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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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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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 »

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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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 »

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 »

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 »

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 »

Moving further to the right, is the ‘Y’ld Gr’s’ (Gross Yield) column. This shows the annual return on a shareholding at the current price, assuming the dividend remains unchanged. In the final column, the P/E (Price/Earnings) ratio is calculated by dividing the share price by the earnings per share. Read the rest of this entry »

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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The next column, ‘Div net’, is the ‘C’vr’ (cover) column. This figure is calculated by dividing the size of a company’s profits by the dividend. If the company had made ?100 million in profits and paid out ?40 million in dividends, the ‘C’vr’ figure  would read 2.5, since the company had enough profits to cover its dividend tow and a half times. Read the rest of this entry »

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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Any serious investor should buy the Financial Times which carries each day a host of information about companies and the financial markets. Read the rest of this entry »