?
Preference shares are a type of stock that entitles holders to dividends payable from the company's profits before ordinary shareholders and generally at a fixed rate.
104
How do preference shares differ from ordinary shares?
Preference shares differ from ordinary shares in that they typically offer dividends at a fixed rate, have priority over ordinary shares in dividend payments, often lack voting rights, and have a higher claim in the event of company liquidation.
105
What are cumulative preference shares?
Cumulative preference shares are those where unpaid dividends accumulate and must be paid out before dividends can be distributed to ordinary shareholders.
106
Do preference shares usually carry voting rights?
Preference shares do not normally carry voting rights, but in some cases, holders may acquire voting rights if their dividends have been delayed.
107
What happens to preference shareholders if a company is wound up?
In the event of a company being wound up, preference shareholders have a higher claim on any remaining assets than ordinary shareholders, though they still rank below creditors.
108
Could you explain the entitlements of preference share holders regarding dividends?
Holders of preference shares are entitled to dividends at a fixed rate and receive dividends before ordinary shareholders, with cumulative rights to dividends if they are not paid when due.
109
How do the rights of preference shareholders compare to those of ordinary shareholders in terms of dividends and claims on assets?
Preference shareholders have the advantage over ordinary shareholders in terms of receiving dividends first and having a higher claim on assets if the company is liquidated.
110
Can you describe the conditions under which preference shareholders might receive voting rights?
Preference shareholders might receive voting rights in specific circumstances, particularly if there is a delay in the payment of their dividends.
111
What is the typical priority order for repayment in the event a company goes bankrupt?
In the event of bankruptcy, creditors are repaid first according to a set order of priority.
Shareholders are at the lowest priority, with preference shareholders ranking above ordinary shareholders but below creditors.
112
What implications do cumulative preference shares have for a company's financial obligations?
Cumulative preference shares require a company to accumulate unpaid dividends, adding to its financial obligations, as these dividends must be paid before any dividends can be distributed to ordinary shareholders.
113
What are convertible preference shares?
Convertible preference shares are securities that offer the right to be converted into ordinary shares of the issuing company at a later date.
114
How do convertible preference shares differ from traditional corporate bonds?
Convertible preference shares, unlike traditional corporate bonds, offer the option to convert into equity, typically resulting in a lower interest rate compared to conventional bonds due to this potential for conversion.
115
Why do convertible preference shares typically offer a lower rate of interest?
They offer a lower rate of interest because the conversion feature into potentially more valuable equity compensates for the lower yield.
116
What has been the trend regarding the issuance of convertible securities in recent years?
In recent years, there has been an increasing trend towards issuing convertible preference shares instead of traditional corporate bonds.
117
Could you explain what convertible preference shares entail?
Convertible preference shares are a type of security that allows holders the option to convert their shares into ordinary shares of the issuing company at a predetermined future date.
118
What are the financial advantages of investing in convertible preference shares?
The financial advantages include potentially lower initial yields balanced by the opportunity to convert into equity, which may appreciate in value, providing a higher overall return.
119
What are warrants?
Warrants are financial instruments that give the holder the right to purchase shares at a fixed price on a future date.
120
Why are warrants attractive to investors?
Warrants are attractive because they allow holders to gain rights to buy shares at a fraction of the cost of the shares themselves.
121
Under what condition will a warrant typically be exercised?
A warrant will be exercised if the share price is above the fixed purchase price specified in the warrant terms at the time it can be exercised.
122
What happens if the share price is at or below the price specified in the warrant at the exercise date?
If the share price is at or below the specified price, exercising the warrant would not be economically beneficial, and the warrant will lapse.
123
Could you explain what warrants entail and their function in financial markets?
Warrants are rights issued to investors that allow them to purchase shares at a predetermined price on a specific future date, providing an opportunity to invest in shares at a lower initial cost.
124
What makes warrants a preferred option for some investors?
The main appeal of warrants is their cost-effectiveness, as they provide investment rights at a much lower cost compared to directly purchasing shares.
125
Under what circumstances is exercising a warrant considered advantageous?
Exercising a warrant is advantageous when the current market price of the shares is higher than the price set in the warrant, allowing the holder to buy shares at a discount.
126
What are the implications for a warrant holder if the market price does not exceed the strike price at the time of exercise?
If the market price is not above the strike price at the time of exercise, the warrant becomes worthless and lapses, as exercising it would not offer financial gain.
127
What is the common extent of residential property ownership for most investors?
Most investors typically own residential property just for their personal residence, although some purchase additional properties specifically for investment purposes.
128
What are the benefits of investing in residential property?
The benefits include property being a strong form of security for borrowing and the UK property market being highly developed, efficient, and professional.
129
What are some pitfalls inexperienced investors should be aware of in residential property investment?
Pitfalls include the critical importance of location, the susceptibility of the property market to economic conditions, and property being a less liquid form of investment.
130
How have buy-to-let mortgages affected the accessibility of property investment?
Buy-to-let mortgages have made it easier for small investors to enter the property market by providing tailored financing options.
131
What are property bonds and how do they work?
Property bonds are an investment option where funds are invested in a mix of physical properties and shares in property companies, suitable for those with less capital or those wishing to spread risk.
132
What tax implications apply to the purchase and income from residential properties?
The purchase of property is subject to stamp duty land tax and a surcharge if it’s not the only property owned. Income from property is taxed after deductible expenses, and gains from the sale are subject to capital gains tax (CGT), although capital expenditures can be offset against taxable gains.
133
What makes residential property a viable option for securing loans?
Residential property is considered a viable option for securing loans due to its stable value and acceptance as collateral in financial markets.
134
Can you discuss the challenges one might face when investing in residential property?
Challenges in residential property investment include selecting the right location, the impact of economic downturns on property values and rental opportunities, and the relative difficulty in quickly converting property into cash.
135
How do property bonds provide an alternative to direct property investment?
Property bonds offer an alternative by pooling investments into a diversified portfolio of physical properties and property company shares, reducing individual investment risk and requiring less capital.
136
What are the tax responsibilities for property investors in the UK?
Property investors in the UK are responsible for paying stamp duty land tax at purchase, income tax on rental earnings after expenses, and capital gains tax on the profit from property sales, with the possibility of offsetting enhancements against gains.
137
What impact have tax crackdowns had on the buy-to-let market in the UK?
Tax crackdowns have significantly impacted the once buoyant BTL market, although many landlords still hold portfolios of BTL properties.
138
What makes buy-to-let attractive to investors?
Buy-to-let is attractive to investors because it offers a regular and potentially increasing income stream that can hedge against inflation, easy access to BTL mortgages, a well-developed market, and easy access to ancillary services like letting and property management.
139
What are the risks associated with buy-to-let investments?
Risks include high initial costs, illiquidity, potential void periods without tenants, risk of property damage by tenants, legal fees for removing unsatisfactory tenants, and ongoing management and maintenance costs.
140
How has government policy changed regarding buy-to-let investments?
Government policy has limited tax relief to a basic rate tax credit, replaced the wear-and-tear allowance with a furniture replacement relief, and imposed a stamp duty land tax surcharge on second properties.
141
Could you explain the reasons behind the government's concern regarding the growth of the BTL sector?
The government was concerned that the growth of the BTL sector was reducing the availability of affordable housing for first-time buyers, prompting regulatory changes to curb its attractiveness.
142
How do the benefits of buy-to-let investments compare to general property ownership?
Beyond general property ownership benefits, buy-to-let offers specific financial advantages such as regular income which helps in inflation hedging, easier financing options, and support services that enhance investment ease and potential returns.
143
What financial pressures might a buy-to-let investor face?
A buy-to-let investor might face financial pressures from high upfront and ongoing costs, periods without rental income, and potential expenses from property damage or legal issues related to tenant management.
144
Can you describe the changes in tax regulations affecting buy-to-let landlords?
Changes in tax regulations for BTL landlords include limiting mortgage interest deductibility to a basic rate tax credit, replacing the wear-and-tear allowance with only actual costs for furniture replacement deductible, and adding an SDLT surcharge for second homes.
145
What specific changes did the government implement regarding tax relief for BTL landlords?
The government changed tax relief from allowing BTL landlords to deduct the full cost of mortgage interest from their income to limiting this deduction to a tax credit at the basic rate only.
146
What replaced the annual wear-and-tear allowance for BTL landlords?
The annual wear-and-tear allowance was replaced by a furniture replacement relief, which only allows the actual cost of replacing furnishings to be offset against profits.
147
How does the SDLT surcharge affect buy-to-let investors?
Buy-to-let investors purchasing second properties now face an SDLT surcharge, increasing the upfront cost of acquiring additional properties.
148
Can you describe the impact of recent tax changes on the profitability of BTL investments?
Recent tax changes have potentially reduced the profitability of BTL investments by:
1. limiting mortgage interest deductions to a basic rate tax credit,
2. Altering the allowance for furnishing costs
3. Introducing an SDLT surcharge on additional properties
All of which increase the costs for landlords.
149
What strategies might BTL investors use to manage the new financial burdens introduced by tax reforms?
BTL investors might manage new financial burdens by optimizing property management to reduce costs, possibly refinancing mortgages, or adjusting rental prices to reflect the increased expenses due to tax reforms.
150
How have changes in tax policy affected the accessibility of the BTL market for new investors?
Changes in tax policy, including stricter mortgage interest deductions and higher stamp duty costs, have made it more challenging and less attractive for new investors to enter the BTL market.
151
What constitutes commercial property?
1. Commercial property includes individual retail units
2. Shopping arcades and centers
3. Offices
4. Industrial units
5. Hotels and leisure facilities
6. Mixed-use properties.
152
What are the main advantages of investing in commercial property?
The main advantages include reasonably high rental income, steady capital growth, regular rent reviews, longer lease terms, more stable and long-term tenants, and typically lower initial refurbishment costs.
153
What are the drawbacks of investing in commercial property?
Drawbacks include higher average values which make risk spreading difficult, less potential for spectacular value growth compared to residential properties, and potentially higher interest rates on loans.
154
What do lenders investigate before financing the purchase of commercial property?
Lenders check the quality of the land and property, the reputation of builders, architects, and other professionals involved, and the suitability of likely tenants.
155
Could you explain the typical characteristics of commercial property investments?
Commercial property investments typically offer high rental income and steady capital appreciation. They benefit from features such as regular rent reviews, longer leases, and stable tenancies, making them attractive to investors looking for less frequent tenant turnover and predictable income streams.
156
What factors make commercial property less attractive than residential property in terms of investment growth?
Commercial property generally lacks the rapid appreciation seen in some residential markets and involves higher initial investment levels, making risk diversification more challenging and the investment less liquid.
157
How do the financial commitments for commercial property compare with residential property investments?
Financial commitments for commercial properties can be higher due to greater initial values and potentially higher interest rates on loans, contrasting with residential property where initial costs and borrowing rates may be lower.
158
What due diligence is typically performed by lenders when financing commercial properties?
Lenders perform thorough due diligence, including assessing the physical and legal integrity of the property, evaluating the credibility of associated professionals like builders and architects, and considering the commercial viability and stability of prospective tenants.
159
What is agricultural property in the context of investment?
Agricultural property refers to farmland that an investor can either manage themselves to generate income or rent out to others for rental income.
160
What are the financial benefits of investing in agricultural property?
The financial benefits include the potential for capital growth and rental income from leasing parts of the land.
161
What are the market characteristics for agricultural land?
The market for agricultural land is highly specialized with limited demand, which can lead to concerns about liquidity.
162
What is agricultural relief for inheritance tax?
Agricultural relief for inheritance tax provides up to 100% relief on inheritance tax liabilities for owner-occupied farms, and 50% relief for farms where the land is leased out.
163
What challenges do investors face when entering the agricultural land market?
Investors face challenges such as the highly specialized and limited demand nature of the market, which affects liquidity and can make buying and selling the property more difficult.
164
What considerations should an investor keep in mind when contemplating investment in agricultural property?
Investors should consider the liquidity challenges due to the specialized market, potential income from operations or leasing, and the benefits of agricultural relief in planning for future inheritance tax liabilities.
165
What are money-market instruments?
Money-market instruments are forms of short-term debt where interest is not paid during the term but is determined by the difference between the invested/borrowed amount and the repayment amount.
166
What are Treasury bills?
Treasury bills are short-term redeemable securities issued by the Debt Management Office of the Treasury, used as fundraising instruments by the UK government.
167
How do Treasury bills differ from gilts?
Treasury bills differ from gilts primarily in their duration and interest payment structure. They are short-term, typically issued for 91 days, and are zero-coupon securities, meaning they don't pay periodic interest but are issued at a discount to face value.
168
What is the return on investment for a typical Treasury bill?
or example, a Treasury bill might be issued at £9,850 with a par value of £10,000, providing a £150 gain over 91 days, which translates to an annualized return of just over 6%.
169
How is the secondary market for Treasury bills characterized?
The secondary market for Treasury bills is robust, primarily facilitated by financial institutions rather than a centralized marketplace, with prices generally rising steadily towards the redemption value unless affected by significant interest rate changes or supply and demand fluctuations.
170
Could you explain how the interest on money-market instruments like Treasury bills is calculated?
In money-market instruments such as Treasury bills, interest isn't paid out during the term. Instead, the interest is implied in the purchase price, which is less than the redemption value—the difference effectively representing the interest.
171
What makes Treasury bills a low-risk investment option?
Treasury bills are considered very low-risk due to the negligible risk of default by the issuer, the UK government, making them a secure investment for guaranteed returns over a short period.
172
Why are Treasury bills typically not attractive to small, private investors?
Due to their large denominations and the nature of their trading, Treasury bills are generally not suited for small, private investors.
They are more commonly held by large organizations and financial institutions that need secure, short-term places to park large sums of surplus cash.
173
How do market conditions affect the trading price of Treasury bills?
The trading price of Treasury bills can be affected by significant changes in market interest rates or shifts in supply and demand within the financial markets, though the impact is generally muted due to their short-term nature.
174
Can you describe the typical holders of Treasury bills and their reasons for investing?
Typical holders of Treasury bills include large financial institutions and other large organizations that invest in them as a secure, short-term repository for temporarily surplus cash, seeking both security and liquidity.
175
What factors can significantly affect the price of Treasury bills in the secondary market?
Significant changes in market interest rates can affect Treasury bill prices, as these will influence the discount rate at which new bills are issued and the yield required by the market.
Additionally, shifts in supply and demand for Treasury bills also impact their pricing in the secondary market.
176
Could you elaborate on the factors that stabilize Treasury bill prices despite market fluctuations?
Treasury bill prices are relatively stable despite market fluctuations due to their short-term nature and the government backing, which assures investors of their safety.
However, significant changes in interest rates or unusual market conditions can still impact prices, though typically less so compared to longer-term securities.
177
How do investors calculate the yield on a Treasury bill when considering its purchase in the secondary market?
Investors calculate the yield on a Treasury bill by determining the annualized return based on the discount and the remaining days until maturity.
This involves adjusting the simple return for the short duration to an annual basis, giving a clear picture of the investment's yield over a year.
178
How exactly is the return on a Treasury bill calculated?
The return on a Treasury bill is calculated based on the discount at which it is issued relative to its par value.
For instance, if a Treasury bill is issued at £9,850 and has a par value of £10,000, the return is the £150 difference.
The percentage return over the 91-day period is calculated as (£150 / £9,850) * 100, which equals 1.52%.
179
What are 'Treasure Bill'?
Short‑term redeemable securities
issued at a discount to their face
value.
Also known as T‑bills.
180
What are Certificate of Deposits?
A ‘receipt’ confirming that a (substantial) deposit has been made with a bank or building society for a fixed period at a fixed rate of interest.
181
What are 'Bearer Securities'?
Securities that are deemed to be owned by whoever physically possesses the document that confers ownership, rather than ownership being determined by an entry on a register.
182
What are the typical terms for a CD?
CDs typically have terms of three or six months, but depositors can often roll them over for an additional similar period under specified terms if a longer investment period is desired.
183
What is the typical minimum deposit amount for CDs?
The minimum deposit amount for CDs is typically £50,000 or more.
184
What are the penalties for early withdrawal of a CD?
There are significant penalties for withdrawing funds from a CD before the end of its term.
185
Can CDs be transferred before their maturity?
Yes, CDs, being bearer securities, can be sold to a third party if the depositor needs access to the funds before the term ends.
186
How do banks use CDs to manage their liquidity?
Banks issue CDs maturing at times of expected liquidity surplus and hold CDs that mature at times of expected liquidity deficits to balance their liquidity positions.
187
Could you explain how CDs provide security and return to investors?
CDs offer security by being backed by the issuing bank or building society, and they provide a fixed return through interest paid at the end of the deposit term, making them a low-risk investment option for depositors seeking stability.
188
What flexibility do CDs offer to depositors needing to access funds early?
While CDs have significant penalties for early withdrawal, they offer flexibility as they can be sold on the secondary market to third parties, allowing depositors to liquidate their investment if necessary before maturity.
189
How do CDs benefit banks besides attracting deposits?
CDs help banks manage their liquidity by allowing them to align their cash inflows with expected liquidity needs, issuing CDs when they anticipate excess liquidity and holding CDs to cover periods of potential cash shortfalls.
190
What considerations should an investor keep in mind when choosing CDs?
Investors should consider the term length, the interest rate, the penalty for early withdrawal, and their own liquidity needs, as CDs lock in funds but provide a fixed return, which might be below market rates if withdrawn early.
191
What happens if a CD is rolled over?
When a CD is rolled over, it is renewed for another term at the end of its initial period.
The terms of the rollover, such as the interest rate, might differ based on the prevailing market conditions at the time of renewal.
192
How should an investor decide whether to sell a CD on the secondary market or absorb the penalty for early withdrawal?
An investor should consider the current market value of the CD versus the penalty for early withdrawal, alongside their immediate need for liquidity.
Selling on the secondary market may be beneficial if it avoids a significant penalty and the CD can be sold at a favorable price.
192
What factors influence the interest rate offered on a CD?
The interest rate on a CD is influenced by several factors including:
1. The term length
2. The overall interest rate environment
3. The amount deposited
4. The specific policies of the issuing bank or building society.
193
Can the interest rates of CDs adjust during the term or are they fixed until maturity?
The interest rates on CDs are fixed until maturity. This fixed rate provides certainty for both the depositor and the issuing institution regarding the financial terms for the duration of the CD’s term.
194
What is commercial paper?
Commercial paper is a short-term unsecured debt instrument issued by companies to meet working capital needs.
It involves large transactions, typically purchased by institutional investors like pension funds and insurance companies.
195
How does the commercial paper market function for companies with different credit ratings?
Companies with good credit ratings can issue commercial paper at cheaper borrowing rates.
Those with lower credit ratings can still issue commercial paper if they secure a letter of credit from a bank, which guarantees repayment in case of default.
196
What are the typical maturity periods for commercial paper?
Commercial paper is typically issued for periods ranging from 5 to 45 days, with an average maturity of about 30 to 35 days.
197
Why do companies roll over their commercial paper?
Companies roll over their commercial paper to retain funds for longer periods without committing to a fixed interest rate for a long time, providing flexibility in managing their financial liabilities.
198
Could you explain the advantages of using commercial paper over other forms of borrowing for companies?
Commercial paper offers advantages such as lower borrowing costs for companies with good credit ratings and flexibility in financial management due to its short-term nature.
This makes it ideal for managing working capital without the long-term commitment of other debt forms like corporate bonds.
199
How does a letter of credit work in the context of issuing commercial paper?
In the context of commercial paper, a letter of credit acts as a financial guarantee from a bank that assures the paper's purchasers that the bank will repay them if the issuer defaults.
This allows companies with lower credit ratings to access the commercial paper market by reducing the risk to investors.
200
What considerations should a company make when deciding to issue commercial paper?
A company should consider its credit rating, the cost of obtaining a letter of credit if needed, the interest rates compared to other borrowing options, and its ability to repay the debt within the short maturity period typically required by commercial paper.
201
Can you describe how the flexibility of commercial paper's interest rates benefits issuing companies?
The flexibility of commercial paper's interest rates allows issuing companies to take advantage of varying market conditions to refinance their paper at potentially lower rates upon rollover.
This can lead to cost savings and more adaptable financial strategies in response to market dynamics.
202
What is Commercial Paper?
An unsecured promissory note – ie a promise to repay the funds that
have been received in exchange for the paper.
203
What is Working Capital?
Funds available for the day‑to‑day running of the business, calculated as current assets minus current liabilities.
204
Direct investment in shares is low risk for individual investors
because, over the long term, equity markets have outpaced
inflation.
True or false?
False.
It is high risk as if the company fails, the entire investment is at risk. It is difficult for investors to spread the risk effectively across a large number of companies and sectors.
205
Name three factors that can affect share prices.
Company profitability
Strength of economy (UK and internationally)
Strength of market sector
Supply and demand of shares
206
What are the implications for the purchaser of buying shares
ex-dividend?
They will not reveive the next dividend payment following acquisition of shares. The previous owner of the shares will recieve this.
207
A share with a low P/E ratio is likely to be more expensive than
other shares in the same market sector.
True or false?
False
A low P/E ratio shows they are not in high demand and so will likely be less expensive.
208
If a company distributes 25 per cent of its profits in the form
of dividends to its shareholders, what would the dividend
cover be?
a) 4.
b) 8.
c) 10.
d) 25.
A) 4
The profit is 4 times the dividend pay out.
209
What is the difference between a rights issue and a scrip issue?
A rights issue involves offering existing shareholders the oportunity to buy more shares in order to raise capital.
A scrip issue involves issuing additional shares to shareholders free of charge. The effect being to increase number of shares and reduce share price proportionately.
210
Elliott is considering investing in a buy‑to‑let property. He thinks this is a good way to achieve a high return.
What are the main drawbacks that Elliott should be aware of?
Suitable tenants hard to find
Must be in desirable location (schools and transport).
In time of recession letting may be difficult and prices may fall.
Property less easy to realise than other investment.
Investment costs are high, management, stamp duty and Legal charges.
Government measures to discourage BTL have made the tax position less advantageous.
211
How can a buy‑to‑let investor claim relief for wear and tear on
furniture?
They are allowed a furniture replacement relief, which allows the actual cost of replacing to be offset against profits.
212
Treasury bills are zero‑coupon securities.
What does this mean?
They do not pay interest, instead they are issued at a discount to their par value.
213
Commercial paper is generally issued for a term of between
three and six months.
True or false?
False.
Commercial paper is generally issued for between 5 and 45 days. With 30-35 days being typical.
Certificates of deposit are generally issued for between 3 and 6 months.
