Guide to Analysing Companies


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FINANCE Essencial finance

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SPECULATION
03 Essential Finance 10/11/06 2:22 PM Page 278


capital shares if a trust is liquidated. Splits, as they are known,
suit investors looking either for income or for capital growth,
but rarely both at the same time.
Splits have got into trouble in the past by investing in each
other’s shares, which is fine when markets are rising but can be
disastrous when they are not. This is because some splits
borrow money from banks as well as investing their share-
holders’ funds. As markets fall, the hurdle rate rises – that is,
the rate at which a trust must generate enough income to pre-
serve the value of its original investment while paying inter-
est on the money it has borrowed. Three consecutive years of
declining stockmarkets until the end of 2002 caused some
splits to fail, spelling disaster for shareholders. Many had in-
vested in splits in the belief that they were safer than ordi-
nary shares, only to find that they were not.
Spot market
A market where things are quoted at their spot price.
Spot price
The price quoted for a transaction that is to be made on the spot;
that is, the price for something that is to be delivered now and
paid for in cash now.
Spread
In general, the difference between one item and another, most
frequently related to the difference between a buying price and
a selling price. For example, a spread is:
 the difference between the rate paid for deposits and
the rate received for loans;
 the difference between the yield on bonds of the same
maturity but different quality;
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SPREAD
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03 Essential Finance 10/11/06 2:22 PM Page 279


 the difference between the price at which a share is
sold and the price at which it can be bought;
 in underwriting, the difference between the total cost of
an issue to the underwriter and the proceeds from
successfully selling the issue to the public;
 the variety that a company enjoys in its borrowings or its
business, or a bank has in its loans. A good spread of
maturities, for example, helps to provide a smooth cash
flow.

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