Money Tips Network

Corporate mergers and acquisitions have been more important even than new issues in keeping the merchant banks’ names in the public eye. Over the past few years, such deals have become even more acrimonious with charge and counter-charge flying back and forth in national newspapers. The growing importance of American banks in this field is increasing the use of the rather less ‘gentlemanly’ tactics used in US takeovers.

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Many merchant banks were begun by immigrants, refugees or Jews, shut out of the rather stuffy world of the clearing banks. The wheeling and dealing involved appealed to the more adventurous spirits. However, after the early inspiration of a maverick leader, the merchant banks quickly became absorbed into the mainstream establishment .there are a lot of very blue-blooded merchant bankers.

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The high street banks are household names. Although most people have heard of the term ‘merchant bank’, few can name specific institutions such as Morgan Grenfell or S. G. Warburg. In general, the merchant banks have a bad image and are associated with asset stripping and hard-hearted capitalism in many minds. However, they also offer for some the suggestion of adventure and romance in the financial system.
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Suppose that a country has only one bank, which finds that it needs to keep 20 per cent of its deposits in the form of cash. It receives an extra ?200 worth of cash deposits. The bank the buys ?160 of British Telecom shares, leaving ?40 cash free to meet any claims from depositors. The person from whom it bought the shares now has ?160 in cash, which is deposited with the bank. So the bank has ?360 in deposits (the original ?200 plus the new deposit of ?160), of which it needs to keep only ?72 (20 per cent) in the form of cash. The bank is therefore able to increase its total investment to ?288 (?360 – ?72) and can buy a further ?128 of BT shares. Once again the person from whom it buys the shares will receive cash, depositing this with the bank. This process will continue until the bank has deposits of ?1,000, of which ?200 is held in the form of cash. The bank’s balance sheet will then look like this:

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The earliest issues of money that was not backed by gold were known as fiduciary issues. Money is now totally divorced from its precious metal origins. It will never regress. Imagine the political problems involved in basing a monetary system on a commodity whose biggest producers were South Africa and the Soviet Union.
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Primitive societies did not have money, since they did not trade. When trade began it was under a barter system. Goats might be exchanged for corn, or sheep for axes. As society became more complex, barter grew inadequate as a trading system. Goats might be acceptable as payment to one man but not to another, who might prefer sheep or cattle. Even then it was easy to dispute the question of how many sheep were worth a sack of corn.
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Stags are one species of the financial menagerie which commentators use to describe different types of investor. Essentially, stags are speculators who believe that a new issue has been priced too low, and who therefore attempt to purchase as many shares as possible. If they have correctly assessed that the issue is underpriced, the shares will immediately rise in value when the issue is made. The stags can then resell the shares and make a quick profit. A good example of a successful stag deal was the British Telecom issue in November 1984. Read the rest of this entry »

Once the underwriting is arranged, a company will issue a prospectus setting out in very detailed form its structure, trading record and prospects. The prospectus must appear in at least two daily newspapers. Investors are then invited to apply for shares by a certain day. On the day that applications close, the sponsor counts up all the offers and then announces whether the issue is over- or undersubscribed. If oversubscribed, this means that investors have applied for more shares than there are on offer; either their applications will be scaled down or there will be a ballot, in which only a few will get shares. If the issue is undersubscribed, the underwriters will have to buy the shares at the offer price.
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New issues are one of the most exciting parts of the stock market. Not only do they allow investors to spot the successes of the future at a relatively early stage, they are also a direct means of providing capital for industry. Obviously, the daily buying and selling of shares – known as the secondary market – is extremely important. Without the knowledge that their shares could easily be sold, investors would not subscribe for new issues. But it is new issues – and the subsequent capital – raising exercises for expansions and acquisitions – which provide the main economic argument for The Stock Exchange’s existence.

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Traditionally, building societies have been the main providers of mortgages but now their hold on the market is challenged by banks and insurance companies. This competition has meant an end to the old days of ‘mortgage famine’ when borrowers were forced to go cap in hand to their building society manager. Now many institutions will lend three (and even four) times an individual’s annual income. If a couple are buying a house, the lower of the two incomes will be added to three times the higher (i.e. if one person earns ?10,000 and the other ?8,000, the possible total will be ?30,000 + ?8,000 = ?38,000). However, some may expect the buyer to provide a deposit of around 5 to 10 per cent of the purchase price.
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Most people make their life’s main investment in property. Taking out a mortgage is a different form of investment from the others discussed in this chapter since it is an investment financed by borrowing. The other schemes discussed involve the use of money saved from income. One of the great advantages of investing in property is that the cost of repaying the interest (not the capital) on a mortgage is eligible for income tax relief at the investor’s marginal rate. However, this applies only on the first ?30,000 of a mortgage and them only if the house is the main residence of the borrower.

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We have already proposed a general principle of finance – that lesser liquidity demands greater reward. That being the case, longer-term instruments should always bear a higher interest rate than short-term ones. This is not always true. Long-term rates can be the same as, or lower than, those of short-term instruments.

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Having understood the difference between simple and compound interest and the importance of yields, we can now look at the factors that determine an interest rate. In fact, it is more correct to talk of interest rates. At any one time a host of different rates are charged throughout the economy. So it is important to distinguish the determinants of specific interest rates are well as those which affect the general level of rates in the economy. Read the rest of this entry »

The advantages of the Eurobond market – the degree to which it is unfettered by regulation and the size of the investor base – have resulted in its truly phenomenal growth since that first issue in 1963. In that year the volume of Eurobond issues was just over $100 million. By 1986 it was over $183 billion. The UK government was able to raise $4.5 billion at a stroke in 1986.

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Under the interest-rate option, which is in some ways a refinement of the forward-rate agreement, an option buyer purchases the right (but not the obligation) to lend or borrow at a guaranteed interest rate. In return the option seller receives a payment known as a premium, generally paid at the time the option is sold. On the day the option expires it is up to the option buyer to exercise the option and to lend or borrow it at the guaranteed rate if it is possible to do so. Read the rest of this entry »

The field of pensions is one of the most complex of all to cover. Everyone knows about the basic old-age pension, funded by National Insurance contributions. Few think it is adequate as a sole source of income. In addition to the basic pension, there is the SERPS (State Earnings Related Pension Scheme), which was designed to give a higher benefit to those who wish to make extra payments in return for a higher pension at the end.
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The riskiness of share ownership, and the distortions of the tax system, have contributed to a decline in the proportion of shares held by private individuals. Instead, investment institutions now dominate the equity markets. However, the privatization issues have encouraged many individuals back into the stock market and some have estimated that there are still as many as 9 million shareholders in the U K.

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The TSB

The big retail banks have faced increasing competition for the deposits of ordinary individuals. The challenge of the building societies has already been mentioned. There are other long-standing competitors of which perhaps the most important is the Trustee Savings Bank (TSB). Trustee Savings Banks were set up in the nineteenth century to collect the savings of small depositors who did not have enough money to be attractive to the larger banks. The banks were run by ‘honorary trustees’ who invested the depositors’ funds in gilt-edged securities and paid the interest thus earned to the depositors. In the 1860s, there were over 600 banks but this number fell to 20 in the mid-1970s as the banks merged.

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In addition to these varied duties, the Bank also has to keep a watchful eye over the City. This brings it into a wide variety of areas. It reported its concern about the activities of the London Metal Exchange some eighteen months before the tin market collapsed. The scandals at Lloyd’s insurance encouraged the Bank to intervene and impose an outside Chief Executive, even though it had no real powers over the insurance market.

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Participants in the foreign-exchange market include everyone from the Governor of the Bank of England to you and me when we purchase our foreign currency for a holiday. Tourist purchases are, in fact, among the few foreign-exchange transactions in which noted and coins actually change hands. The vast majority of deals take place over the telephone in bank dealing rooms, and funds are transferred telegraphically from one account to another.

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Gold and silver have traditionally been the two predominant monetary metals for the reasons outlined in Chapter 3. As a result, goldsmiths and silversmiths became the earliest bankers. Nervous citizens, who were well aware of the dangers of keeping their gold under the mattress, began to use the smiths, who had safes to store their wares, as a place to keep their wealth. In return, the smiths would give the depositor a handwritten receipt. Read the rest of this entry »

Among the earliest bankers were goldsmiths and silversmiths from the Lombardy region of Italy who were granted land in London by King Edward I. one of the sites they received – Lombard Street – is at the heart of the modern City of London. Back in Italy, the money lenders had conducted their business from wooden benches in market places. The Italian word for bench, banco, was corrupted by the English into ‘bank’. The Italians were also responsible for introducing the symbols that were synonymous with British money until 1971 – ?, s. and d., or lire, soldi and denarii.

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A new issue normally takes place in the early years of a company’s existence. As companies attempt to expand, however, they need more funds than were provided by the original sources. There are many avenues open to raise funds in the form of debt. However, as we noted in Chapter 8, too much debt makes a company unbalanced. At some point, the company will need further equity capital.
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The company will also have to allow a grace period, usually three weeks, to allow shareholders time to decide whether or not to take up their rights. If the price of the existing shares falls too far during that period, it can ruin the prospects of the issue; the discount offered may have to be substantial in order to avoid that risk.

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British governments have historically spent more than their incomes and, like anyone else, they have to borrow to cover the difference. They borrow, as we saw in Chapter 5, in the form of long-dated securities called gilts and short-dated securities called Treasury bills. Money is also borrowed direct from the public through the various national savings schemes on offer. The government can give itself a built-in advantage in the market for personal savings because it can allow savers to escape tax. It does so on some schemes. However, the loss of tax income increases the government’s cost of borrowing. As a result, it tries to maintain a balance between the amount it borrows in the form of savings schemes, bills and gilts.
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Is it not immoral that governments should pile up debts which must be paid for by future generations? The image comes to mind of the philandering nineteenth-century gentlemen who drank and gamble their families into ruin. Does not the money the government pays in interest each year constitute an unacceptable tax imposed by the irresponsibility of past politicians?
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Money on its own is a very useful but, in the long run, unprofitable possession. That ?200 stashed under the mattress will in five years’ time still be only ?200. In the meantime inflation will have eroded its purchasing power, so that it may be able to purchase only half as many goods as it could five years before. Had the money been deposited with a building society, however, interest would have been added every six months. At 10 per cent a year the original cash deposit would have increased to ?322.10 at the end of the five-year period. Read the rest of this entry »

In theory, the yield on shares should be higher than that on most bonds, since shares a riskier form of investment. However, in recent years equities and property have offered lower yields than bonds or savings accounts because the prospects of capital growth are much greater with the former investments.

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In the late 1970s and early 1980s, Lloyd’s was hit by a series of scandals which caused much adverse press and parliamentary comment. The first headline case was the Savonita dispute which concerned the loss through fire of a number of cars aboard ship. The Lloyd’s underwriters felt the circumstances were suspicious and refused payment. That was followed by news of heavy losses on computer leasing insurance and a loss to the Sasse syndicate of ?21.5 million which seemed to have been caused by the insurance of some dubious properties in the USA. The names involved protested strongly and the Lloyd’s committee eventually agreed to cover part of the losses, although the names were still expected to find the balance of ?6.25 million.

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Instead, commentators often talk of the ‘big four’ – Lloyds, National Westminster, Midland and Barclays – which are still the best known banks in England, with over 10,000 branches between them. Although the services they provide are virtually identical, each has its own personality and problems.

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National Westminster Bank, the most profitable UK bank in size, was formed when the National Provincial and Westminster Banks merged in 1968. It survived a crisis of confidence in 1974, when it made the unwise step of issuing a statement assuring investors that it was not in trouble (a sure way of making people believe the opposite). It is now most famous for the 600-foot-high tower which dominates the City skyline and from the air resembles the Nat West symbol of three irregular hexagons.

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Soon even credit cards may seem out of date if the banks and retailers succeed in establishing an EFTPOS system. The idea behind EFTPOS (Electronic Funds Transfer at the Point Of Sale) is quite simple. When you check out at Sainsbury, Tesco or even Harrods, instead of paying with cash, cheque or credit card, you hand the cashier a new card with a special electronic code. When the right sequence of numbers is keyed into the machine, it will automatically debit your account and credit the story with the value of the bill.
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Capital gains tax of up to 40 per cent is payable on profits of over ?5,000 (as of 1989-90) but share losses can be offset against any profits and a share loss during the year can be carried forward to offset profits in the following year. But it is a rare investor who earns enough profits to be subject to capital gains tax. Read the rest of this entry »

They will then send the seller a contract note, stating the terms of a sale. No stamp duty is paid, but sellers do have to pay a further broker’s commission. Read the rest of this entry »

The best way to sell shares is to ring a stockbroker, who will quote an indicative price, which may or may not be the price eventually paid. That will depend on the movement of the share price while the order is being processed. Read the rest of this entry »

Those who buy shares will eventually receive a share certificate from the company. Dividends will normally be paid twice a year, at six-monthly intervals. However, it is wise to remember that if a company is in trouble it will declare only a small dividend or sometimes none at all. Read the rest of this entry »

It is possible to give a stockbroker a discretionary brief in which case he will handle all the buy and sell decisions for the investor. Again, this is a service worth using only if the investment is large. Read the rest of this entry »

The yield was only 2.3 per cent, compared with 6 per cent for ICI and 4.6 per cent for the property sector as a whole, but the P/E ratio of 15.7 compared well with the property sector average of 22.9. Read the rest of this entry »

That was 1 penny down on the day and compares with a high and low of 165 and 131 for the year. The last dividend paid was 2.5 pence per share, which was covered 3.1 times by its profits (a respectable figure). Read the rest of this entry »