UK Financial Services, regulations and ethics

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The most effective correlation is a negative correlation as the losses in one area are balanced by the gains in another.

Cash deposits are not investments as such but deposits of funds into recognised institutions such as banks and building societies who in turn, use those funds to lend money to other institutions and individuals at a higher rate of interest than they pay the depositor.

Providing the investment is into a recognised financial institution such as a UK bank or building society or via National Savings and Investments, any capital invested via deposit accounts is exposed to minimal risk but, equally, there is no potential for capital growth. Therefore, the real value of the original capital can be eroded by the effects of inflation over time.

Returns will be in the form of interest on the capital invested at the rate offered by the account. Both the nominal annual rate and the Annual Equivalent Rate (AER) are usually quoted. The nominal rate will just be expressing the annual rate of interest that the account pays. However, because interest can be pa...

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The Personal Savings Allowance gives basic rate taxpayers £1,000 of tax-free interest this tax year. Interest in excess of this allowance is liable for income tax at 20%. Higher rate taxpayers have £500 of tax-free interest each tax year and pay 40% on any excess. Those paying income tax at the additional rate have no allowance and pay income tax at 45% on the full amount of gross interest received.

In addition to the personal savings allowance there is also a £5,000 0% starting rate of income tax for savings income but it only applies if income from other sources is no more than £5,000.

Where an individual has to complete a tax return and has received interest payments, they must show the gross and net amounts received.

Each year the Bank or Building Society will provide the account holder with a certificate showing the gross amount of interest produced.

Current accounts provide cheque books and allow the user to set up direct debits and standing orders and withdraw money from ATMs. If any interest is paid on these accounts it is normally at a very low rate.

Savings accounts generally come in two forms, namely instant access or restricted access.

An instant access account can only be so named where the individual account holder is able to withdraw funds immediately. Rates for these accounts will ...

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For those using the Lifetime ISA for retirement savings, the funds and bonus can be withdrawn tax free after age 60. Funds withdrawn before age 60 for any purpose other than a first home purchase will lose the Government bonus plus any interest on this and will have a 5% charge imposed

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Fixed interest savings certificates

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They have several common features. In the main, these securities are tradable in that once an investor buys a bond (by doing so ...

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An accurate calculation of yield is to look at the effect of any capital gain or loss at redemption and include this within the overall return.

The redemption yield is the figure that can be used to compare a bond with the return from another type of investment, but the redemption yield calculation is complex and not required for this level of study.

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In the case of fixed interest securities, we would need to consider factors that could affect an institution’s ability to repay capital and/or income. The risks of this happening can be categorised under the headings of non-systematic risk (the risk arising from factors affecting the individual institution) and systematic risk (the risk arising from factors affecting the market as a whole).

Under non-systema...

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The holder of a shorter dated bond will get a return on the bond earlier than a holder of a longer dated stock and will be exposed to interest rate movements over a shorter period of time.

Therefore, the stocks that tend to be most volatile in price movements are longer dated stocks with lower coupons.

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When calculating the redemption yield for index-linked gilts, one would have to assume a level of RPI between now and redemption in order to accommodate the increased cash flows received prior to redemption.

The markets are less liquid, i.e. fewer buyers and sellers.

Creditworthiness of institutions is forever being updated. Overall, credit ratings fall into two categories: investment grade bonds and non-investment grade bonds. Investment grade bonds have ratings of BBB or higher from Standard and Poors, or Baa3 from Moodys, and are considered to have a relatively low risk of default. Non-investment grade bonds have lower ratings and are higher risk. They are also referred to as high yield or junk bonds.

Yields on ...

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Risks

Although bonds are relatively simple products there are still risks involved. The risks are interest rate risk, liquidity risk, inflation risk and default risk. When interest rates rise, bond prices fall and vice versa. Many bonds trade infrequently so it may be difficult to sell at a particular time. Returns on conventional bonds are eroded by the effects of inflation although index-linked bonds give an element of protection against this and all bonds carry the risk that the issuer will not be able to meet the ongoing interest payments or the return of capital at maturity.

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All share classes will provide the ability to receive a dividend in some ...

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History indicates that people wanting to achieve long-term real returns of income and capital but who are willing to accept the volatility surrounding returns should consider investing in equities.

The expectations of the markets as a whole and investor sentiment in terms of supply and demand will have a great deal of impact on the values of equities.

The connection between the attitudes of the markets on various company shares derives from factors such as the political and economic environment, and expectations of a company’s profit-making capability. Past performance of the organisation can act as a strong guide but will not definitely predict the future.

A large part of the company’s abi...

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Any appreciation in capital value on disposal will result in a capital gain potentially subject to capital gains tax. However, you should note that the individual can still offset these gains by use of the annual exemption allowance, where gains up to a certain amount each year are free of capital gains tax, and other allowances that may be available depending upon the circumstances of share ownership.

Ordinary shares are the most common forms of tradable equities

They give shareholders the right to all profits that exist after tax and preference shareholders’ dividends have been paid

Not all profits will generally be paid out by companies. They will retain some as reserves which will therefore increase the overall asset value of the co...

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On a company winding up, preference shareholders rank ahead of ordinary shareholders but after loan stock and other debt

Warrants

Warrants are not shares

They are an investment giving the right to buy shares at a fixed price at a pre-determined date, or within a specified period, in the future

They do not receive dividends

The London Stock Exchange (LSE) is one of the oldest and largest exchanges in the world. 

A company wanting to have its shares listed needs to meet certain criteria:

Have a three-year track record

Make a full disclosure of its...

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The LSE acts as both a primary market (one for trading newly launched share issues) and a secondary market (one for buying and selling of existing shares).

The largest market for unlisted securities is the Alternative Investment Market (AIM). The AIM is the most liquid market for unlisted securities. It is designed for companies that are “smaller, young and growing” as defined by the LSE. Companies join AIM to raise capital, broaden the...

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Market capitalisation is a measurement of the company's size and is found by simply multiplying the number of shares issued by the current share price.

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This will depend upon the economic conditions over a period and the quality of tenants. Property analysts will tend to foresee where conditions are improving or getting worse and buyers and sellers keeping a close eye on trends can have little time in which to make decisions. However, prices can start to spiral either way and those not taking all factors into account can suddenly suffer nasty shocks.

As an example, if the property is in an area already charging high rents on average, then the landlord letting out to a student will be charging out...

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If an individual lets part of their principle private residence, then subject to certain conditions, up to £7,500 per year can be received tax free and the residence will continue to enjoy its tax-exempt status for CGT purposes.

Note, that purchasers of land and property in the UK will be subject to Stamp Duty Land Tax, the rate of which as a percentage of the total value of the consideration increases the higher the value. There is also additional stamp duty to pay on the purchase of second homes/buy-to-let properties.

Buy-to-let

We have already discussed some key issues but it is worth reiterating that an individual wishing to buy this type of property needs to consider liquidity, management of the property, potential tenants and void periods befo...

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Offshore property companies

Real Estate Investment Trusts

Risks

Property investment is not risk free, but prices tend to be less volatile than equities. Property is an illiquid investment and has costs associated with it - buying and selling costs and stamp duty - which can make it expensive. There can be periods of time with no rental income if tenants are not available and sales can take a significant period of time to achieve.

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