Equities

The first possibility is to buy ordinary shares of companies - often referred to as 'equities'. These are literally a share in the ownership of companies in the private sector, and are essentially risk capital. The companies make no guarantee to pay dividends on the shares, and there is no certainty that a shareholder will get his capital back. Were the company to lose all its capital, for example, through trading at a loss, through bad management, or from the uncertainties of a changing market for its product, the shares could become practically worthless, and would certainly pay no dividend.

That said, however, the potential for gain is unlimited. Very successful companies are sometimes able to increase their profits and dividends at such a rate that both dividends and market value of the shares can double in quite a short time. Others make losses. Selecting shares to buy is a tricky business and is really a job for the professional investor.

Nominal value

 


A share in a company is described as having a certain value, e.g. share, 50p share, 25p share. Thus if a company has an issued share capital of £10,000,000 there might be 10 million shares, 20 million 50p shares, or 40 million 25p shares, and so on. Although a £1 share will have been worth just £1 when the money was first subscribed for it, it would be purely coincidental were it still to be valued at that figure at any date thereafter; it might be higher, or it might be lower, depending on how profitably the company has been trading.

A holder of 1,000 £1 shares in a company with an issued share capital of 10,000,000 ordinary shares, is technically the owner of one 10,000th part of the company. He does not directly own any of the specific assets of the company, but only his share of what is collectively left over after all prior claims have been met. These claims will include those of any loan stock holders, debenture holders, preference shareholders, bankers and trade creditors. What is left is sometimes called 'ordinary shareholders' funds', or just 'the equity'.

 

Are you interested in setting up your own small business, but worried about making that leap into the unknown? Does it make you feel uneasy knowing that you would be responsible for your own fortunes, and that there would be no safety net around you. Maybe you need to consider a transition role then, such as being part of a franchise. Take cleaning companies, such as Time For You or any of the other big domestic cleaners. They are nationwide companies, but each locality has its own franchise, where the owner is in charge, but also has the support of the national company. You get the experience of being in charge of your own small business, but at the same time you are not alone.

 

When a company makes a profit it is usual for a large proportion of it to be retained in the business to enable it to expand and, in times of high inflation, to maintain the real value of the company's assets; only some of the profits are distributed in dividends. So a company that has been profitably trading for, say, five years may have ploughed back profits as large as the starting capital, and used some of them for expanding the business and making even bigger profits. Although the net assets of the company - that is, the total of assets less the total of outside liabilities - when it started up five years ago may have been of a value of only £10 million, they might now be worth £20 million in today's money. (It may be remarked that the price of a share would need to double in that time merely to retain its real value.)

 

A large number of companies host big commercial events and attend technology shows and events. During these events they advertise what they produce to other businesses and visitors. In order to make their products more appealing to their customers they use branded inflatable event buildings to stand out from the rest of the event participants.

 

Small businesses have a huge amount of issues to think about, and one which might seem quite small in comparison is what type of phone number to have. You can see a wide range on the DBS website, but it is worth weighing up the pro's and con's of 0800 numbers. On the plus side, they are non-geographic numbers, so can make a small business seem much larger than they actually are, and are freephone, so clients calling from landlines don't have to pay. On the negative side, the recipient of the call pays to receive them, so if you are a small company, can you afford to pay for these calls? Does the custom gained by having a freephone number make the cost worthwhile? Or would a different type of number, such as an 0845 number, be better? Give DBS a call to discuss which option is best for your small business.


Investment Exercises

A Jonathan Brown has £2,000 to invest. Ignoring brokerage and other charges, which of the following will give him the best income yield?

(a) 9% Treasury Stock priced at 85.

(b) 61/2 % Funding Stock priced at 70.

(c) Bank deposit paying 9%.

B In 2001 Jill White wishes to select a gilt-edged stock for a four-year period. She has the choice of:

(a) 4% Exchequer redeemable at par in 2005, priced at 75.

(b) 71/2% Funding redeemable at par in 2009, priced at 84.

Which of these is likely to give a better redemption... see: Investment Exercises


Personal And Business Finance 2017

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