WEEK 5

LOOK AT 2ND POWERPOINT

Learning Objectives

• Understand equities, main types of shares.

• Describe the characteristics of equity-based investments.

• Calculate investment ratios measuring performance and appreciate limitations.

• Understand employee share schemes and incentives.

• Explain AIM shares and unlisted securities characteristics.

• Understand the main features of derivatives.

• Distinguish between primary and secondary markets.

Equities

• Definition of Equities: Represents ownership in a company through shares.

• Types of Shares:

  • Ordinary Shares: Common stock, typically offering voting rights and dividends.

  • Preference Shares: Fixed dividends but usually no voting rights.

  • Deferred Ordinary Shares: Dividends paid after other shares.

  • Partly Paid Shares: Shareholders pay part of the share price upon purchase.

  • Convertible Preference Shares: Can be converted into ordinary shares under certain conditions.

• Listings and Quoted Shares: Shares that are registered and traded on a stock exchange.

Share Dealing & Taxation

• Equities include portfolio and pooled investments.

• Buying & Selling Shares:

  • Execution Only: Broker executes trades without providing advice.

  • Advisory: Broker provides advice and executes trades.

  • Discretionary Service: Broker makes investment decisions on behalf of the client.

• Costs Associated with Investing:

  • Purchase Cost: Price paid for shares.

  • Broker’s Commission: Fee for executing trades.

  • Stamp Duty/SDRT (Stamp Duty Reserve Tax): Tax on share transactions.

  • PTM Levy: Charged on transactions exceeding £10,000.

Shares & Taxation

• Taxation of Dividends: Tax on earnings from shares distributed to shareholders.

• Capital Gains Tax (CGT): Tax on profit made from selling shares.

• Stamp Duty/SDRT: Additional tax on share transactions.

• Tax Wrappers & Incentives:

  • Equity ISA: Tax-free savings account for equities.

  • Enterprise Investment Scheme (EIS): Tax relief for investors in small companies.

  • Employee Share Scheme: Incentives for employees to own company shares.

Share Prices

• Factors Affecting Share Prices:

  • Past Performance: Historical company performance impacts perception.

  • Value of Share: Current price versus intrinsic value.

  • Dividends/Re-investment: Dividend announcements influence prices.

  • Supply & Demand: The balance between buy and sell orders affects price.

  • Investor Information: News and analysis impact investor decisions.

  • Company Management: Leadership and their decisions can sway investor confidence.

  • Interest Rates: Higher rates may lower share prices due to higher borrowing costs.

  • Investor Sentiment & Market Psychology: Market moods can drive prices up or down.

Share Valuation

• Fundamental Analysis: Evaluates a company's financial health through statements and ratios.

• Technical Analysis: Studies chart patterns and market trends.

• Efficient Market Hypothesis (EMH): Suggests that stock prices reflect all available information, making it impossible to consistently outperform the market.

• Mergers & Acquisitions (M&A): Transactions that can impact share values and market perceptions.

Measuring Company Performance

• Financial Statements Include:

  • Chairman’s Statement: Insight into company outlook.

  • Income Statement: Summary of revenues and expenses.

  • Balance Sheet: Snapshot of assets, liabilities, and equity.

  • Cash Flow Statement: Reports cash inflows and outflows.

• Assess Activities:

  • Operating Activity: Core business operations.

  • Investing Activity: Buying/selling of long-term assets.

  • Financing Activity: Borrowing and equity financing.

• Notes to Accounts: Additional details on specific items in financial statements.

Ratios & Analysis

• Common Ratios:

  • Earnings per Share (EPS): Indicator of profitability.

  • Price/Earnings (P/E): Valuation measure comparing share price to EPS.

  • Dividend Yield: Ratio of annual dividends to share price.

  • Loan Capital Gearing: Measure of financial leverage.

  • Net Asset Value (NAV): Value per share of an asset-based business.

Stock Market Indices

• Importance of Stock Market Indices: Benchmark for market performance.

• UK Indices include:

  • FTSE 100 (Footsie): Top 100 companies in the UK.

  • FTSE All Share: Represents the entire UK stock market.

  • FTSE 250: The 250 largest companies after the FTSE 100.

  • FTSE Small Cap: Companies with smaller market capitalization.

  • FT Ordinary: Represents ordinary shares in public limited companies.

International Indices

• International Indices Include:

  • DJIA (Dow Jones Industrial Average): Tracks 30 large companies in the US.

  • S&P (Standard & Poor's): Includes 500 large US companies.

  • S&P 500: Similar to S&P, focusing on top 500 companies.

  • Nikkei 225: Leading index in Japan.

  • FTSE World: Measures global stock performance.

  • FTSE Eurotop 100: Represents major European companies.

  • Hang Seng: Index of the Hong Kong stock market.

Derivatives & Warrants

• Definition of Derivatives: Financial instruments whose value is derived from an underlying asset.

• Types of Derivatives:

  • Futures: Agreements to buy/sell an asset at a future date.

  • Options:

  • Calls: Give the right to buy an asset.

  • Puts: Give the right to sell an asset.

  • Warrants: Long-term options issued by a company.

  • Contracts for Difference (CFD): A trading agreement reflecting price movements.