Finance

• Medium-term and longer-term savings

  People need financial products that allow them to save over a longer period (more than three + years). This allows people to fulfill their aspirations as they are saving for the future.
• Investments

  Long-term savings. People save for a longer-term want/aspiration. This has a higher risk but also higher returns than savings.
• Pensions

  Many people save money in a pension scheme throughout their working lives to finance their retirement.
• Longer-term borrowing

  People borrow to finance a large purchase but they need to pay it back over a long period. Eg, mortgages (A loan secured on the value of the property being purchased, Hire purchase is a type of secured consumer credit to finance items such as cars, this involves the borrower repaying over a number of years).
• Insurance

  Insurance companies and banks provide insurance policies that cover long-term risks.

  Life assurance allows people to protect their loved ones in case they die.
• Internal factors that influence needs, wants and aspirations

  Key factors:

  Values and beliefs tend to be fairly stable. These affect they way people manage their money.

  1. Values
  2. Beliefs
  3. Attitudes
• Values

  Our values show how much priority we give towards things.

  Values are general feelings or beliefs about desirable behaviour and goals. These involve the concept of GOOD and BAD. Values help people decide their general approach to financial matters + help people distinguish what they consider needs and wants.
• Beliefs

  Beliefs are more specific and detailed more than values. They are less about what people think things are meant to be and more about how they are.

  They can be described as absolute beliefs.

  Alternatively beliefs can be casual. They explain how one event causes or makes another event happen.

  Beliefs can influence the way people see financial services and the firms that provide them. Eg, Banks having a bad rep (2007).
• Attitudes

  Attitudes refer to how, at a given time and place, people think and feel about another person, an event or an issue. A financial example of peoples attitude is saving for their old age.
• Perceptions

  Peoples perceptions represent their understanding of the world around them, not just their physical surroundings but also their social environment.
• Preferences

  Preferences depend on personal values, beliefs and attitudes.

  Different people prefer different kinds of goods and services and different features within each product means that businesses must provide a good range of products to suit all tastes.
• External factors

  Key factors:

  1. Marketing and advertising
  2. Peer pressure
  3. Trends, fashions and role models.
• Marketing

  A company that undertakes to promote the buying and selling of a product or service. (Includes advertising, selling and delivering).

  Marketing can be subdivided into promotion and public relations.
• Promotion

  >Communicating with people

  >Informing them of goods and services

  >Persuading them to buy it

  Advertising can carry out explicit and implicit messages.

  Advertisements are carried out by the media, television and radio, newspapers/magazines etc..
• Public relations

  This is a specific part of promotion that is known as below the line expenditure.

  This is not paid for directly but keeps the business in the publics eye.

  PR is part of the promotion with implicit messages.
• Product placement and sponsorship


  Involves a product appearing on a TV show or in a film.
• Peer pressure

  Our equals who are in the same position as us however wanting to fit in can be particularly important for young people, liking the same things and owning the same things as their peers.
• Trends and role models

  Trends are also found in the area of financial services such as:

  • The way in which people pay for goods
  • Peoples attitude to savings
  • How people view using credit

  Eg, peoples attitude to borrowing as many years ago it was considered to be low class however the trend reversed making it desirable to fund a high class lifestyle as it is considered a high/good risk.
• Culture

  About norms (Behaviour and attitudes) across social groups. This indicates what society consider to be acceptable and what is unacceptable. Eg, in the UK there is a strong culture of home ownership.
• The feedback effect and expectations

  Peoples feelings affect how they behave.

  The link between thoughts, feelings and behaviour is called the feedback effect and is linked to expectations.

  Eg, If interest rates rise people will save more and borrow less.
• The influence of personal values on financial decisions

  Examples,

  • Ethical investing
  • >involves someone choosing to save in ways that mean the money will be used for what the individual considers a good purpose.
  • Managing finance
  • >A persons financial choices are affected not only but what they borrow, spend or invest but also by how well they feel they can manage the costs and consequences. It is a persons attitude to risk and reward that is the key factor influencing choices.
  • Religious beliefs
  • >Islamic law prohibits the payment of interest on a debt, so Muslims are not allowed to borrow.
• Affordability - implications and responsibilities

  When someone purchases a financial product, they are entering into a relationship with the provider for a period of time (this can be short-term or long-term). The customer must be able to afford to meet their obligations. In case of short-term borrowing a person can know a good deal of certainty however with long-term borrowing it is uncertain. Buying insurance policy means considering afforability too.
• Setting priorities

  Nobody can afford to buy everything so they need to choose between alternatives, this means setting their prioritise.
• Attitudes to risk

  Different people see risk in different ways.

  Some are very cautious and avoid risky situations (risk averse).

  Some find it exciting to take tisks and engage in hazardous activities (risk tolerance).

  Some may be inbetween.
• Why do people save in the medium and long term?

  This is because they make a decision on how to save out their current income to finance a future need, want or aspiration.

  Two main ways use their savings is:

  • Hope for capital growth. (That the market value of the investment is greater when sold than what they paid for).
  • They can use their fund for income. (The investment will pay out a regular amount that they can use as part of their monthly income).
• Difference between Savings and Investments (1)

  Savings and investments are ways in which people put away their surplus money. The general rule is that the higher the risk the greater the return. Savings products are less risky than investment products.

  Savings accounts are held at financial services providers (banks, building societies and credit unions). If the providers fails to protect the consumers deposit, this will be protected by the financial services compensation scheme up to a deposit of £85000.

  The capital sum is not at risk an savings accounts do not pay high interest rates.
• Difference between Savings and Investments (2)

  Investments are suitable for people who are prepared to invest for the medium to long term. Investors hope that the capital value of the investment will grow over the period they hold it.

  Investment products are higher risks because their value at any time depends on the performance of the assets in which the money had been placed and also general movements in the financial markets.
• Providers of long-term savings and investment products

  Friendly societies are mutual organisations that offer their members a wide range of financial products. Eg, short-term savings account/ long-term savings, investments, life insurance, pensions and anuuities.

  Insurance companies provide a range of long-term investment products that incorporate life assurance and pension.

  investment companies offer a wide range of product types to meet their customers particular needs.
• Managing investments

  Portfolio managers look after a portfolio of various types of financial instrument (products). Eg, shares and bonds.

  stockbrokers carry out deals for people who want to buy and sell shares, bonds and other instruments.
• Long term savings product

  Fixed-term savings account

  
  

  Easy access savings account

  >Short term savers

  >Money is instantly available

  >Low rate of interest

  If someone wants to put money aside for a fixed period of time they can earn higher rates of interest with lower risks by buying a fixed term savings account.

  No withdrawals are allowed.
• National savings and investments

  Offer a small range of savings accounts however these are short-term.

  NS&I Childrens Bonds could be bought for children under 16 by a guardian. These pay an interest rate that is fixed for a set term. Min investment is £25  and max is £3000 per child. 90 day penalty if cashed early.

  Income Bonds account designed for over 16s. £500 minimum deposit but can hold up to £1 million in income bonds accounts.

  NS&I Products are seen to be less risky because they are 100% backed by the government however returns are not high.
• Investment products - assets

  Stocks and shares

  Shares are part ownership in a company. This can be bought directly from a cxompany or on the stock market from a previous owner.

  They receive dividends however shares is a high risk investment, they offer both capital growth and income however the stock market can rise and fall according t the global economic conditions.
• Stocks and shares ISA

  Allows a person to put money into different types of investments on a tax-efficient basis.Every adult has an ISA allowance each tax year. (UK)Best for people who are willing to tie their money up for five years, as the value of ISA will fluctuate with changes in the market.

  Investors can:

  >Buy readymade products and let the provider manage the investment for them.

  >Choose and buy their own share.

  ISA ‘wrapper’ means that they can earmark shares up to the permitted limit for ISAs (allowance) and receive a tax-free return.
• Corporate and government bonds

  Investors lend their money to the issuer by purchasing the bonds.

  Fixed term saving bonds are a type of long-term savings account where the capital sum is safe whereas bonds issued by the government and by the companies are traded on a financial market and their values fluctuate.

  Bondholders receive income in the form of interest on their bond.

  Best known bonds are ‘gilt’, these are regarded as safe as they are issued by the government.
• Property

  Land and buildings.

  These are seen as good investments as property value moves up in the longer-term but this is risky as the current economic circumstances and buy-to-let mortgages have been more difficult to access from the financial crisis.
• Commodities

  Eg, Gold/silverHigh capital gains but risky, these are suitable for wealthy and experienced buyers.

  Gold is seen as the safest asset as it is relatively scarce, durable and tends to keep its value, Gold prices have been high from the financial crisis.
• Investment funds

  Banks, Building societies, friendly societies and insurance companies

  Barclays funds

  Easy for beginners to invest in. (multi asset funds).

  Lloyds bank share dealing

  People can deal online and by phone in shares on the London stock exchange. The tradeplan service allows people to arrange to buy or sell a share.

  Foresters friendly society bonds

  A bond designed to provide growth potential over the long term. The bond may lead to bonuses on investments depending on how they perform, however there is risk thgat they might get back less money than they put in.
• Collective investments

  Specialist organisations that carry out investment on behalf their clients
• Collective investment funds

  Pooled investments, where the money contributed by many people is put into a common pool and investments are made out of that money
• Types of collective investment funds

  • Unit trust
  • Investment trusts
  • OEICs