Equities

What are Equities?
There are two ways in which a company can raise money for business investment - they can either borrow it from a lending institution (e.g. bank) and/or they can issue shares to investors. Interchangeably referred to as equities, stocks and/or shares, it is a certificate of ownership interest of shareholders in a corporation. Buying shares in a publicly quoted company is the most common form of investment in today’s economy. When you buy a share in a company you become a part of the business and share in the future of that business. Furthermore, it gives rights to the shareholders to participate in the control of a corporation, in its profits or in the distribution of its assets if divided.

Large Companies vs. Small Companies?
The equity markets are generally divided into two, essentially large companies and small companies. The larger companies trade on the main market, whilst the smaller on ‘Small Cap’ markets, like the AIM and Plus Markets. [READ MORE ON THE AIM MARKET]

London’s main market, the London Stock Exchange, is where the Blue Chip names of both British and International companies are traded. YTM Stockbrokers offer dealing and advice on main market investments, not only UK based but also overseas - US and European for example.

Many companies, especially smaller ones, might elect not to trade on the main stock markets, but on specialised small markets. In London, these are referred to as AIM (Alternative Investment Market) and PLUS). Small Cap stocks are not traded frequently, but when they move they tend to move considerably. Small Cap stocks also tend to be illiquid. Again YTM Stockbrokers offer dealing and advisory services on such markets – both domestic and overseas.

Bull Markets vs. Bear Markets?
A bull market is one in which prices of securities rise, or is expected to rise. It is a prolonged period where investors have faith that the market will continue to rise in the long term. Bull markets occur as a result of economic recovery or economic boom.

A bear market is the opposite of a bull market and is characterised by falling prices and an expectation that they will continue to fall. Bear markets occur as a result of a slowdown in economic growth.

Those who invest in a rising market and think that it will continue to be so are called bullish investors while those who speculate in falling markets and think that it will continue are known as bearish investors.

Blue Chip vs. Small Cap?

Blue Chip stocks are perceived to be less risky due to their size, historic stability and liquidity. The term blue chip came from casino houses, which used the colour blue to represent the highest value poker chip. Blue Chips are the dominant companies in their respective industries, whose sound business practices and established financial security have earned them broad recognition throughout their sector and around the world.

Small Cap investment opportunities arise when a company first comes to the market. Most companies’ float/list on small capitalisation markets like AIM or PLUS. They choose to do so either because of their lower funding requirements or they are too small to meet the requirements of a main market listing. This presents the first investment opportunity for the private investor - the ground floor - because the launch price is deemed to be attractive, and post-launch prices can be a profitable selling opportunity.

In short, Small Cap trading volumes may be thin and the shares can be volatile, which may not suit all investors. This volatility however, is what makes these Small Cap stocks exciting.  Whilst equity prices in both large and small companies can increase (or decrease) significantly in value, there is a bigger likelihood that the rate of increase (or decrease) will be far larger for Small Cap investments.

The downside on both is limited (the value of your investment), but the upside is magnified far greater with Small Cap shares. Likewise the risks are greater for Small Cap investments.

Low Risk vs. High Risk?
Since 1991, following the BCCI collapse where around 6500 people lost money, the Bank of England now guarantees all deposits held at high street banks. However, this aside, there is no other single investment with zero risk. Whilst, there is a distinction between low risk shares (Blue Chips) and high-risk shares (Small Caps), YTM Stockbrokers, believe everything that is traded on the stock market is risky, and investors can risk loosing their initial investments.

Companies like Marconi plc (previously General Electric Company - G.E.C.), which were once thought to be the bellwether of the electronics industry, would never have been labelled as a possible failure. Similarly, the collapse of Railtrack plc (a privatised government business) could never have been envisaged. But it happens!

Long-Term Growth vs. Short-Term Growth?
Equities tend to outperform other mainstream investments over time, which is why many of our investors regard equities as long-term investments. Whether a day trader or long-term investor, it is illegal to trade on inside information. Furthermore, crystal balls don’t exist and at YTM Stockbrokers we do not pertain to have one.

When investing in Blue Chip stock, one must understand that the majority of growth has already occurred. Hence future growth, generally, is likely to be gradual and sustained but not explosive. Explosive growth however, is potentially offered with Small Cap investments. Small companies are embryonic, not yet having reached their prime. For this reason, we advise longer term holding periods for such investments.

Long-term holding periods do not necessarily represent 10-15 years, and alternatively they do not imply holding periods of less than 1 year. All YTM Stockbrokers will advise holding periods relative to the stock they advise on. As Small Caps are at the early stages of their growth cycle, one must appreciate that the company must be given some time to implement its business and sales model so as to achieve growth. Nevertheless, experience has generally shown that we look for holding periods of at least 1-2 years. Holding periods of greater than 2 years will be advised if the client wishes to benefit from the tax advantages available to AIM stocks. [see Income Tax vs. Capital Gains Tax section below]

Capital Growth vs. Income Growth?
Capital Growth is simply the increase in value of an asset or investment (i.e. the difference between the current value and the original purchase price). Whilst there is capital growth potential in both Blue Chips and Small Caps, there is greater potential with the later. One reason is that large companies are well researched by professional investors making it harder to find stocks that are undervalued. For this reason, where shares are less researched, one has greater opportunity to make more money by identifying smaller undervalued investments. This is the primary reason why there is greater capital growth potential with investing in smaller companies.

Apart from capital growth, some stocks also regularly pay dividends (a share of the company’s profits), which can be taken as income, or reinvested automatically in additional shares. Income growth is more associated with Blue Chip stocks, but can also be offered by smaller companies too.

Income Tax vs. Capital Gains Tax?
Investing in Small Cap companies bring considerable tax benefits to investors. The tax advantages of AIM (Alternative Investment Market) are enormous. Provided you hold the shares for at least 2 years, you will only pay 10% capital gains tax and no inheritance tax on gains.

The full range of benefits are summarised below:

• Capital Gains Tax Relief
• Inheritance Tax
• Enterprise Investment Scheme
• Venture Capital Trusts
 
Whether one is investing for growth, tax efficiency or a mixture of both, and whether gains are attributable to capital or income growth, the tax advantages mentioned above are only associated with small capitalisation stocks. Depending on your own situation, we would suggest you consult with your tax advisor or accountant as to how your position is affected.

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