Introduction to Investment Bruce Viney Director of Training and Client Services
Introduction to Investment Bruce Viney Director of Training and Client Services 1 Why we are here…. • Exam (syllabus valid from 1 October 2006) – 60 minutes – 50 Questions – Multiple choice – Pass mark is 70% 2 Programme/Syllabus Workbook Chapter Content Questions in exam* 1 Financial Services in the UK 8 2 Asset Classes 13 3 Derivatives 2 4 Financial Products 6 5 Pooled Funds 9 6 Investment Wrappers 2 7 Financial Services Regulation 8 8 Taxation 2 Total 50 * plus/minus 2 3 CHAPTER 1 Introduction • The Role of the Financial Markets • Financial Institutions • London’s Markets • The Bank of England • The UK Economy 4 The Role of Financial Markets Companies Governments Savers Borrowers Surplus capital, looking for a return Need capital The Role of Financial Markets BANKS Financial Markets Savers SHARE MARKETS Companies BOND MARKETS Governments Borrowers Money Markets Capital Markets Financial Market stages onward trading of shares at market price Company PRIMARY MARKET SECONDARY MARKET issue shares at £2.20 each 7 Financial Institutions • Retail banks and building societies • Investment banks • Pension funds • Insurance companies • Fund managers • Stockbrokers • Custodians • Credit card companies 8 London’s Markets UK equities and corporate bonds Gilts Overseas equities and bonds Insurance market Soft commodities Financial futures Traded Options Non-ferrous Non-precious Brent crude Gas oil Natural gas London Stock Exchange Date Event 1773 Brokers create The Stock Exchange 1986 Big Bang - major reforms 1995 Tradepoint starts in competition with LSE 1997 SETS - electronic order book 2001 Listed as a quoted company 10 The Lloyds Market Syndicate Policy £60m Broker Synd A £20m £15m £15m £10m Syndicate Syndicate Syndicate Members Clients World Securities Markets • NYSE • Nasdaq • Euronext • Japan • Deutsche Borse 12 Economics • Categorising Economies • Gross Domestic Product • Gross National Product • Balance of Payments • Inflation • PSNCR State controlled Market Mixed Open 13 Gross Domestic Product • Market value of goods and services • • produced in a country Measure of the level of economic activity Three ways of representing: –Total GDP –GDP per head (per capita) –GDP growth 14 Gross National Product • GNP for the UK is the GDP: –Plus interest, profits, and dividends received from abroad by UK residents –Less income earned in the UK by overseas residents 15 Balance of Payments Current account • Measures the difference between money flowing into and out of the country Imports Exports visible visible invisible invisible Inflation • What is it? • Problems caused by inflation • Measurement –headline –underlying –harmonised RPI RPIX HICP What is money? • Caused by an increase in the money supply? 17 Bank of England • Three core purposes: – maintain integrity and value of the currency – maintain stability of financial system – seek to ensure the effectiveness of the UK’s financial sector • Intervenes in the forex market (in accordance with govt policy) • Bank for – Commercial banks – Government • Sets interest rates through the Monetary Policy Committee (MPC) • • • Interest Rates Short term interest rates are set by the MPC MPC are to use interest rates to meet a set inflation target (currently 2.5%) Interest rates are changed as a result of Bank of England’s dealings with banks MPC control this rate Bank of England % % % bank % % bank % LIBOR customer bank Government Borrowing • Government income from taxation • Government expenditure • Difference is called: Public sector net cash requirement (PSNCR) Foreign Exchange • Market in currencies • No central market • London is the largest centre • Dominated by banks • Types of contract –spot –forward 21 CHAPTER 2 Companies, Capital and Asset Classes • Equities • Corporate actions • LSE trading and settlement • Bonds • Money market instruments • Company administration 22 Security General term for any type of financial instrument (usually) traded on an investment exchange. Equities Part ownership = shares Bonds Debt in the form of IOUs In the UK, capital market securities are generally held in registered form whilst money market instruments are issued in bearer form 23 Equity types • The two main equity types in the UK are ordinary and preference shares • Preference shares have preference over ordinary shares in terms of: • Dividend payment • Repayment on winding up Equity type Voting rights Dividend Ordinary Yes Variable, not guaranteed Preference No Fixed, not guaranteed (can be cumulative) Why own shares? • Voting • Income – dividends • Capital growth • Trade perks Risks • Price • Liquidity • Issuer 25 Corporate Actions • Types of action – mandatory – voluntary – mandatory with options • Examples – bonus issue (to increase the liquidity of shares) – dividend (to distribute profits) – takeover offer (to acquire the shares) – rights issue (to raise funds) 26 Rights Issues • Company raising additional finance –new shares are issued –existing shareholders can buy them first • (pre-emptive rights) Upon receipt of a rights letter a shareholder has to decide upon their course of action 27 Calculating the ex price A company announces a 1:5 rights issue at £3.50. If the cum market price of the underlying shares is £4.00, what is the theoretical ex price of the shares? 23.50 6 Number Price per of shares share Total value Before 5 £4.00 £20.00 Rights 1 £3.50 £3.50 After 6 £3.92 £23.50 How much is the right to buy a share worth? Bonus Issues • Free shares • The effect on share price? • Why would a company do it? 29 Calculating the ex price There is a 1:1 bonus issue. The market price of the shares before the capitalisation is £12.00. What is the theoretical ex price of the shares? £12 2 Number Price per of shares share Total value Before 1 £12.00 £12.00 Scrip 1 £0.00 £0.00 After 2 £6.00 £12.00 Cash dividends • What is a dividend –Payment/distribution to shareholders from • • realised profits Interim and final dividend Timetable cum div Feb ex div Wed 8 Fri 10 March March Fri 10 Tues 7 May May AGM Dividend announced Record Ex-dividend Day day (Books closed day) Dividend Payment date 31 Listing on the Stock Exchange The main advantages are: Capital - access to a large pool of capital Status/prestige – assist company’s trading prospects Takeovers – using shares to fund the acquisition of other co’s Employees – stock options can be used to retain key staff The main disadvantages are: Regulations – disclosure requirements are more stringent Threat of takeover – anyone can become a part owner Short termism – impatience and emphasis on short term goals Listing Full list Trading history Minimum 3 years Market capitalisation Minimum £700,000 ‘Public’ holding At least 25% Alternative Investment Market No minimum No minimum No minimum Indices • Indices enable investors to: – measure performance of a market – use as a benchmark to judge actively managed portfolios – trade futures and options based on them • The main indices on LSE equities are: – FTSE 100 – FTSE 250 – FTSE Actuaries 350 – FTSE All Share Index 34 FTSE Indices 1 FTSE 100 100 FTSE 250 FTSE All Share 350 FTSE Small Cap c900 World Markets Securities • New York • NASDAQ • London • Euronext (Paris) • Tokyo • Deutsche Borse • Hong Kong Indices Dow Jones S&P 500 NASDAQ Composite CAC 40 Nikkei 225 Xetra DAX Hang Seng 36 Domestic Equity Market Order driven Seller Broker Buyer Broker Quote driven Seller Broker Market Maker Buyer Broker 37 Domestic Equity Market • • • SETS – FTSE 100; FTSE 100 reserve stocks; stocks removed from FTSE 100. SETSmm – FTSE 250 shares not on SETS, order book plus one or more market makers SEAQ – fully listed shares, not on SETS or SETSmm, with two or more market makers – AIM shares with two or more market makers 38 SETS Buy & sell orders displayed (price/time priority) • Standard settlement • Visible to all but only member firms can input and delete orders 39 40 SEAQ • Market makers show prices and sizes • Two way prices (bid, offer, spread) • Touch strip 41 42 Equity Settlement Buy me 1000 PJC plc shares Trade £ Contract Note Broker shares Market Maker Settlement 43 • CREST is an electronic settlement system • Mainly settles UK equities, corporate loan • stock and gilts Dematerialised/uncertificated settlement 44 Crest Structure Investors Regulators Member Bank Revenue(s) Registrar Companies 45 Bonds • A bond is a tradeable loan • Issuer promises to: –repay the loan at a future date (on maturity) –pay interest at a defined rate (usually fixed) • Issuer might be the British government –bonds are called gilt edged securities • Issuer might be a company 46 Corporate Bonds Domestic Foreign Issued by home company to home investors in home currency Issued by overseas company to home investors in home currency Eurobond Issued to many investors in any currency – international issues 47 Other bonds - features • Zero Coupon Bonds • Convertibles 48 Gilts • Interest (coupon) • • Repayment (redemption) Classification by DMO • • – gross annual interest on the nominal value (£100) – paid semi annually – Short – Medium – Long Less than 7 years 7-15 years More than 15 years Issue by DMO – bid basis (auction to those on an Approved List) – individuals may submit non-competitive bids (up to £500,000) Secondary Market – GEMMS or DMO/Computershare service Yields • Flat Yield annual coupon ---------------------market price x 100% Example: Treasury 2006 6% is currently trading at £102, calculate the flat yield A 3.6% B 4.9% C 5.9% D 6.0% 50 Money market instruments • Money market instruments are forms of short term tradeable debt. The products you need to be aware of are: –Treasury bills –Commercial paper –Certificates of Deposit 51 Treasury bills • Short term zero coupon bonds • Maturities generally after 3 months • Issued weekly by the DMO on behalf of the • Treasury Sold at a discount to their face value 52 Commercial paper • Short term unsecured debt • Usually zero coupon therefore issued at a discount • Usually high nominal value • A CP programme specifies a total amount that can be issued and may have an end date CP programme issue limit £150m end date 2008 Date Mar 2006 Apr 2006 Oct 2006 Jan 2007 Issue £100m £50m £75m £75m Term 6mth 3mth 6mth 3mth 53 Certificates of Deposit (CD) Investor A Bank Investor B 54 Company types All companies public (plc) fully listed AIM listed private (ltd) unquoted Company Administration Memorandum Company Articles Company Directors Executive Non-executive Meeting types: AGM EGM ARTICLES: Shareholders rights Borrowing powers Dividends Meetings Directors Winding up Shareholders MEMORANDUM: Name of Co Domicile Authorised Share Capital Statement of liability Objects PLC or not. 56 CHAPTER 3 Derivatives • Futures • Options 57 Futures • An agreement to buy or sell a specified • • • quantity of a specified asset at an agreed price on an agreed date Exchange traded and on standardised terms For example: Futures on metals, oil, agricultural products Motives: Hedge or Speculate 58 Futures Terminology • Long = buy a future • Short = sell a future • Open = enter into a futures position • Close = trade out of a futures position 59 Options • A contract that gives the right but not • • the obligation to buy or sell a specified quantity of an underlying asset at a specified price within a specified period Call option = the right to buy Put option = the right to sell 60 An example of an Equity Call Option Writer Call Option (10p per share) PJC plc 1000 shares Market price 105p I grant you The right to buy 1,000 PJC plc shares From me At a price of 100p Within 3 months (£100) Option Premium Holder Options terminology Consider an equity call option with a strike price of 100p and premium of 10p. The underlying share is currently valued at 105p Price 110p breakeven “in the money” 105p 100p strike “at the money” “out of the money” Time Options Terminology • Call Option • Put Option • In the money • At the money • Out of the money • Breakeven 63 CHAPTER 4 Financial Products • Deposits and loans • Interest rates • Mortgages • Insurance and Pensions • National Savings and Investments 64 Deposits and loans • Deposits – Fixed term v Instant access – Interest • Gross v Net – R85 enables payment gross • Loans – Bank loans • Secured v Unsecured – Overdrafts • Authorised v Unauthorised – Credit cards 65 Interest Rates • • Quoted rate v Effective rate Steps to turn quoted into effective 1. Quoted expressed as a decimal 2. Divided by number of periods per year 3. Added to one 4. To the power of the number of periods per year 5. Subtract one and times by 100 66 Mortgages • • • • • Secured loan on property Mortgage types – – Repayment Interest only Mortgage interest – – – – Fixed Capped Discounted Variable Redemption penalties Other types – – – – – Endowment Pension linked ISA Unit linked Flexible 67 Insurance and Pensions • Life policies – Term v Whole of life – With profit (incl unit linked) v non profit • Pensions – State • Basic v Second – Occupational • Defined benefit v defined contribution – Private/Personal – Stakeholder 68 National savings products • National Savings accounts: – Easy Access a/c (instant access) – Investment a/c (one month notice) • Premium bonds • – Random prize Paid Gross but taxable. Paid Gross But taxable Tax free. Paid on maturity Other products Tax free up to Fixed Interest Savings Certs £15,000 per issue. – – Fixed Rate Savings Bonds Taxable, Paid net of 20% 69 CHAPTER 5 Pooled Funds • Unit Trusts • OEICs • Investment Trusts 70 Rationale of Collective Investment I’ve got a spare five thousand, I think I’ll invest in a UK equity fund. Shares/units in collective inv’t Advertise Fund Manager £5,000 Role of the FSA • Authorised v unauthorised • Onshore v offshore 72 Unit Trusts - Basics Investors (1,000) 1 million units x 500p per unit £5,000 x 1,000 Legal owner of the trust property Safeguards assets Fund Monitors Manager the manager Makes investment Trusteedecisions Markets Investments Prices the units Investments Deals with investors Types of Unit Trust Authorised/regulated funds • Securities Funds - most common • Money Market funds • Futures and Options funds • Geared F&O • Warrant funds • Property funds • Fund of funds • Feeder Funds • Umbrella Funds • Limited issue funds • Principal protected funds • Mixed funds Buying more Units 1 000 units x 515p per unit FM prices Bid Offer UK Equity 485 515 £5,150 Fund Manager Trustee Investments Another 1,000 units created (open ended) Creation of more units? Sellers Buyers 9,000 units 10,000 units Fund Manager Trustee Investments Markets Investments “Create 1,000 units” How to price a unit • • • Prices calculated by the managers FSA rules – prices based on net asset value at the most recent valuation – calculate separate bid and offer prices although single pricing is possible – maximum offer price = creation price plus initial charge Offer price tend to include an initial charge - around 5-6% on top of allowances for stamp duty and brokerage 77 What is an OEIC ? • Open Ended Investment Company • Also known as an ICVC (Investment Company • with Variable Capital) Invests money on behalf of it’s shareholders in shares and bonds 78 Key elements of an OEIC • • • • • • Variable capital base Shareholders are direct owners of the company Shares are traded at a single price (at NAV) Authorised Corporate Director instead of Manager Depository instead of Trustee An OEIC is a UK company that can repurchase its own shares on demand 79 Investment Trusts Trade Investors Price tends to be at a discount to the 5 million £1 ord shares net asset value of the company. This £5,000 x 1,000 discount narrows in a bull market and widens in a bear market Investment Trust Depository Markets Investments Investments Exchange Traded Funds (ETF’s) • Index tracking funds • Open ended • Structured as a company • Listed on exchanges (such as the LSE’s • extraMARK) Trade at net asset value 81 Collective investments comparison Feature Unit Trust Invt Trust OEIC/ ICVC ETF Open/ closed ended open closed open open Legal structure/ Investment unit Trust/ unit Company/ share Company/ share Company/ share Price based on Net asset value Demand and supply Net asset value Net asset value Bid/offer or single price Bid/offer Bid/offer Single price Bid/offer Investments purchased from Fund manager Stock market Authorised corporate director Stock market Authorised depositary Authorised depositary Custodian Investments held by Trustee 82 Hedge Funds • Unregulated schemes • High investment entry levels • Flexible investment style, including • gearing Fees are performance related 83 CHAPTER 6 Investment Wrappers • ISAs/PEPs • Child Trust Funds 84 ISAs • Designed to replace PEPs – no tax on income or capital gains • An ISA is a tax free wrapper that can be • applied to a wide range of products Up to 2 components as follows – Cash – Stocks & Shares 85 ISA limits Mini ISA Stocks & shares £4,000 p.a. Maxi ISA Stocks & shares Cash £3,000 p.a. no limit £7,000 p.a Cash £3,000 p.a Child Trust Funds • For children born on or after 1 Sept 2002 • Money cannot be withdrawn until child turns • • • • 18 (child can manage from 16) Government starts CTF with £250 (£500 for lower income families) Can add up to £1200 per annum Savings, shares or stakeholder accounts No tax on income or gains 87 CHAPTER 7 Regulation • FSMA 2000 • Money Laundering • Insider Dealing and Market Abuse • Takeovers and Mergers 88 UK Financial Regulation • • • • • The UK’s main financial regulator is the Financial Services Authority (FSA) The FSA operates under the Financial Services and Markets Act 2000 (FSMA 2000) The Act states that any person (firm) conducting regulated activities in the UK must be authorised by the FSA or exempt Certain individuals within the firm must also be approved by the FSA for their roles The FSA have written a handbook which must be complied with to avoid prosecution 89 The FSA’s four objectives • Maintaining confidence • Promoting public awareness • Appropriate protection for consumers • Reduce scope for financial crime 90 Approved persons regime • Certain people working for an authorised person (firm) must be approved by the FSA for their role. The 27 separate controlled functions (jobs) that require approval are grouped under five categories: –Governing functions (e.g. Directors) –Required control functions (e.g. MLRO) –Systems and controls functions –Significant management functions –Customer functions 91 Key statutes governing financial services • Financial Services and Markets Act 2000 • Proceeds of Crime Act 2002 and ML Regs 2003 – Anti-money laundering • Criminal Justice Act 1993 92 • • • • • Money Laundering Definition 3 stages ML Regs 2003: Financial institution procedures : – identify new clients – record keeping – internal reporting – internal controls to prevent the firm being used for money laundering POCA ’02 Offences: – concealing; arrangements that you know or suspect is to acquire, retain, use/control criminal property; acquire, use or possess criminal property; failure to report; tipping off Suspicion reporting process – Employee => MLRO => SOCA Insider Dealing If an individual who possesses inside information from a primary or secondary insider Encourages others to deal Tell others the information Deals Market abuse Offence under FSMA 2000 Includes : Using information not generally available to others Regular user test employed to establish guilt or innocence 95 Takeovers and Mergers • There are two main concerns regarding a • takeover and different regulatory bodies are in place to address each concern: Is the takeover anti competitive? Competition Commission • Are shareholders treated fairly? Panel on Takeovers and Mergers 96 Takeovers and Competition OFT CC The Office of Fair Trading considers whether a proposed takeover might be anticompetitive. The OFT could result in the bid being referred to the Competition Commission The Competition Commission decides on whether the takeover should be allowed to proceed, any restrictions required and the like 97 Takeovers and shareholders • • • The Panel on Takeovers and Mergers (POTAM or PTM) ensures that all shareholders are treated fairly Their rulebook is known as the Takeover Code or Blue Book The rulebook principles state: – Shareholders of a target company must be treated equally in all respects during an offer – Don’t bid for a company unless you intend to, and can afford to, go through with the bid – Directors should make decisions by considering what is best for shareholders, not themselves 98 Takeovers – key %’s 100% Must make a bid for the remaining shares in the company SARs – prevent the following: (1) 10% or more (2) Within 7 calendar days (3) From more than one source (4) Resultant shareholding is 15% or more Actual control 50% Effective control 30% 0% 99 Takeover of a Listed Company 28 days 0 21 39 46 60 Offer document dispatched Bid announced through Stock Exchange First closing Final Final revision target company announcements Final closing Other Regulations • Data Protection Act – 8 principles especially ‘adequate, relevant and not excessive’ • Complaints – System required and Financial Ombudsman Service can compel firms to pay up to £100,000 • Compensation – Financial Services Compensation Scheme payout maximum of £48,000 101 CHAPTER 8 Taxation • • • • Income tax Capital Gains Tax Inheritance Tax Stamp Duty 102 Taxation • Income tax Paid on income, potentially including investment income • Capital gains tax • Inheritance tax Potentially payable on the sale of an investment Potentially payable on investments held at death 103 Income Tax • Salary From an employer • Profits from running a business Individuals or partnerships • Dividends From companies • Interest From banks/building societies/bonds 104 Income Tax Higher rate 40% £33,301 Basic rate 22% £33,300 Lower rate 10% £2,150 Personal allowance £5,035 Income 105 Taxation (Income) • Tax is usually deducted at source. – salaries PAYE – savings income (interest) • basic rate of 20% is automatically deducted – dividend income • basic rate of 10% is automatically deducted 106 Taxation (CGT) • Capital Gains – Shares – Bonds (some) – Property – Antiques • Exemptions – Main home – Gilts – Cars 107 Taxation (CGT) • Allowance of £8,800 for the year • CGT only paid on gains above the allowance • Any losses can be carried forward • Paid at the investor’s marginal rate of 10%, 20% or 40% 108 Inheritance Tax • A certain amount is exempt – threshold of £285,000 –anything left to a spouse –anything left to a charity –items given away more than seven years before death –IHT charged at 40% 109 Stamp Duty/SDRT/SDLT • 0.5% on the purchase of shares • 1% on homes >£120,000 • 3% on homes >£250,000 • 4% on homes >£500,000 110 End of Course 111
© Copyright 2024