Arthur BeverlyPWP FU May14 equities
FINANCE UPDATES
MAY 2014
Equities: stocks and shares This guide gives an overview of investing in equities, otherwise known as stocks and shares.
An equity investment represents ownership of part of a company in the form of shares in the company. You can buy shares directly or you can pool your money in a collective investment such as an investment fund, which will hold a number of underlying equities. If you buy directly you will also have shareholder rights, giving you a say in how the company is run, although you don’t receive these when you buy through a fund.
Investment UPDATE ‘preference shares’. The income payments for both types are as follows:
UK ordinary shares •
a dividend is declared half yearly, based on the performance of the company
•
the dividend is declared and then paid with a 10% tax credit
•
the net yield is the dividend divided by the price of the share multiplied by 100%.
Investment returns Typically, the reward for owning part of a company is the ability to share in the profits in the form of dividends and any increases in the market value of the company, although this may not always be the case. In most cases stocks and shares provide returns in the form of both income (through dividends) and capital (loss or gain).
Share income Most shares are known as ‘ordinary shares’, which differentiates them from
2 Stewart Street Milngavie Glasgow G62 6BW 0141 956 5525 [email protected]
Preference shares •
these pay a fixed dividend quoted in percentage terms based on the initial value of the share.
Share capital The value of ordinary shares is dependent on the price a potential investor is willing to pay. Many outside factors can influence this, including company specific news as well as wider ranging news affecting the whole market, a specific industry sector or the economy.
As the value is influenced by external factors it can change rapidly. This can be good news for speculators, but not for long-term investors. This volatility gives stocks and shares their high risk profile and is why it is normally recommended to hold shares for the medium to long term (five years plus). It is time that helps iron out the ‘ups’ and ‘downs’ and reveal the true value of a company.
The taxation of shares Dividends on ordinary shares are paid with a tax credit at 10%. To calculate the gross dividend you need to divide the net dividend by 0.9. The 10% meets the tax liability for basic rate taxpayers, while higher rate taxpayers with income at or below £150,000 will have a liability of 32.5% in total, less the 10% tax credit. Those earning more than £150,000 will have a liability of 37.5% in total, less the 10%.
www.abfm.co.uk
Equities: stocks and shares For example: Net dividend
£80.00
Gross dividend (£80/0.9)
£88.89
Tax credit
£8.89
Tax payable (32.5% x £88.89)
£28.89
Less tax credit
£8.89
Higher rate tax payable
£20.00
When shares are given away or sold, there may be a liability for capital gains tax on any increase in market value while you held them.
Share classifications There are different types of shares that can be issued, including: •
Quoted shares issued by companies listed for trading on the Stock Exchange.
•
Unquoted shares issued by companies that aren’t listed for trading on the Stock Exchange.
To have shares listed for trading, a company needs to: •
have a 3 year track record
•
make full disclosure of the company’s financial affairs
•
offer at least 25% of the total shares of the company for public subscription.
However, not all companies needing to raise capital can meet the Stock Exchange requirements for a full listing. Since 1995, the Alternative Investment Market (AIM) has existed for companies ineligible for a full stock market listing. The AIM enables young companies to raise capital without the high costs of
Important information This document is solely for information purposes and nothing in this document is intended to constitute advice or a recommendation. You should not make
flotation on the main market. There are fewer restrictions too. For example, a company doesn’t have to offer a minimum percentage of its shares for sale. AIM shares are very high risk/reward and great care must be taken when investing.
Evaluating risk and reward
The risks related to preference shares are considerably lower than ordinary shares and more related to the credit rating of the company concerned. However, the potential rewards are also lower and more in line with fixed interest investments.
AIM share risk
It is important to consider the potential for investment returns as set against the risks offered and establish whether it is suitable for your specific circumstances.
Evaluating income potential The simplest way to do this is to look at the dividend yield. Those that provide a high dividend yield (typically 4% plus) are often seen as income shares, while those with a yield of less than 2% are often described as growth shares due to the fact that a larger proportion of profits are re-invested to help the company grow.
Risks associated with ordinary shares Ordinary shares are volatile. The price can rise or fall rapidly, making them a relatively high risk investment. Even the safest ‘blue chip’ shares should be regarded as medium risk as their price can still fall significantly. One of the other main risks is access to capital. As the price fluctuates it may be that when you need the money it is below the amount originally invested. Shares can offer high rewards compared to other investment types, but the balance between risk and reward must be taken into account when deciding to invest.
any investment decisions based upon its content. The value of investments can fall as well as rise and you may not get back the amount you originally invested. Past performance is not a guide to future performance.
Preference share risks
Because AIM shares have less stringent requirements they are considered as higher risk investments than those on the main market. But with the greater risk comes the potential for significant returns. Diversification is more important when it comes to AIM shares.
Unquoted shares Unquoted shares are those of companies without a stock market listing, often that are too small or young to obtain one. The risks are very high but the rewards can be good. Holding shares for the medium to long term can help to iron out fluctuations in local and global economies. Shares have their part to play in a diverse investment portfolio but it is important that your investments meet your specific requirements. We can help you to review your portfolio and make sure your investments are structured to meet your needs.
Get in touch for further information on stocks and shares.
Whilst considerable care has been taken to ensure that the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information. Errors and omissions excepted.
Arthur Beverly Financial Management is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 485198. Registered in Scotland Number 342744. Registered Office: 22 Backbrae Street, Kilsyth, G65 0NH
MAY 2014
Equities: stocks and shares This guide gives an overview of investing in equities, otherwise known as stocks and shares.
An equity investment represents ownership of part of a company in the form of shares in the company. You can buy shares directly or you can pool your money in a collective investment such as an investment fund, which will hold a number of underlying equities. If you buy directly you will also have shareholder rights, giving you a say in how the company is run, although you don’t receive these when you buy through a fund.
Investment UPDATE ‘preference shares’. The income payments for both types are as follows:
UK ordinary shares •
a dividend is declared half yearly, based on the performance of the company
•
the dividend is declared and then paid with a 10% tax credit
•
the net yield is the dividend divided by the price of the share multiplied by 100%.
Investment returns Typically, the reward for owning part of a company is the ability to share in the profits in the form of dividends and any increases in the market value of the company, although this may not always be the case. In most cases stocks and shares provide returns in the form of both income (through dividends) and capital (loss or gain).
Share income Most shares are known as ‘ordinary shares’, which differentiates them from
2 Stewart Street Milngavie Glasgow G62 6BW 0141 956 5525 [email protected]
Preference shares •
these pay a fixed dividend quoted in percentage terms based on the initial value of the share.
Share capital The value of ordinary shares is dependent on the price a potential investor is willing to pay. Many outside factors can influence this, including company specific news as well as wider ranging news affecting the whole market, a specific industry sector or the economy.
As the value is influenced by external factors it can change rapidly. This can be good news for speculators, but not for long-term investors. This volatility gives stocks and shares their high risk profile and is why it is normally recommended to hold shares for the medium to long term (five years plus). It is time that helps iron out the ‘ups’ and ‘downs’ and reveal the true value of a company.
The taxation of shares Dividends on ordinary shares are paid with a tax credit at 10%. To calculate the gross dividend you need to divide the net dividend by 0.9. The 10% meets the tax liability for basic rate taxpayers, while higher rate taxpayers with income at or below £150,000 will have a liability of 32.5% in total, less the 10% tax credit. Those earning more than £150,000 will have a liability of 37.5% in total, less the 10%.
www.abfm.co.uk
Equities: stocks and shares For example: Net dividend
£80.00
Gross dividend (£80/0.9)
£88.89
Tax credit
£8.89
Tax payable (32.5% x £88.89)
£28.89
Less tax credit
£8.89
Higher rate tax payable
£20.00
When shares are given away or sold, there may be a liability for capital gains tax on any increase in market value while you held them.
Share classifications There are different types of shares that can be issued, including: •
Quoted shares issued by companies listed for trading on the Stock Exchange.
•
Unquoted shares issued by companies that aren’t listed for trading on the Stock Exchange.
To have shares listed for trading, a company needs to: •
have a 3 year track record
•
make full disclosure of the company’s financial affairs
•
offer at least 25% of the total shares of the company for public subscription.
However, not all companies needing to raise capital can meet the Stock Exchange requirements for a full listing. Since 1995, the Alternative Investment Market (AIM) has existed for companies ineligible for a full stock market listing. The AIM enables young companies to raise capital without the high costs of
Important information This document is solely for information purposes and nothing in this document is intended to constitute advice or a recommendation. You should not make
flotation on the main market. There are fewer restrictions too. For example, a company doesn’t have to offer a minimum percentage of its shares for sale. AIM shares are very high risk/reward and great care must be taken when investing.
Evaluating risk and reward
The risks related to preference shares are considerably lower than ordinary shares and more related to the credit rating of the company concerned. However, the potential rewards are also lower and more in line with fixed interest investments.
AIM share risk
It is important to consider the potential for investment returns as set against the risks offered and establish whether it is suitable for your specific circumstances.
Evaluating income potential The simplest way to do this is to look at the dividend yield. Those that provide a high dividend yield (typically 4% plus) are often seen as income shares, while those with a yield of less than 2% are often described as growth shares due to the fact that a larger proportion of profits are re-invested to help the company grow.
Risks associated with ordinary shares Ordinary shares are volatile. The price can rise or fall rapidly, making them a relatively high risk investment. Even the safest ‘blue chip’ shares should be regarded as medium risk as their price can still fall significantly. One of the other main risks is access to capital. As the price fluctuates it may be that when you need the money it is below the amount originally invested. Shares can offer high rewards compared to other investment types, but the balance between risk and reward must be taken into account when deciding to invest.
any investment decisions based upon its content. The value of investments can fall as well as rise and you may not get back the amount you originally invested. Past performance is not a guide to future performance.
Preference share risks
Because AIM shares have less stringent requirements they are considered as higher risk investments than those on the main market. But with the greater risk comes the potential for significant returns. Diversification is more important when it comes to AIM shares.
Unquoted shares Unquoted shares are those of companies without a stock market listing, often that are too small or young to obtain one. The risks are very high but the rewards can be good. Holding shares for the medium to long term can help to iron out fluctuations in local and global economies. Shares have their part to play in a diverse investment portfolio but it is important that your investments meet your specific requirements. We can help you to review your portfolio and make sure your investments are structured to meet your needs.
Get in touch for further information on stocks and shares.
Whilst considerable care has been taken to ensure that the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information. Errors and omissions excepted.
Arthur Beverly Financial Management is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 485198. Registered in Scotland Number 342744. Registered Office: 22 Backbrae Street, Kilsyth, G65 0NH
