Buying and Selling of Admiral Group PLC Shares in the London Stock Exchange Market - Case Study Example

Trading Portfolio Student’s Name Institutional Affiliation Abstract This paper looks at the buying and selling of Admiral Group PLC shares in the London Stock Exchange market. The paper also reports on the reasons for the choice of the shares of the mentioned company and lessons learnt on the process of buying and selling of the stock. Keywords: Shares, stock, market Trading Portfolio Introduction Shares are defined as financial instruments whereby one acquires a stake of ownership of a company through their purchase. The returns are not fixed or guaranteed. A shareholder acquires benefits and voting rights. Choice of Company The first step before buying shares of a company, it is fundamental that the strength and stability of the industry in which the company belongs is established and determined as strong (McChrystal, 2013).The shares chosen in this case were as a result of carrying out a fundamental analysis of the company shares, its position in the market and its current management which portrayed the company to be growing and promising more future dividends to the owners. The choice of the shares was also informed by an understanding that the stock return = share price growth + dividend yield. For instance the shares chosen are for a company that is currently paying 5 % dividend yield with an annual appreciation of 5 % and a total return of 10 %. The management of the company ensures that high quality of all the company affairs is maintained. This has ensured that the dividends last and grow at a good rate that is satisfying to the stakeholders (Hobson, 2011). A list of candidate stock was started with. There are large and leading London companies with most of them demonstrating characteristics of long term performance. This list of stock is critical as it is being used as the stock market benchmark. Every stock is compared against other stocks in the list to determine and choose the best that will offer the best dividends to the investors. The best stock should at least have a market capitalization of 100 million, a dividend yield of at least 150 % of the industry average, more than 15 % of return on Equity over an average of a five year period. It need to have a long term debt to equity ratio of less than 1, an interest coverage of more than 5 % and a growth rate above 5 % in a ten year earnings per share. (Hennessy, 2001). The above criteria narrowed the list to arrive the above chosen stock. The rationale behind the selection was also informed by checking through the list of dividend achievers, it was discovered that the stock has a history of raising dividends. This was determined by carrying out an internet search. A check at the listed dividends aristocrats showed that in every single year for the past 25 years, the stock has consistently increased its amount of dividends, therefore making the stock the most viable investment stock option (McChrystal, 2013). The financial statements of the company for the past 10 years demonstrated increased earnings per share. The 10 year history indicates that the company has a lesser risk than the rest hence the best to invest in (McChrystal, 2013). The company has good financial strengths that are an indicator of high quality. The company’s debt to equity ratio is 0.07, which is less than 1 indicating low debt. It has very high interest coverage having its net earnings 8 times the interest expense determined and disclosed on the annual financial statements. The cash flow of the company was also determined by comparing the current assets to the current liabilities. The company enjoys a sound liquidity position indicating a smooth flow of its activities (Hobson, 2011). The frequency and consistence of payments of dividends for the past 10 years demonstrated a yearly increase in the amount of dividends as well as increased return on equity a 5 year average of 20 % (Hobson, 2011). The selection of the stock was also based on dividend growth. The selected stock dividend grew per year at a rate of 5 %. The margin of safety has also been provided for by decreasing the dividend payout ratio The trend of sales in the past ten years and the earnings per share (EPS) was determined in selecting the stock. It’s through increased sales that bring about growth of earnings which is paramount in the growth of dividends (McChrystal, 2013). Durable competitive advantage of the company was also determined in order to ensure that the stock selected is of a company that ensures that there is continued profitability (Hobson, 2011). Marketability of the shares informed the choice of the selection. The shares chosen are readily bought and sold in the London stock exchange market. This is critical that in the moment of disposing the shares, there is an already market (McChrystal, 2013). It is advisable that the shares selected are of a company that has diversified its operations. This is because of the fact that a company that has multiproduct is able to remain in business even if one of its products fails. It’s possible that if one of its products fails, another one might be doing better thereby having an overall net effect of a good profit position (Hobson, 2011). Lastly the choice was informed from a licensed stock broker with a requisite professional expertise and experience, which was taken advantage of in selecting the shares. Lessons Learned From Buying and Selling Of Shares in the London Stock Exchange London stock Exchange is a system of trading shares that offers people who want to buy shares and those who want to sell shares an opportunity to connect. Therefore, London exchange market doesn’t sell anything. Instead, it connects sellers to buyers of the shares in the market (McChrystal, 2013). In order for an individual to buy or sell shares in the Stock Exchange, a Stock Broker is needed. The broker can be an individual or a website who facilitates the buying and selling of the shares. It is worth noting that all shares in the London stock exchange are carried out electronically (McChrystal, 2013). The stock exchange is actually global; there are several markets around the world and sub divisions within that market. In the London stock exchange, there exist a main market and the alternative investment markets. There are also professional and specialist securities markets. They all function similarly except that accessing them is determined by the individual broker or the share dealing website. The FTSE 100 index is used as the financial times stock exchange index. The indexes show the top 100 companies that are highly capitalized on the London Stock exchange. The 100 companies are the most popular where people buy and sell the shares. The national and global markets use different names which are most often acronyms (McChrystal, 2013). London exchange market often uses the terms ups and downs. When shares are down; it implies that the amount at which the shares were being sold at was less as compared to the previous price of the same shares. If the shares were up, then it means that the price of the shares had increased as compared to the previous price. In order to make money on the stock market, the shares are bought when they are trading at their lowest. This means that the shares are purchased when they are cheap. Then these shares are sold when they their market price has increased. This ensures that share traders make profits. The middle men who are in between the stock brokers are referred to as market makers. They run the London stock exchange market (Hennessy, 2001). There are also bulls and bears. A bull market term is used when most of the shares in the market are on the rise and the economy seems to be prospering. A bear market describes a situation in which there is a consistence decrease in the share value in the market. In order for companies to be listed in the London Stock exchange market, the minimum market capitalization is £700,000, at least a public float of 25 per cent, three year audited financial statements and a working capital that is sufficient to run the operations of the company for at least the next 12 months from the listing date (Hennessy, 2001). There are benefits of buying shares of a company on the London stock exchange market. As a shareholder, an individual acquires the right to vote on board resolutions and dictate on how the company’s assets should be utilized and managed. The shareholder also gets informed on the ongoing performance of the company, enabling that individual to make a decision as to whether to continue holding the shares of that company or to dispose them ( Hennessy, 2001). Traders in the London exchange market hold share portfolios; they own multiple shares across industries in multiple companies. It is that collection of the multiple shares that is referred to as share portfolio (Blakey, 2008). Ways of Making Money through Shares An individual can be paid dividends on the shares held in a company if a profit is made. The dividend is divided amongst the shareholders depending on the number of shares held. The dividend received is tax allowable especially if the paying company had already paid taxes on the profits. There are also tax credits from these dividends that can be used to offset the tax that is due to be paid income. The other way through which individuals make money in the stock market is through share price growth. This whereby an individual buys shares at a reduced price and sells them at a higher price and enjoys capital growth (Blakey, 2008). References Blakey, G. G. (2008). A history of the London stock market, 1945-2007. Petersfield: Harriman House. Hobson, R. (2011). How to build a share portfolio: A practical guide to selecting and monitoring a portfolio of shares. Petersfield, Hampshire: Harriman House Ltd. Hennessy, E. (2001). Coffee house to cyber market: 200 years of the London Stock Exchange. London: Ebury Press. McChrystal, S. A. (2013). My share of the task: A memoir. New York: Portfolio/Penguin. Techmark: The London Stock Exchange market for innovative technology companies. (2000). London: HS Financial Pub. Read More