An Introduction to Stock Trading Part 4 - Types of Accounts

Part four of the Beginners Guide will look at the different types of account that can be used to hold your shares.

Follow these links for earlier posts on Terms, Dividends and Corporate Actions

One of the main differences in the types of accounts is to do with Tax treatment and as such they will change by tax jurisdiction, Therefore the information I am listing here is related to the UK Tax area only.

The first two accounts Traditional and Nominee can be grouped together as Non-Tax Efficient accounts, neither of these accounts offer any tax relief on your savings. 

Traditional Broker Account (Paper Certificate)

Before the proliferation of the internet and the digital Revolution most shares were held physically in paper form either by yourself or by your broker.

With this type of broker account you request for your broker to make a deal they will then purchase the shares and the companies register of stockholders would be updated and a new paper certificate would be dispatched to you to show your ownership, after this point all correspondence will be directly from the company to the shareholder with the broker only being involved when you wish to sell.

Traditional Brokerage is now likely to hold the shares in CREST (The UK's security settlement system) which allows direct ownership but with the advantages of same day clearing and faster confirmation of the deals.

Nominee Account
These days most shares of small holding share owners are owned through brokers electronically in what is known as a Nominee Account. The advantages of the Nominee Account is that the shares are traded and cleared a lot sooner, as you do not hold the shares directly then you are known as the beneficial owner where as the broker is the nominee owner. Technically the Broker remains the owner of the shares so all decisions that are owed to you as the owner are passed to you through the broker rather than coming from the company directly.


Forms of tax efficient accounts include

ISA - Individual Savings Account

The Individual Savings Account (ISA) is probably the most important of tax efficient savings accounts and I have never heard any advice different to filling your ISA before thinking about using any other account. Shares saved in an ISA are free from paying Capital Gains Tax (If you are over the CGT threshold) and Income Tax (Only payable for higher rate tax payers.)

The ISA comes in two types, Cash or Stocks and Shares, each year the government sets a limit to hhow much can be invested in ISA accounts per person. The amount for 2014 is set to £11,520 of which half (£5,760) can be stored in a Cash ISA.

You can combine a Cash ISA with a Stocks and Shares ISA so you could have £5,760 in each or any proportion as long as you do not exceed the total limit or have more than 50% as cash. The other thing to remember with an ISA is that the limit is money paid in regardless of what is withdrawn so if you pay in £6,000 and then withdraw it you will be unable to repay it all in as it would be over the total ISA Limit.

An ISA is a flexible account as subject to the account providers terms and conditions there is no limit to when you can withdraw the money and it is entirely tax free.

SIPP - Self Invested Personal Pension

A second type of tax free savings account is the SIPP, The SIPP as the name suggests is essentially a pension plan that is managed by you rather than by a fund manager. As it is a pension plan the money paid in is not available for withdrawing until you are at least 55 years of age, at 55 you have the option of withdrawing up to 25% of the balance tax free as a lump sum with the option of using the remainder to purchase an annuity to provide a retirement income or to start drawing down the SIPP as an income. All income that comes from a SIPP is taxable at the usual income tax rates.

Although you pay income tax on the money withdrawn from a SIPP the main tax advantage is that the money placed in is pre-tax, so if you are a standard rate tax payer (20%) you will get £1,000 for ever £800 you put in and if you are a higher rate tax payer you can also claim a further 20% relief on your tax return.

So as an example if a higher rate tax payer wanted to invest £1,000 in a SIPP he would pay £800 to his broker who would request the additional £200 tax relief from HMRC giving him £1,000 to invest. When he fills out his self-assessment (providing that he has paid more than £200 of higher rate tax) he can claim an additional £200 of his tax liability.


SIP - Share Incentive Scheme


The SIP is a specific shares scheme operated by a company for their employees. Only share schemes that are approved by HMRC are SIPs and valid for tax relief. A SIP can include Free Shares, Partnership Shares, Matching Shares and Dividend Shares.

Free Shares: A company can give up to £3,000 a year worth of free shares per employee, The shares can be given free of tax, if the shares are removed less than 3 years after being awarded then Income Tax and NI is payable at the current market rate. If the shares are removed between 3 and 5 years of the award date then the shares are taxed at the lower of the value of when they were awarded and when they were sold. If they have been held over 5 years then there is no tax payable.

Partnership Shares: These shares are bought by the employee with pre-tax pay (Also known as salary sacrifice) There is an annual limit of £1,500 each year that can be used to purchase partnership shares. The tax implications are the same as for free shares so holding them for over 5 years will result in no tax to pay.

Matching Shares: These shares can be awarded by the company for each partnership share that is bought up to a rate of 2 matching shares for each partnership share. Matched Shares can only be awarded if the Employee remains employed by the company for three years after the award date. They will also be liable to tax if removed from the scheme before 5 years after the award date.

Dividend Share: These shares are the reinvested company dividends, like the matched shares they can not be removed from the scheme less than 3 years after the award date unless you leave the company, unlike the other shares in the SIP there is no Income Tax or NI paid on these shares regardless of how long they have been held.

An Introduction to Stock Trading Part 3 - Corporate Actions

For the third part of my Beginners Guide to the Stock Market I am going to speak about Corporate Actions.

Part 1 - A few Terms and Part 2 - Dividends can be found on these links.

 

A corporate action is an action taken by a publicly listed company that effects the share holding in some way, The most common type of Corporate Action is the Dividend as I spoke about earlier but in this section I am going to look at a few of the more common corporate actions that come up rarely but that you will see if you hold shares for any period of time - especially through a turbulent financial time.

Please note that all of these explanations are  generic and you should seek advice before making any decisions on your portfolio.

Rights Issue:

A rights issue is where a company looks to raise more capital from its shareholders and it does it buy issuing to those shareholders a "Right" to purchase more shares - normally at a reduced cost. These rights can be taken up by the shareholder in which case the %age of the company he owns is maintained, he may refuse his rights in which case the shares are sold on the market and the profit from the sale is given to the shareholder or the shareholder can sell some of the rights and use the proceeds to purchase the remainder of the shares (Called Swallowing Your tail.)

as an example if we consider a company where we hold 100 shares worth £1 each in a company. during a rights issue the company gives a rights ratio of 1:1 and a discount of 25% then their rights would be for 100 shares at 75p each. If he took the full rights then he would have 200 shares at an average cost of 88p if he sold the rights then they would be worth 25p each (Effectively the difference between the special purchase price - 75p - and the normal market value -£1) so he could sell all of his rights for £25 or "Swallow the tail" by selling 75 of the rights to purchase 25 of the new shares to give him 125 shares at an average cost of 80p but with a smaller % of the company.

Return of Value:

A return of value typically occurs when a company is able to release a lot money either through dispersal of assets, a planned for project that is no longer needed or simply to return reserves that had been built up.

The return of value could be in Cash or Shares depending in what way the company receives what it is holding. The actual return of value will normally follow the same process as a dividend payment and will normally be received the same way that you receive your dividends. If you receive shares as part of the return then there will often (but not always) be a trade facility offered to dispose of them at a reduced rate - depending on your broker and the size of the deal.

When there is a return of value to the shareholders the price of the share will normally increase by the amount to be returned when it is announced, in fact it is normally priced in before that as the market senses that something may happen, and the share price will drop by the amount of the return on the ex-div date.

Consolidation/Stock Splits:

A stock consolidation reduces the amount of shares in a company and a stock split increases them, essentially they are two sides of the same coin.

Stock Splits are done to increase the amount of shares in the market and typically take place after a share value increases rapidly, the share split is designed to make the market in the shares more liquid as it enables people to diverge part of their holdings and more buyers may be present for 10 shares at £10 than for 1 Share at £100. although a Split is often thought to encourage further price rises by making shares more trade able there is no net gain by the shareholder unless the share price continues to go up.

A consolidation goes the other way and takes  several shares and replaces them with one share of the combined cost. so if you had 10 shares at £1 each they may replace them for 1 share at £10. this is often as result of a very poor performing share so there is often a stigma to consolidating but it can also occur after corporate events for example if a company sells off a large asset it may lose half its value in which case by doing a stock consolidation they can maintain the share price.

for example, if you have 100 shares at £1 each and the company announces that you will get a return of value equal to 50p per share your shares will reduce in value by 50p to offset this the company may also complete a consolidation and therefore they will return to you 100 x 50p (£50) and at the same time complete a 2:1 consolidation so after the return of value you would have £50 and 50 shares at £1 there is no net difference to the shareholder (If there is money to be made it would be made before the action is announced)

Share Buy Back:

A buy back is an alternative to a dividend payment,The company uses its profits to purchase its own shares which it can then take out of distribution or hold for a time that it needs to reissue them.

A share buy back should return some value to shareholders as it will restrict the amount of shares available and should therefore push the share price higher, it is mostly used when the company believes that its shares are trading on a considerable discount.

An Introduction to Stock Trading Part 1

As I have previously stated I am very interested in the Stock Market at the moment so I have decided to compile an introduction to the Stock Market in the hopes that it may help someone who is in the position I was in last year.

I hope someone may find it useful, if there is anything you think I should include then please let me know so I can research it.

Thanks.

The first part is just a few definitions of terms, phrases and ratios

Stock/Share

I guess the first thing to define is what is a Stock? There are a few different types of stocks but for the basis of this guide I will only look at Ordinary Shares, which are the most regularly traded. A stock is basically a part of a company, how much of the company depends on how many Stocks are in circulation. A Limited Company owned by an individual still has a Stock but there is only 1 which covers 100% of the company if there were two directors then each share would cover 50% and so on. With the larger PLC (Publicly Limited Company) the volumes of shares is massive. Lloyds Banking Group as an example have 71,368,000,000 shares in circulation so a single share gives control of 0.0000000014% of the company. When the company holds meetings and decisions need to be made then every shareholder is entitled to a vote equal to the percentage of the company owned.

Ticker (EPIC) Symbol   

The ticker symbol of a stock is the abbreviation code by which it is traded, It is called a ticker symbol as a historical throw back to when the prices were released on a giant ticker tape. The symbol comprises two elements the first one being the name of the company and the second being the exchange that it is registered on. The first part of the symbol can include letters and numbers and is usually up to 4 characters. The market identifier is added to the end of the Ticker after a "." a company can (But doesn't have to) use the same code on different exchanges.

i.e. BP PLC has the following ticker symbols.
BP.L                 London Stock Exchange
BP                    NYSE
BPE.F              Frankfurt Stock Exchange
Obviously in this situation using BP alone would not be a unique identifier. It is good to know the ticker symbol of Stocks that you are interested in as it will remove the need to search through lists (It is also useful to always add the ".L" onto the share when looking for UK shares as otherwise many websites will assume you are after US securities.


Market Capitalization

The Market Cap of a company is taken by taking the share price and multiplying it by the number of shares, in essence this is the cost to purchase the company (Assuming everyone was willing to sell) so for Lloyds Banking Group with a share price today of  83.16p the Market Cap would be 83.16p X 71.368M shares which means that Lloyds as a company are currently worth £59,349,000,000. The market Cap is the default measure of a companies worth (At least its worth according to the stock market) and is a key metric of listed companies and it is market capitalization that is used to work out the constituents of share indexes such as the FTSE 100 (The 100 largest companies on the London Stock Exchange)

Monthly Share Updates

Not a great deal of action with my portfolio in the first month of the year, I was due to make a top up or a new purchase to balance my portfolio a little more, to do this I decided to either top up BP or National Grid or to buy into either Glaxo SmithKline or a house builder.

In the end I bought some more Tesco (reducing my per Share price from £4.34 down to £3.92 unfortunately this is still well above the current £3.21 price tag but at the end of the day I believe in Tesco and think that the recent news hasn't been as bad as made out in the press so think that the Share Price has some rebound in it. I would be expecting Tesco to sit around the £4 mark by the end of the year.

What I really learned is that I need considerably more self control to create a true High Yield Portfolio as I seem to be too driven by my feelings.

Anyway here is the state of my augmented portfolio taking into account a Dividend from National Grid as well as the £/Average of Tesco.

Interesting to see that if I had invested £1,000 in each of these as proposed in the table I would now be looking at a profit of £2,905

Stocks and Shares

I am a big fan of the stock market - to be honest I am a fan of anything that creates such a wide variety of statistics but having read Rich Dad, Poor Dad I have started to realize that I have not been paying enough attention to money producing assets.With that in mind I am going to create a HYP (High Yield Portfolio) which I am going to update on here in case anyone else is interested in my portfolio and wants to start a discussion about it.

My current portfolio contains the following shares.

Barclays
BP
Lloyds Banking Group
Royal Bank of Scotland
Tesco
Vodafone
National Grid

Now those of you that know about dividends will guess that this portfolio wasn't constructed to be a high yield portfolio as I bought all of the Banks during 2009 as I sensed a bargain, experienced investors will also notice that this portfolio is very badly balanced with 3 out of 7 banks over the next few months I am aiming to get this balanced as well as pick up some more High Dividend Payers. I will update when something is interesting but this is where I find myself at the end of the calender year. (Although the divs are calculated as a financial year so divs paid between now and March will be added and final Yield will not be finished until March.) Also I bought National Grid only a few months ago hence have not yet received a Dividend.

*For full disclosure I should say that I do indeed own all of these shares however the volumes are worked out on investing £1,000 in each share (The Purchase price is the price I paid but I didn't buy £1,000 of each - I just don't want to tell the world too much about my finances.)*

Anyway this is the state of my real/modified portfolio that I will be updating around the time I make any real trades.

Rich Dad, Poor Dad

I have just finished reading "Rich Dad, Poor Dad" and it has really changed the way I am looking at my finances. There is nothing in this book that is really all that different or against what you probably already know but it is constructed in a way that really makes it make sense, and although it doesn't contain anything I didn't already know what it has done is shown me that my thinking has been back to front, essentially (And very basically) I have always tried to pay all my bills and then save what I have left, this has caused me to have very slightly more money at the end of each year, I have then worked to improve my Job so that the amount of extra money is slightly more each year, according to Rich Dad what I should have been doing is improving my Assets (Basically anything that creates a passive income) so that they pay my expenses in fact other than as a way to buy assets the Job I have worked so hard to get really is irrelevant to my future wealth. Anyway as I say this is a very basic lesson I learned from the book so I am now going to try and follow the advice and see how it goes.

Since reading the book and to make sure I am not just being taken in by some slick advertising I have also read a lot of views that are against the book.

Taking both sides into account I think I would still happily recommend this book, Most of the "Anti" comments I have read are basically saying that Robert Kiyosaki isn't being honest with his stories or that he doesn't have a proven business reputation but to be honest I am not all that worried about these things as my advice is read the book and absorb the lessons but don't worry that much about the actual stories, to me it seemed these were more there to illustrate the message, they were not the message itself. (Even the books title could be seen as false as the Rich Dad referred too isn't Robert's Dad even if you believe everything in the book) So don't take it too seriously and you should enjoy it a lot.