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www.InvestmentGuide.co.uk STOCK
(Also called Loan and Debenture, Unsecured Loan Stock, Fixed Interest, Eurosterling)
Lump sum invested in a stock issued by a company for a
fixed term at a fixed interest rate. At the end of the term (the redemption
date), the original value is repaid in full; meanwhile the stock can be
bought and sold at any time at the market price. Some stocks are issued by
foreign companies, public authorities or governments in which case they are
called Eurosterling because these stocks are issued in £ sterling
rather than € or € or other currencies..
The yearly return you
get, called the net redemption yield is the after tax interest you
receive plus the averaged out gain (or loss) you expect. The running
yield is the return ignoring any gain or loss. Some stocks will show no
gain to redemption as they currently stand above the nominal value of
100. Indeed many guarantee a hefty loss if held to redemption. Sometimes a
re-organisation can result in the interest rate being raised, the stock being
repaid early or a loan stock being converted to a debenture (see
Risk below).
There are also Convertible Loan Stock
or Bonds which in addition carry the right to be converted into Ordinary Shares
at a fixed price and date in the future although these conversion rights often
turn out to be worthless.
Who can invest Anyone.
How worthwhile Different stocks are good for different rate taxpayers. Investing directly in stocks with a fixed redemption date may be safer than investing in a fund of such stocks. The yield on these stocks will probably be higher than from fixed term accounts offered by banks and building societies or on Stock Government Fixed Interest but possibly with more risk. Stock maturing in 10+ years not recommended although in the past these generally had a higher running yield and can eventually be expected to do so again. Investing in these through a Stock Maxi ISA is a possibility. See also Stock Convertible Loan and Stock Eurobonds.
Minimum A portfolio of 7 stocks worth £2,000-£5,000 each. Lower amounts not worthwhile because of minimum commission. If you stick to debenture stocks and/or stocks in the top 100 companies, you could run a smaller portfolio of say 3 or 4 stocks.
Maximum None but some stocks are in short supply.
Suitable Lump sums.
Money back At end of term. Or 5 working days if you sell earlier when you get the market price.
Interest Fixed. About 5 weeks before the interest is paid the stocks go ex-dividend. The seller gets the next interest payment. When you buy a stock (or if you sell before it matures) your contract note giving details of the transaction shows accrued interest as an addition or deduction from what you pay or receive.
Interest paid Half-yearly by cheque or direct to a bank account.
Tax 20% tax is deducted from the interest. Non-taxpayers can reclaim the tax from the Inland Revenue. Higher rate taxpayers pay extra; basic taxpayers don't. Any accrued interest is added to your contract note, see Interest above, is liable to income tax. If accrued interest is deducted, you can deduct it from other interest from the stock or claim a tax rebate if applicable. These accrued interest rules don't apply if the nominal value of all your stocks is £5,000 or less; for more details from the taxman, see Accrued Income Scheme. You can invest in a stock through a Stock Self Select ISA in which case taxpayers don't have to pay income tax on the income or accrued income but not all ISA managers allow you to invest directly as opposed to through a Corporate Bond Fund which can be more risky. Gains are exempt from capital gains tax whether or not the stock is bought through a personal equity plan.
Fees to pay Stockbrokers' commission when you buy varies from ¾% to 1½%; min. £10 to £30. Same when you sell. None if you buy a new issue direct or hold to redemption.
Passbook None. Statement of ownership from your stockbroker as nomineeor preferably under your own membership of Crest.
Children Under 18 stock must be held in an adult's name but can be designated with the child's initials or name.
Risk If a company goes bust, debenture holders have the right to be paid in full before other creditors get anything; loan stock holders don't but are paid before ordinary shareholders. Possible capital loss if you sell early.
How to invest Ask a stockbroker which stock has the best net redemption yield for your tax rate and the time you want to invest for. Closing prices, running and redemption yields (but only at a nil tax rate) are published at Bondscape Index (when you get to the site click the link in the box on the right for closing pricesand scroll down past the list of government stocks to see corporate bonds). With loan stocks, you need to check somehow that the company is likely to stay in business until your stock matures.
Where from A stockbroker.
Last updated 1 May
2009.