TERM 4

• Categories of investment

  • Growth assets
  • Income or defensive assets
• Growth assets


  • e.g. shares, property
  • Generally provide higher return over longer periods
  • Volatile (prices fluctuate greatly, higher risk)
• Income or defensive assets


  • e.g. cash, government bonds, mortgage deposits
  • Usually provide lower returns but are lower risk
  • Value does not change dramatically in the short term
• Dividends


  Money paid and shared twice a year to shareholders based on the financial performance of the company
• Blue chip shares


  Very safe and secure shares
• What to look for in property investment 


  • Attractive features - to appeal to as many people as possible
  • Wide appeal - to attract more than one segment of the rental market
  • Low maintenance – some homes e.g. with a pool may cost more to maintain
  • Property type - units can be easier to maintain than houses, though you have to pay body corporate fees (strata)
• Risks of property investment

  • Vacancy
  • Loss of value
  • Interest rates
• Investment mixes in managed funds


  • High to low risk: growth → balanced → conservative → cash
  • Conservative, balanced, growth, aggressive growth

  Superannuation is a type of managed fund, currently 11.5% of income
• Cryptocurrency


  • Digital currency that doesn’t require a bank or financial institution to verify transactions, can be used for purchases or as an investment
  • Advantages: cheaper and faster money transfers
  • Disadvantages: price volatility, use in criminal activities as it is harder to trace
• Ethical investments

  • Ethical investing: practice of selecting investments based on ethical or moral principles
  • Sin stocks (gambling, alcohol)
  • Positive (seeking desirable firms) and negative (avoiding some types of firms) screening
• Entrepreneurs


  • A person who starts, operates and assumes the risk of a business venture in the hope of making a profit
• 5 key elements in planning a business

  • Market research
  • Location
  • Demographics
  • Competition
  • Target market
• Market research


  Collecting and analysing information about customers and the business opportunities available through surveys, interviews and research
• Location


  • Bricks and mortar stores (physical location)
  • Online businesses/e-retailers (virtual location e.g. Google search rank)
• Demographics


  Population characteristics that affect consumer spending preference
• Competition


  Decide on the type of market in which the good or service will compete

  • Mass or niche market
  • Need a competitive advantage
• Target market


  Group of customers to whom the business intends to sell its products

  • Marketing aimed at target market
• Business structures

  • Sole trader
  • Partnership
  • Private company
  • Public company
• Sole trader


  • Business that is owned and operated by one person
  • Most common type of business in Australia
  • Simplest and cheapest structure to establish
  • Receives all the profit and suffers all the losses
  • Unlimited liability
• Partnership


  • Business that is usually owned and operated by between 2 and 20 people (partners)
  • Partners share their profits and losses
  • Unlimited liability
  • Common for people with similar skills to form a partnership
• Private company


  • Usually has between 2 and 50 private owners (shareholders)
  • Small to medium in size
  • Often family-owned
  • Shares in private companies are offered only to those people the business wants as part-owners
  • Must have Proprietary Limited (Pty Ltd) after its name
  • Shareholders have limited liability
• Public company


  • Can have an unlimited number of shareholders
  • Shares are listed on the ASX - the general public may buy and sell shares in those companies
  • Most are large
  • Shareholders in public companies have limited liability
  • Must have Limited (Ltd) after its name
• Unlimited liability


  Business owner can be forced to sell personal assets to pay business debts
• Limited liability


  If the business cannot pay its debts, the shareholder loses only the money they invested in the business

  • May be different if the company directors were engaged in illegal behaviour
• Incorporation


  Private and public companies are incorporated - the company is a completely separate legal entity from the people who created the business.

  Companies:

  • Can sue and be sued
  • Can own and sell property
  • Have perpetual succession (continue to exist even if the owners die or change)
• Financing a business

  • Debt
  • Equity
• Debt


  • Loans using other people’s money from banks and finance companies
  • No need to share ownership
  • Tax advantages (claim debt as a tax deduction)

  Common terms on loans:

  • Term of the loan (length)
  • Interest rate
  • Secured loan
  • Unsecured loan
• Secured and unsecured loans

  Secured loan

  • Borrower uses assets as security such as a car or house. If the borrower does not repay the loan the lender may sell the asset to get their money back

  Unsecured loan

  • No asset needed for security but the interest rate is usually higher
• Equity


  People buy shares in your business and become part owners in the business

  • No need to repay the money in regular instalments

  A public company needs to provide a prospectus for investors

  • Document which contains information required to make decisions about whether to invest, e.g. history of the business, risks, financial information, description of management
  • Can be wise for private company to prepare a prospectus in case of disagreements between shareholders
• Shares can be bought and sold on the sharemarket (ASX) or through a stockbroker.
• Things to consider when purchasing a property

  • Familiar suburbs
  • Growth suburbs
  • Vacancy rates
  • Rental yield
  • Planning rules (zoning)
• Length of investment

  • Short term: less than 3 years
  • Medium term: 4 to 6 years
  • Long term: greater than 7 years
• Risk mitigation strategies


  • Avoid the risk
  • Reduce the risk
  • Manage the risk
  • Transfer the risk
• Australian Securities and Investment Commissions (ASIC)


  • Independent government body to enforce and regulate company and financial services law to protect Australian consumers
• Going into business

  • Setting up a new business
  • Purchasing an existing business
  • Purchasing a franchise
• Buying an existing business


  • Everything included in purchase price: stock, equipment, premises, customer base, staff, reputation, goodwill
  • Goodwill is the monetary value of a business reputation
  • Lots of research when purchasing a business to ensure that business performance is accurate
• Purchasing a franchise


  • Under a franchise agreement, a franchisee buys the right to use the business name and distribute the goods or services of an existing business (franchisor)
  • Fastest growing area of small business
• Advantages and disadvantages of setting up a new business

  Advantages:

  • Freedom to set up the business exactly as wished
  • More flexibility to select the location, target market, range of products and level of customer service
  • No goodwill for which you have to pay

  Disadvantages:

  • High risk and a measure of uncertainty
  • Time needed to develop a customer base, employ staff and develop lines of credit from suppliers
  • Profits may not be generated for some time
• Advantages and disadvantages of purchasing an existing business

  Advantages:

  • Sales to existing customers generate instant income
  • A good business history increases the likelihood of success
  • Equipment is available for immediate use

  Disadvantages:

  • Existing image of the business may be difficult to change, especially if the business had a poor reputation
  • Success of the business may have been due to previous owner’s personality and contacts, which may be lost when the business is sold
• Advantages and disadvantages of purchasing a franchise

  Advantages:

  • Products, equipment, premises design and marketing are usually established
  • Franchisor often provides training
  • Immediate benefit from franchisor’s goodwill

  Disadvantages:

  • Franchisor usually controls everything to do with price, suppliers and health regulations
  • Profits must be shared with the franchisor
  • Franchisor often charges a service fee for advice