Disclaimer

This article is for general information and educational purposes only. It does not constitute investment advice, a personal recommendation, or a financial promotion within the meaning of the Financial Services and Markets Act 2000

Readers should make their own independent assessment and where appropriate seek advice from an FCA authorised advisor.

ETF’s Exchange Traded Funds

In most respects these are like funds in that they hold a collection of securities. Unlike funds however they are traded throughout the day when the market is open just like shares. Automatic investment instructions (covered later under share trading) may be given on ETF’s.

Your platform provider will list and categorise individual ETF’s. Some platforms only offer ETF’s whilst others list these plus funds and equity.

Equity (Company shares)

Company, business & market valuations As we are now moving on to consider equity investing it is the time to look at how companies and markets are valued.

Valuing private companies and businesses These organisations are not listed on an Exchange and therefore do not have a traded share price. They are therefore valued on a multiple of earnings. Financially they will be run and may be indebted in many ways. To value them against each other and other assets earnings are further defined as ‘EBITDA.’ 

This specific way of looking at earnings is as follows: –

Earnings Before Interest, Taxation, Depreciation and Amortisation. The first three items E.I.T. represent the profit made before interest is paid on any loans and before Taxation, Depreciation, or Amortisation.

Depreciation Where the tangible assets of a business, such as plant and machinery, are reduced in value each year as a charge against profits.

Amortisation is the same process as Depreciation but applied to non-tangible assets such as goodwill.

EBITA Allows lenders and investors to the assess risk and return on a business and compare different businesses.

Quoted company valuations and key metrics.

Companies having shares which the public may buy through a stock exchange are called quoted companies and their shares have a price which fluctuates over the course of the stock market trading day. Earnings are the profits of the business attributable to the shareholders. In the UK these are published for the half year (|Interim) and year end (Final). In the US earnings for major companies are published quarterly.

The most important way of valuing these enterprises is their P/E Ratio.

Price the cost of one share.

Earnings the post-tax profit of the business which when divided by the total number of shares gives the earning per share EPS.

The PE Ratio is calculated as in this example. Price £1 per share divided by the EPS of 20p gives a PE multiple of five.

Yield The total of annual dividends paid per share against the stock’s share price. E.g. A 6p dividend per share against a £1 share cost is a yield of 6%.

Forecasts Historic information is available for all quoted companies. Analysts following individual companies will try to forecast their future earnings, usually for two years ahead. They then apply an appropriate multiple to the company shares based on how well they expect it to perform relative to its peers.

From this research they forecast the future value of the company’s shares and its total worth. They then issue a buy, sell, or hold recommendation for its shares.

Share Capital The issued share capital of a company may be increased in two ways.

Scrip issue This is where additional shares are given to existing shareholders.

The object of this is to increase the number of free float shares and reduce the price of each share.Rights issue. Here the company sells new shares to raise capital. Existing shareholders have the right to buy these at the offer price by a set date and any unsold will then be offered to the public.

Market valuations In the same way that individual companies are valued, the earnings of those businesses that make up a particular market index are aggregated against its price to value the index.

Example The aggregated earnings of the 30 US companies constituting the DOW compared with the cost of owning all these companies provides the current and historic PE Ratios for this index. From these calculations’ commentators speculate whether the index is over or under valued.

How Equity Investing works in the UK using your Investment Platform

Equity Research

Depending on your platform, it will show the equity you want to check out via a search. Let’s take an example. ‘XYZ Co’ ordinary shares, with its exchange code. A summary page appears with ‘At a glance information.’

Market Capitalisation, P/E Ratio. Dividend Yield, Performance over time etc. There is a lot of information on each stock’s page which will help you to consider the merits or otherwise of investing in the company. You will also want to conduct research from other sources.

Equity Trading

Market Order This is an order to buy or sell placed on your platform for immediate execution. Only available when the Stock Market is open.

If you do decide to trade you press the deal button to buy (if you do not hold the stock) or either the buy or sell option if you do depending on the trade you wish to make. The current Buy and Sell price is shown. If you are buying you then enter either the number of shares you wish to acquire or the amount of money you are investing in the trade. The trade is then conducted; the stock appears on your account, and the purchase cost is deducted from your cash holding.

If you are selling you enter the number of shares you are selling and press the sell option. This trade is then conducted, and your new holding is shown on your account. The proceeds are added to your cash balance.

Order Terminology

Bid Price in a stock market transaction is the highest price buyers are willing to pay right now. Ask Price is the opposite being the lowest price a seller is willing to accept. Example ‘XYZ Co’. Bid £9.80 ( Buyers are offering up to £9.80 to buy the share) Ask £9.90 (Sellers want at least this price) The difference is called the Spread and is the stockbroker’s commission.

Automatic Investment Instructions: These may be placed at any time.

Buy Limit An order on your platform to buy a share or EFT, which is triggered if the offer price drops to, or below, the price set by you. Used when you are interested in buying a particular stock in the future but don’t want to place a market order on a particular trading day.

Stop loss An order to sell an existing shareholding or ETF which is triggered if the bid price falls to, or below a price (the stop loss price) set by you. This could be used when you want to limit any loss on a security you own. Limit and Stop Loss Orders have an automatic time limit and can be cancelled at any time.

Fill or Kill An order to buy a share or ETF which is placed outside market hours. The order is to buy a security, up to a set price above the last closing price, when the market opens, Fill, or if not possible Kill the order.

Holding equity, ETF’s, funds or all three. This is very much an investors personal choice..

I only have one equity holding in my Stocks and Shares ISA because I prefer holding Funds and ETFs rather than individual stocks. This is a FTSE 100 company with a good historical record and a yield of 8%. My rational is therefore that providing it holds its price within a set parameter I am earning 8% against savings rates of under 4% (Feb 26).