It's always been my belief that the key to outstanding success is a strong foundation. So here's a list of the basic questions and answers I made a while ago when first investigating the world of finance.
What is The Stock Market & The Stock Exchange?
A stock exchange is a market on which shares are bought and sold (or "traded"). For a company's shares to be traded on a stock exchange, they must generally be listed on that stock exchange.
What is a Share?
A share is a unit of ownership in a company. When you buy a share you become a part-owner, a shareholder, in the company. Shares are also known as equities or securities. A company whose shares may be bought by the public and traded on the open market is called a quoted Public Limited Company (PLC).
A Share has a "nominal" price - at which it was originally authorised for issue - and a market price - at which it is currently trading. You'll find prices quoted in most newspapers and in specialist magazines. You can also find prices quoted on other places, like on Teletext and on the internet for instance.
Why do companies List on the Stock Market?
Companies generally list on the stock market in order to raise capital for their company and create a market in the companies shares, the owners give up a share in the company in return for money to help expand the company.
How do Companies List on the Stock Exchange?
Companies will launch a new issue of shares into the market, this is known as the primary market and it is when the company first offers it shares on the market.
- Offer For Sale
The most common form of this is “offer for sale” where a company will produce a prospectus on the company describing what it does, who the directors are and forecasting the profits that they believe they will make. This prospectus announces the new issue of share's, sets a price for them and invites people to subscribe to the new issue. This price is often set low so as to encourage investors to subscribe to the new issue.
A company can also arrange for there shares to be placed with an initial spread of share holders by arranging privately to sell the shares to a range of investors. These placings are usually arranged by the companies broker and they will usually place them with there own clients or to large institutions.
- Tender Offer
A company doesn't always have to set a price for their shares, they can sometimes invite investors to apply for shares at a price that they are willing to pay. Once all applications are received for at least the total numbers of shares available, the company works out the Strike price which is the highest price at which the shares can be bought, all subscribers that applied for the shares at this price or higher will receive the shares. Anyone who applied at a lower price will get none.
This is when a company has a large spread of share holders and simply wants permission for the shares to be dealt on the market. It involves no initial raising of capital but it could lead to a way of raising capital in the future.
What are the advantages of holding shares?
By holding shares, you have the potential to share in the success of the company through Dividends or Capital Growth, the better a company does the higher the investment returns.
A dividend is a payment made to shareholders out of company profits. Not all profit is paid out in dividends. Some is reinvested in the company (sometimes all). But it is not necessarily a bad thing for the shareholder if dividends are not received. If profits are ploughed back into the company, the company may grow and in turn mean increased value of the shares. This is of course an advantage to the shareholder.
- Capital Growth
Capital growth occurs when a rise in the share price gives you the opportunity to sell your shares at a profit. Capital growth is not certain as it depends on what happens to the share price, which can be affected by a number of factors. It is also possible to have a capital loss if the share price falls.
What are the different types of share?
- Ordinary shares
There are a number of different types of shares, the most commonly bought is ordinary shares and these are the shares that people refer to when they talk about the share price of the company. Ordinary shares give the owner a share in the company's dividend the right to vote, attend the annual general meeting and to receive copies of the accounts. The holder may also benefit from company specific perks such as discounts on products.
- Preference shares
In contrast to ordinary shares, preference shares have a fixed rate or amount of dividend, which must be paid before any dividend can be paid to ordinary shareholders.
Preference shares may be cumulative in which case any arrear dividend (for example, if profits are insufficient to meet a fixed dividend of 10%, then an arrear dividend results) has to be made up in future years before dividends on ordinary shares can be resumed.
Non-cumulative preference shares on the other hand do not pay arrears and any arrear dividend is lost for good.
Preference shares can also be participating which means that they participate in a given proportion of the dividends paid on ordinary shares over and above their fixed rate of dividend.
Redeemable preference shares may be redeemed for cash at either a fixed or determinable date or at the discretion of the issuing company.
Preference shares may also be convertible, i.e. capable of being converted into ordinary shares at a future date.
It is possible to have a preference share combining the above options, for example, a cumulative, redeemable participating preference share.
- Deferred shares
These shares only receive a dividend once preference shares have received their fixed rate of dividend and ordinary shares have received a specified dividend.
What are Market Indices?
A Market indice is a benchmark of the value of a range or market of shares, an indice allows you to see what the overall performance of the market is and allows compare an individual shares performance against the general trend of the market.
When people refer to the current level of “the market” in the UK they are often referring to the FTSE 100
- FTSE 100 (Footsie)
This is an index of the largest 100 UK Companies by market capitalisation. The price of the index is updated every minute so that you get a constantly updating level of the total market.
FTSE 250-This lists the 250 largest companies after the FTSE 100
FTSE 350-This is the list of the largest 350 companies and incorporates the FTSE 100 & the FTSE 250
FTSE Actuaries All Share-
This is the most comprehensive stockmarket index and covers a far wider range of companies it accounts for over 90% of the companies on the market. The index is an arithmetic mean of over 800 shares and fixed interest stocks. These are segregated into industrial sectors allowing you to track the performance of a particular sector and the companies that make it up.
Which factors affect the share price of a company?
The share price will be influenced by a large number of factors, many of which are outside the company's control.
The factors may include:
* The financial performance and prospects of the company;
* The performance and prospects for the industry in which the company operates;
* Political, general economic, financial and Stockmarket conditions, particularly where the company operates or is listed;
* The perceptions of investors about the above factors;
How do you trade shares on the Stockmarket?
As a private investor in order to buy and sell shares on the Stockmarket you need to use a Stockbroker. There are three types of service offered by stockbroker that you could use:
- Discretionary services
This gives broker or investment manager complete authority to buy and sell shares for you without obtaining your prior approval. This will be in the context of a carefully-designed brief, a clear framework for your portfolio manager to use when making transactions on your behalf. The advantage is that your manager can therefore act instantly on changes in the market, rather than spending valuable time trying to contact you. You will receive a contract note every time a transaction is made and detailed reports will be sent to you regularly.
- Advisory services
A second kind of advisory service gives you access to this advice, but still allows you to control your own portfolio and manage your own bargains. Essentially you simply call your professional and ask whether he or she shares your view on whether you should buy or sell a particular share.
- Execution only
Execution only services are generally the cheapest as they do not require advice or management - you simply tell your stockbroker to buy and sell shares for you. Because of the increasing knowledge of investors and the wider access to these services the use of execution only stockbrokers has increased dramatically over recent years.
Most execution only brokers allow you to trade over the telephone or over the internet.
The internet has changed the face of share trading for the private investor as today's on-line trading platforms allow you instant access to the market at the touch of a button.
What are the costs of buying and selling shares?
The costs of buying and selling shares will depend on the type of service that you are using and the broker that you are using, for an execution only service you will have two costs to take into account.
* The broker commission on shares bought & sold
* SDRT (Stamp Duty Reserve Tax): This a government tax on all share purchases which is currently 0.05% of the transaction value
* TM Levy, this is only on trades over £10,000 and is collected by the Panel of Take-overs and mergers(POTAM), who oversea all take-over and mergers within the UK.
How are share prices displayed / quoted?
All share prices are quoted with a “two way price": a bid and offer spread which is the price that you can buy (the offer) and the price that you can sell (bid) the particular share. This price will update constantly throughout the market opening hours which for UK shares is 8.00 to 16:30.
The ‘width' of the spread will be different for particular shares depending on the ‘Liquidity of the Shares' i.e. how easy it is to buy and sell the shares and how much volume is being traded large stocks such as Vodafone will have thousands of trades going through and will therefore often have very tight spreads.
When can you buy and sell shares?
The opening hours of the London Stock Exchange are 8.00 – 16:30 Monday to Friday you can buy and sell shares throughout this period.
And there you have it, a list of all my first FAQ's. On that bull point we leave it until next time...