Certificate for Introduction to Securities & Investment (Cert.ISI) Unit 1 Lesson 6:  Equities 6cis

What are equities? Basic definitions of equity: Ownership of an asset. In the property market, it refers to the amount by which the value of a house exceeds any mortgage or borrowing secured on it – the net worth. In the stock market, it refers to shares in a company. We refer to shares as equities. Fancy definitions of equity: Equity: the residual claim or interest of the most junior class of investors in an asset, after all liabilities are paid. Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the remaining interest in assets of a company, spread among individual shareholders of common or preferred stock.

Where to put your money? UK investors are likely to place their money in the following order: 1. Cash deposits 2. Property 3. Equities (shares in companies) These are three different classes of assets Many people are investing in equities without realising they are doing so:  Child trust fund  Pension scheme  Membership of club or society Some people invest in equities deliberately:  Collective investment scheme, such as a unit trust  Directly in the stock market

Equities Shares offer investors the potential for: Capital gain  The value of the share can go up (and down)  The value of the share is the price that someone is prepared to pay for it on the stock-market Income  Shares can pay regular dividends  A dividend is an annual payment – a small portion of the company’s profits for that year Capital growth Income

Looking for companies in which to invest Companies issue shares to raise money to finance the expansion of their business  If business goes well, the company will make more profit and pay out a larger dividend  Investors want a higher dividend, so the shares will be in greater demand o More demand for the shares means the price of the share will go up Over the long-term, it has been proven that share prices are driven by:  The size of the dividend  Growth in the size of that dividend The size of the dividend in relation to the share price is known as the “dividend yield” Yield means to “give up”, or “produce”. Investors borrowed the term from agriculture: farmers talk about land yielding tonnes of grain per hectare, or cows yielding litres of milk per year

Yield: comparing equities with cash deposits or property XYZ company share  Share price 120p  Annual dividend 8p  Dividend yield 6.7%  Formula to use = (8 ÷ 120) x 100 Cash deposit  Interest rate 3.8% Buy-to-let flat  Purchase price of flat £175,000  Net annual rental £8,400  Rental yield 4.8% When comparing these three asset classes as a potential investment, we can see that the company share offers more income than cash deposit or property  It has a “yield advantage” of 1.9%- points over property  It has a yield advantage of 2.9%- points over the cash deposit However, the cash deposit is guaranteed by the government. The value of the share or the buy-to-let flat could go down  The share’s dividend yield has to be higher than cash deposit interest rates to compensate investors for that higher risk  This is known as the “risk premium”

Looking for companies in which to invest Investing in shares is all about spotting companies which are about to start making more profits… All companies listed on the stock exchange have to announce publicly any news which might affect their share price

Looking for companies in which to invest …and have a good track record in paying dividends

Looking for companies in which to invest But even the best track record in the world does not protect investors entirely:

Looking for companies in which to invest

Not only has BP suspended paying dividends, but its share price fell from 540p when the giant oil find in the Gulf of Mexico was announced in September 2009 to a low of 299p in June 2010 – a fall of 45%

Big investors in equities: pension funds Even if you don’t own BP shares directly, it is likely that your pension fund will…

Why invest in equities at all, then? Source: Barclays Capital UK asset class returns with income reinvested since 1899 Different assets are good for different purposes:  Cash is king for short-term requirements, such as paying bills and saving a house deposit  Government bonds are most useful for planning outgoings in 5-10 years, since you can know the return you’ll get in advance so long as you hold them until they are redeemed.  Shares are best for long-term investing, since they deliver the best real returns over longer periods, and also because many years of holding evens out the volatility. Note: where data is not available, there is a gap Source: Barclays Capital UK real asset class returns % per annum Equities are volatile: they can move up and down very rapidly. But in the long run, say for a 40-year pension plan, they outperform most other types of investment

“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.” – Warren Buffett Equities markets: bull versus bear

Some key terms Bear market: prices are falling Bearish: pessimistic, fearful that prices will fall Bull market: prices are rising Bullish: optimistic, confident that prices will rise Long: owning the asset Short: not owning the asset, maybe selling an asset you haven’t got Bid price: price at which you will buy Ask price: price at which you will sell (also use Offer)