Every share in a stock represents a small proportional, ownership interest in the company. Equity is often referred to as "Common Stock".
A company is an entity that belongs to its shareholders and the limited or plc after the name indicated that is has limited liability. A public limited company (plc) means that the shared are traded on a market.
Every year the shareholders will elect a board of directors and entrust them to run the company on behalf of the shareholders. The board of directors will then normally hire a management team to actually run the company.
Note that out of the companies profits it will pay taxes to the government and dividends to its shareholders.
Companies - Limited Liability
What is a company - It is a trading entity that belongs to its shareholders and the Ltd (or plc) after the name indicates that it has limited liability.
The plc indicates the company is a (public limited company) which means its shares (or other securities) can be held by the investing public and traded in the market.
In both cases the liability of the owners is limited to the amount of money they have put into the business.
Unless they give personal guarantees for the debts of the business the owners and shareholders cannot be called on to meet the company's debts when these exceed its assets.
Only the money put into the company can be lost.
Anyone who operates a business as a sole trader or as a partner is liable for all the debts of the business.
Usually each ordinary share carries one vote.
Certain major resolutions (for example to change the aims and objectives of a company) will require 75% voting in favour)
Most of the time the shareholders vote th way the directors advise them to and resolutions are passed without contest at the annual general meeting (AGM)
The main items in the accounts are:
Cash Flow -
Balance Sheet -
Under certain accounting rules a company might also have to include a statement of total recognised gain and losses, a note of historical cost profits and losses
Some weeks after the end of the first half of the company's year it will normally produce an interim profit statement (interim) giving unaudited first-half profit figures.
The statement also normally gives the size of the interim dividend and includes some comment on trading and prospects from the company.
Sometime after the end of the full year a preliminary annoucement (prelim) will usually be published giving the profits for the year and often a lot of background information.
This appears some weeks before the full report and accounts are posted to shareholders.
Most daily comment on the company's figures is based on the interim and prelim statements which have greater news value - though less depth of information - than the full accounts
There are two layers of financial ratios applied to companies
one that tell us something about The operations and health of The company itself
one that relates company performance to The price You would have to pay for The shares
Profit margin = pre-tax profits / turnover
Doesn't mean a great deal but it is useful when comparing it to other companies in the same line of business.
Income gearing / gearing
Is how much of the company's operating profit goes into paying interest charges
Income gearing is normally calculated by expressing the interest charges as a proprtion of the profit before interest is deducted.
Investment Ratios - Effects of Interest Rates
Has a company borrowed at a fixed rate of interest or a variable (or floating) rate of interest, which will change with general movements in interest rates
High income gearing based on variable-rate loans can be dangerous in a period of sharply rising interest rates
Earnings per share (EPS)
This concerns the profit after tax or net profit
This is the amount of profit the company is making for each share in issue.
EPS = Net Profit / No of shares
How the company is increasing the amount of profit ?
internal growth or "organic growth" - is the growth of profits generated from existing activities.
growth by acquisition or "external growth" - is the growth from purchases of other businesses.
(Net) Dividend per share
Dividend per share = Dividend allocation / no of shares
This is the NET dividend per share as basic tax has been paid.
The Gross Dividend is the one on which yield calculations are based.
Dividend Cover = Dividend allocation / available profits
This is an important measure of the safety of the dividend
The more strongly it is covered the less chance that the company will have to reduce its dividend. if profits fall.
Companies can still pay a dividend even when they make a loss. In this scenario it comes out of the reserves.
Also tells you the maximum dividend could have been paid out if it had distributed all of its profits.
Retained Profit Depreciation - the money ploughed back into the business
The term cash flow is frequently used for the combination of depreciation and retained profits, since both represent money that is retained in the company out of its profits.
Investing Activities (item on the Cash Flow)
This shows the cash paid out of acquiring additional fixed assets, investments and possibly new businesses and also any cash brought in by the sale of assets or businesses.
Financing (item on Cash Flow)
Which shows cash raised during the year from issuing new shares or loans and cash paid out to repay existing loans.
index - Cash Earnings per share
Gross Yield ?
Yield / Current Yield / Dividend Yield = (Gross dividend per share / share price ) * 100
Example - An investor buys a share for 300p and stands to get a dividend of 15p gross
Current Dividend Yield = (300 / 15) = 4% = share price/dividend
In theory low dividend yield suggests a fast-growing company
High Dividend Yield suggests a company that is not going to increase its profits very quickly or a company that carries an above average risk.
Investors are prepared to accept a low income today if they think the income will rise rapidly in the future as the company earns larger profits and pays higher dividends.
If the dividends are not going to rise much they will want a higher dividend today.
Price - Earnings Ratio / PE Ratio
This is used more for comparison purposes
It is a way of measuring how highly investors value the earnings a company produces.
PE = (earnings per share / market price)
For example if an investor has EPS of 30p and the market price is 200p, the shares are on a PE ration of (200 / 30)
Other common ways of saying the same thing are "the shares sell at (200/30) time earnings" or "the shares are on a multiple of (200/30)
All else being equal a high PE ratio suggests a growth company and a low PE suggests a company with a more static profits outlook or a company in a high risk area.
Retained Earnings - profits that are put back into the company
Goodwill = intangible assets
Remember that yields and PE ratios move in opposite directions
A low yield and a high PE probably indicate considerable expectations in growth
If the share price rises the yield will fall further and the PE ratio will rise further.
Types of Companies
|Utilities||These include power and water companies.|
|They have limited competition and often enjoy a somewhat monopolistic conditions|
|They are considered low risk investments|
|These companies are highly regulated with regard to pricing|
|Blue Chips||The largest and most prestiguous companies|
|They are considered low risk, low reward investments|
|Established Growth||These companies are well-established and well-known, but are small enough to still have the possibility of substantial future growth|
|The earnings are generally re-invested in further growth and so generally do not pay a dividend|
|Emerging Growth||These companies are small and have potential for substantial future growth. These often have very attractive returns but also have additional risk|
|Penny Stocks||The share price is often very low|
|These companies may still be in the Research and Development stage of their first product or companies that have suffered severe set backs and are barely surviving.|
|There is an enormous amount of risk and investors are advised to stay well clear|
Often within groups of companies, one of the subsidiaries may borrow money from the market place. Its loan may have been guaranteed by the parent or holding company and it is then referred to as "guaranteed stock".
Types of Shares
|Shares||Ordinary Shares also known as common stock|
|ADR||American Depository Receipts. These are shares which are settled in the USA in US dollars, but they releate to shares of companies listed in other countries. Settlement takes place in the US, which makes these attractive to US investors.|
|Warrents||A warrant allows an investor to take up shares at a future date at a fixed price in the future. The buyer does not need to pay the full amount for the shares until the warrant is exercised. An option which can be listed on an exchange, with a lifetime of generally more than one year. Warrents are generally issued by the company.|
|Covered Warrents||These are issued by organisations that generally hold the shares. Banks may issue these regardless of whether they hold the shares or not.|
Internal Growth - This is the growth of profits that the company generates from existing activities. Also known as dynamic growth
Technical / Chartist - This is the growth of profits that the company generates from acquiring other businesses. This is also known as growth by acquisition.
There are three methods used to analyse companies to try to determine which stocks offer investment opportunity
Technical / Chartist
Advantages of Equities
Unlike other investment opportunities, annual returns that exceed 100 percent are not only possible, but happen on a regular basis
The potential loss is limited to 100 percent of the initial investment. This is not the case in some derivative products
Most shares are quite liquid. This means that they can be bought and sold quickly at a fair price
The investor can benefit from both capital gains and dividend payments
Disadvantages of Equities
If the company goes bankrupt then the shareholders are the last to get paid
Shareholders are not aware of the companies strategies and tactics and have less rights than owners of private companies
The investors may have to make decisions based on limited information
Stock prices are quite volatile and can change for no apparent reason
Stocks are usually liquid investments; they can serve as collateral for loans. Many investors use the stock they own for loans that they can use to buy more stock. This is referred to as "buying stock on margin" or buying stock with borrowed money. Buying stocks with borrowed money increases both the investors potential return and the degree of risk.
Investors who borrow money to buy stock pay interest on their loan. This rate is referred to as the "margin" rate.
It is just as easy to make money from stocks that will decline in value. Shorting a stock means selling shares that you don't own, in the hope of buying them back at a cheaper price. Shorting a stock must always be done in a margin account in order to protect the lender
Bank holidays ?
When equities are traded they are settled (T + 3) or (T + 2) depending on the currency. So at any one time in time you have what has been "settled" and what has been "unsettled".
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