Introduction to Investment

1. Introduction to Investment Bruce Viney Director of Training and Client Services

2. Why we are here…. • Exam (syllabus valid from 1 October 2006) • 60 minutes • 50 Questions • Multiple choice • Pass mark is 70%

3. Programme/Syllabus * plus/minus 2

4. Introduction CHAPTER 1 • The Role of the Financial Markets • Financial Institutions • London’s Markets • The Bank of England • The UK Economy

5. The City Borrowers Surplus capital, looking for a return Need capital The Role of Financial Markets Companies Governments Savers

6. Loans and overdrafts Deposits Financial Markets Issues shares Buys shares Buys bonds Issues bonds Money Markets Capital Markets The Role of Financial Markets BANKS SHARE MARKETS Companies BOND MARKETS Governments Savers Borrowers

7. Company PRIMARY MARKET SECONDARY MARKET Financial Market stages onward trading of shares at market price issue shares at £2.20 each

8. Financial Institutions • Retail banks and building societies • Investment banks • Pension funds • Insurance companies • Fund managers • Stockbrokers • Custodians • Credit card companies

9. 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

10. DateEvent 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 London Stock Exchange

11. Syndicate Syndicate Syndicate Syndicate Broker Policy £60m SyndA £20m Members Clients The Lloyds Market £15m £15m £10m

12. World Securities Markets • NYSE • Nasdaq • Euronext • Japan • Deutsche Borse

13. State controlled Economics • Categorising Economies • Gross Domestic Product • Gross National Product • Balance of Payments • Inflation • PSNCR Market Mixed Open

14. 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

15. 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

16. Current account visible visible invisible invisible Balance of Payments • Measures the difference between money flowing into and out of the country Imports Exports

17. What is money? Inflation • What is it? • Problems caused by inflation • Measurement • headline RPI • underlying RPIX • harmonised HICP • Caused by an increase in the money supply?

18. 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)

19. MPC control this rate % % % Bank of England bank bank bank % % customer % LIBOR 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

20. Government Borrowing • Government income from taxation • Government expenditure • Difference is called: Public sector net cash requirement (PSNCR)

21. Foreign Exchange • Market in currencies • No central market • London is the largest centre • Dominated by banks • Types of contract • spot • forward

22. Companies, Capital and Asset Classes • Equities • Corporate actions • LSE trading and settlement • Bonds • Money market instruments • Company administration CHAPTER 2

23. Security General term for any type of financial instrument (usually) traded on an investment exchange. Equities Bonds Part ownership = shares 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

24. 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 Yes Variable, not guaranteed No Fixed, not guaranteed (can be cumulative)

25. Why own shares? • Voting • Income – dividends • Capital growth • Trade perks Risks • Price • Liquidity • Issuer

26. 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)

27. 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

28. 23.50 6 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? Number of shares Price per share Total value Before 5 £4.00 £20.00 Rights 1 £3.50 £3.50 6 After £3.92 £23.50 How much is the right to buy a share worth?

29. Bonus Issues • Free shares • The effect on share price? • Why would a company do it?

30. £12 2 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? Number of shares Price per share Total value Before 1 £12.00 £12.00 Scrip 1 £0.00 £0.00 2 After £6.00 £12.00

31. cum div ex div Feb Wed 8 March Fri 10 March Fri 10 May Tues 7 May AGM Record Day (Books closed day) Dividend Payment date Dividend announced Ex-dividend day Cash dividends • What is a dividend • Payment/distribution to shareholders from realised profits • Interim and final dividend • Timetable

32. 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

33. Listing

34. 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

35. 1 100 FTSE All Share 350 c900 FTSE Indices FTSE 100 FTSE 250 FTSE Small Cap

36. Securities New York NASDAQ London Euronext (Paris) Tokyo Deutsche Borse Hong Kong Indices World Markets Dow Jones S&P 500 NASDAQ Composite CAC 40 Nikkei 225 Xetra DAX Hang Seng

37. Seller Seller Buyer Buyer Broker Broker Market Maker Order driven Quote driven Broker Broker Domestic Equity Market

38. 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

39. SETS Buy & sell orders displayed (price/time priority) • Standard settlement • Visible to all but only member firms can input and delete orders

41. SEAQ • Market makers show prices and sizes • Two way prices (bid, offer, spread) • Touch strip

43. £ Market Maker Broker Contract Note shares Equity Settlement Trade Buy me 1000 PJC plc shares Settlement

44. CREST is an electronic settlement system Mainly settles UK equities, corporate loan stock and gilts Dematerialised/uncertificated settlement

45. Crest Structure Investors Regulators Member Bank Revenue(s) Registrar Companies

46. 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

47. Issued by home company to home investors in home currency Issued by overseas company to home investors in home currency Issued to many investors in any currency – international issues Corporate Bonds Domestic Foreign Eurobond

48. Other bonds - features • Zero Coupon Bonds • Convertibles

49. Gilts • Interest (coupon) • gross annual interest on the nominal value (£100) • paid semi annually • Repayment (redemption) • Classification by DMO • Short Less than 7 years • Medium 7-15 years • Long 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

50. Yields • Flat Yield 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% annual coupon x 100% ---------------------- market price