B.S Investment: Securities

• Functions of the JSE

  • Gives opportunity for financial institutions to invest funds in shares
  • Serves as a barometer/indicator of economic conditions in South Africa
  • Keeps investors informed on share prices by publishing them daily
  • Acts as a link between investors and public companies
• Factors to consider when making investment decisions

  • Return on investment
  • Risks involved
  • Investment period
  • Inflation rates
  • Taxation
  • Liquidity
• Return on investment


  The income from investments like interest and dividends
• High risk investments


  Normally yield higher returns
• Risk


  Shares have low or medium risk over longer investment periods, higher risk shares have greater potential for higher returns
• Investment period


  The duration of the investment, longer periods normally have higher returns
• Investment periods


  • Short-term (up to 2 years)
  • Medium-term (2-5 years)
  • Long-term (5+ years)
• Inflation


  Decreases the purchasing power of money, return on investment should be higher than inflation rate
• Liquidity


  The ease and speed with which an investment can be converted to cash
• Taxation


  A good investment will yield good after-tax returns, tax implications must be considered
• Fixed property


  • Usually sustainable as long-term investment, return earned through rental, sales, and capital gains
• Mutual funds/stock valves


  • Informal saving scheme where members contribute and take turns drawing from the fund, encourages monthly saving, low cost due to shared banking fees
• Managed portfolio


  • Investor instructs financial institution to manage various investments, risk is lower over longer periods as investments are diversified, high risk over short term
• Fixed deposits


  • Very conservative investment at fixed rate for fixed period, money cannot be withdrawn or added during deposit period, investors have certainty of returns
• Fixed deposit


  A conservative method of investment at a fixed rate for a fixed period at a financial institution or Bank, where money cannot be withdrawn or added during the deposit period
• Investors may be certain that they will not access or need the money for the fixed deposit period
• If I deposit 2000 Rand into a fixed deposit


  I'm saying I don't need this 2000 Rand for the next six months, and then it will start earning interest
• Fixed deposits


  • The risk is very low as investors will receive what was promised, as the interest rate is usually fixed
  • The return will not be affected by market fluctuations
• 32-day notice accounts or call deposits

  • Money is invested at a fixed rate, although withdrawals may be made provided the bank is given 32 days notice
  • Earns more interest than a current/checking/savings account, but less than a fixed deposit
  • Low risk as investment plus interest will be paid out on maturity date
  • Interest is calculated on a daily basis, accelerating the value/return
• Debentures


  • Issued to raise borrowed capital from the public
  • Lender/debenture holder agrees to lend money to the company on certain conditions for a certain period
  • Debenture holders are creditors as the company is liable to repay the amount
  • Most types can be traded on the JSE
  • Debenture holders receive annual interest payments based on the terms/amount of the debentures held
• Debentures


  • Have a low risk as they need to be paid back, companies are liable to repay the amount plus interest, decreasing the risk for the investor
  • Investors may earn a steady income in the form of interest while preserving their principal amount
• Venture capital


  • Given by an investor/business to start up or expand a business, in return for a share in the new/expanded business
  • Investors should know the type of business, market or economic conditions before investing
• Venture capital


  • High risk for the investor if proper research is not done
  • Inexperienced business owners making wrong decisions may experience big losses or business closure
• Endowments, life insurance policies, retirement and annuities

  A monthly payment is made to an insurance company, with the expectancy of receiving a predetermined amount on a future date, to provide for a future expense or give peace of mind to dependents
• Endowments, life insurance policies, retirement and annuities

  • Low risk as the insured amount will be paid out regardless of circumstances, only the closing down or bankruptcy of the insurance company may result in losing contributions
• Unit trusts


  A collection of investment options or methods made up of shares in different companies, where the investments of multiple investors are pooled and managed by a fund manager
• Unit trusts


  • Investment may be made in low and high risk shares, spreading the risk and lowering it for all investors
  • Fund managers are able to manage the risk level of the fund on behalf of the investor
• Shares


  • Companies sell portions of ownership to shareholders in the form of shares, to obtain capital to operate their core business
  • Shareholders have one vote per share and the right to receive dividends, a portion of the company's profits
  • Companies do not have to repay share capital, making it risk-avoiding capital
• Ordinary shares


  • Can yield higher dividends but also have higher risk
  • Investors may lose full or part of investment if company is dissolved, bankrupt or liquidated
• Preference shares


  • Shareholders have preferential claims on company assets in the event of liquidation, may receive compensation before ordinary shareholders
  • Risk is lower than ordinary shares
• Share prices are linked to factors investors cannot control, such as economic conditions and operational success of the business
• Share prices are volatile and unstable, values may increase or decrease sharply within hours, contributing to uncertainty of share value in the short term
• RSA retail saving bonds

  • Offered by the SA government to encourage saving
  • Two types: fixed rate or inflation linked
  • Interest rate is determined when investment is made and remains fixed for the whole term
  • Interest is earned half-yearly and paid into the bondholder's bank account
  • Cannot be used as security to obtain loans
• RSA retail saving bonds

  • Very low risk as investment is made in the government, which cannot disappear or go bankrupt
  • Safe investment as it cannot be traded on the open market, not exposed to market risks
• Forms of investment covered

  • Government/RSA retail saving bonds
  • Unit trusts
  • Shares
  • Fixed deposits
• Positives of RSA retail saving bonds

  • Guaranteed returns as interest rate is fixed
  • Interest rates are market-related and attract more investors
  • Interest can be received twice a year
  • Interest is usually higher than on fixed deposits
  • Listed on the capital bonds market on the JSE
  • Low risk/safe as invested with the SA government
  • No charges, costs or commissions
  • Cash can be withdrawn after first 12 months
  • Affordable for all income levels including pensioners
  • Easily and conveniently obtained electronically or from post office
  • Minors can invest with help of legal guardian
• Negatives of RSA retail saving bonds

  • Cannot be used as security for loans
  • Minimum 1000 Rand investment may be difficult for small investors
  • Not freely transferable among investors
  • Investors must be over 18 with valid SA ID
  • Penalties for early withdrawal before 12 months
• Positives of unit trusts

  • Managed by expert fund managers
  • Easy to cash in when investor needs money
  • Small amounts can be invested monthly
  • Generally beat inflation in medium/long term
  • Diverse range of shares from low to high risk
  • Easy to invest by completing forms or online
  • Fluctuations in returns often not severe due to investment diversity
  • Offer competitive returns in capital growth and dividends
  • Fund managers are knowledgeable experts, required to be accredited
• Negatives of unit trusts

  • Share prices may fluctuate
  • Not allowed to borrow, reducing potential returns
  • Not good for short-term or risk-averse investors
  • Growth affected if blue chip companies underperform
  • Bid-ask price spread, making investment less liquid
• Positives of ordinary shares


  • Can be freely traded on the JSE
  • Shareholders have limited liability for company debt
  • Shareholders have voting rights at AGM
  • Provide protection against inflation
  • Can provide solid returns at retirement
  • Returns linked to company performance
  • Usually cheaper than preference shares
  • Higher number of shares may result in higher dividends