Transcript University of Portsmouth Personal Finance for Accountants

University of Portsmouth
Personal Finance for Accountants
(U13763)
Lecture 5 Investing in Equities
Lecture 5 Investing in Equities
• Share Ownership in the UK
• Efficient Market Hypothesis
• Buying and Selling Shares
• Key Investment Indicators
• Selecting shares
• Tracker Funds
Share Ownership in the UK
• The recent survey conducted by the Department
of Work and Pensions into the types of savings by
UK households in 2004 established that just 22%
of households held shares compared with 54%
who put their money into banks and building
society accounts. So why are households
reluctant to invest in shares?
• Factors that will influence the choice of
investment will be risk, liquidity and taxation.
Share Ownership in the UK
• Investing in shares is high risk with a real
possibility of losing all of your capital.
• This type of investment can not be liquidated
easily. If you need cash in a hurry you may have
to sell at a loss and there will also be a settlement
period.
• Unless you are investing within an ISA you will
pay tax on your dividends and there is also the
potential for capital gains tax when you sell your
investment.
Share Ownership in the UK
• So why invest in shares?
• Over the long term the stock market produces
a higher return than other investments
around 9% and its also fun.
Determining the Price of Shares.
• What determines the price of shares at any
given time?
• A share price follows the theory of prices that
we have learnt in Economics, it is established
through the interaction of supply and
demand.
• In addition the stock market is an example of
an efficient market.
Determining the Price of Shares.
• Efficient Market Hypothesis (EMH)
The EMH implies that all new information is
incorporated into a share price rapidly and
rationally.
The efficient market implies that Share prices
rationally reflect all available information and
that no trader will be have the opportunity to
make an abnormal return, except by chance.
Determining the Price of Shares.
• There are different level of efficient markets
from weak to strong, the stock market is an
example of a semi-strong efficient market.
• This means it factors into the price all publicly
available information both past and present
Including information relating to:
•
External Economy (National and Global);
•
Business Sector; and the
•
Company itself
Buying and Selling Shares
• When we invest in the stock market we will
buy a quantity of shares, prices can be found
in many sources such as the financial press
and on the Internet. The price of one British
Airways share at currently is 139.6p. This
price will continue to move until the market
closes each day.
Buying and Selling Shares
• There are two prices for each share the buying
(offer) and the selling (bid) price.
To help you remember its "bid to get rid".
• A market maker's bid price is always lower
than his offer price which is the price at which
he will sell you the security. The difference
between the two is known as the 'spread'.
Source: http://glossary.global-investor.com
Buying and Selling Shares
• Shares are bought through a broker, this is a person
who buys and sells securities on behalf of others in
return for a commission.
• Brokers can be found in high street banks, on the
Internet or in a stock broking firm.
• When using an on-line broker there is usually a flat fee
for a transaction which is typically £12 for one-off
trades or £10 for to a more frequent trader. This
service is known as ‘execution only’ which means the
stockbroker is not offering any advice they are simply
carrying out your instructions.
Buying and Selling Shares
• These charges makes it uneconomic to buy or sell
very small amounts of shares.
• The conventional stockbroker will charge a
commission on the value of the shares being
traded.
• Stamp duty is also payable when shares are
purchased at 0.5% of the value of the
transaction. There is a minimum of £5 for paperbased transactions but no minimum for Internet
trading.
Buying and Selling Shares
• If we were buying 230 BT shares at a price of 217p using an
Internet brokering service the total cost would be as
follows:
• 230 shares X 217p
• Other charges:
Brokers Commission (flat fee)
Stamp Duty £499.10 x 0.5%
• Total cost
£499.10
£12.00
£2.50
£513.60
Key Investment Indicators
Extracted from the FT London Share Service
High
Low
Company
Price (p)
+/-
Yield
P/E
407
105.4
BA
139.6
3.5
3.6
2.4
326.75
100.2
BT
116.8
1.7
13.5
5.7
Key Investment Indicators
• The High and Low prices shows the highest
and the lowest price for the share over the
last 52 weeks.
• The Price is the closing price for the share on
the day.
• +/- is the movement on the closing price
compared to the previous days closing price.
Key Investment Indicators
• P/E Ratio
Current market price per share
Earnings per share
• The P/E ratio is the number of years it would take to
payback the investment. This is a popular method of
assessing shares.
• A share with a high P/E ratio is one with a high price
compared with its recent earnings. This implies that
investors are confident about the growth of future
earnings.
• The P/E ratio is often seen as the barometer of confidence
in a company’s prospects.
Key Investment Indicators
• Dividend Yield - here the dividend income per share is
expressed as a percentage of the price of the share as
follows:
Dividend (gross up for tax)
Current market price per share x 100%
• This ratio seeks to assess the cash return on the investment
earned by the shareholders.
• High figures can suggest higher income from investments,
but a high yield can also indicate that a company is not
growing very fast or is quite risky.
Selecting Shares
• How do we chose a share to invest in?
• Investors have a verity of reasons for choosing individual shares to invest
in here are some examples:
• Existing customer e.g. Marks and Spencer
• Investor perks e.g. British Airways holders of 200 shares get 10% off BA air
fares. For a full list see:
http://www.h-l.co.uk/shares/shareholder_perks/action/list
• Low risk strategy e.g. utility companies
• High risk strategy e.g. Technology companies
• Believe that they can predict the market.
Tracker Funds
• Selecting individual shares to invest is a very
risky venture. In order to reduce risk it is
better to have a well spread portfolio i.e.
Shares in different sectors so that if one sector
is not doing very well e.g. Telecoms then
another sector may be able to compensate for
this e.g. Travel and Leisure.
• But if you only have a small amount to invest
how do you get a diversified portfolio?
Tracker Funds
• The answer is to invest in a tracker fund. You
purchase a tracker unit trust which mirrors the
market. You may for example have a tracker fund
which invests in the FTSE all share index. These
tracker funds gives you the performance of the
index plus any dividends.
• There are management fees but they tend to be
low on this type of investment (typically between
0.5% - 1% as an annual charge) as they are
passively managed.
Investing in Equities
• Seminar Work
1. MQC for chapter 11
2. Review questions page 148 of core text.
3. Share cost question attached.
• Further Reading
Personal Finance and Planning Theory and Practice
by Debbie Harrison. Chapter 11 Equities