Guide to Analysing Companies

Discretionary account
An account that an investor has with a broker which gives the
broker discretion to buy or sell securities on behalf of the in-
vestor without consultation. This discretion usually applies
within certain pre-agreed limits and is reviewed regularly.
Disintermediation
The exclusion of financial intermediaries from the process of al-
locating savings. For example, a company may choose to raise
equity, or issue bonds, directly in the financial markets,
rather than borrow from a bank. A government may choose to
raise revenue by issuing attractive savings bonds that are sold
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directly to the public, rather than by the traditional method of
selling Treasury bonds to banks.
To some extent disintermediation is a function of the eco-
nomic cycle. Market rates generally move ahead of banks’ in-
terest rates. So when rates are rising, investors prefer to put
their money directly into the markets, and borrowers are happy
to pay marginally more for easy access to this money. When
rates are falling, bank rates lag behind market rates. Investors
then switch their money out of the markets and into financial
institutions. The opportunities for disintermediation can be ex-
pected to increase the wider the variety of sophisticated instru-
ments is made available in the markets.
Distribution channel
The route by which a company sells its products or services. A
bank may have a variety of distribution channels, starting with
its branches, followed by its direct-mail operations, its tele-
phone selling and its electronic dealings via the internet. The rel-
ative importance of these channels changes over time. Banks
are faced with a difficult decision about what to do with all
their expensive branches (and the expensive employees in
them). Customers want the convenience of being able to make
transactions by telephone or via the internet, only occasionally
needing to use a branch.
Dividend
The part of the earnings of a company that is distributed to
its shareholders. Payment of a dividend is not automatic. It is
decided on by the company and declared by the board of di-
rectors. Companies listed on stock exchanges in the
United States usually report their earnings, and therefore
declare dividends, every three months; in Europe, it is gener-
ally every six months. Dividends on preference shares are
paid at a fixed rate; all others may vary with the performance
of the company. Some companies, usually described by ana-