alternative investments

• Alternative investment opportunities to business ownership


  The potential business owner accepts a larger financial risk if her or she commences their own business
• Forms of return on an investment made by the owner


  • Capital gain
  • Income stream
• Capital gain


  The value of the asset in which funds have been invested increases over time so that it can be sold for more than its purchase cost
• Income stream


  The assets generates some type of income such as interest, rent or dividends
• Investors must be clear about their objectives as some investment options will provide for one, but not both of these types of returns
• Investments


  • Each investment has it own specific level of risk, achievable rates of return for the owner and advantage and disadvantage
  • Risky investments are likely to offer a higher rate of returns
  • Investing carries not only the risk that a return will not be earned, but also the risk that the initial investment may be lost
• Three main asset groups that can be used as investment options


  • Cash
  • Property
  • Shares
• Investment cash


  Placing your cash into an instrument that will provide an income stream in the from of interest
• Bonds are the only form of cash investment that has the potential to provide the investor with a potential capital gain
• Bank accounts


  • The most basic and common form of cash investment is to put money in the bank or similar institution
  • The cash is readily accessible and that there is virtually no risk of the business losing its investment
• Term deposits


  An investment option available from a bank that provides a higher rate of interest in return for agreeing to invest for a set term
• Bonds


  • Are issued by government when they wish to raise funds by borrowing from the public
  • Once purchases, a bond is a tradeable investment that can be bought and sold at its market value
  • If the market interest rate is below the rate offered on the bond, its market value will increase
  • If the market rate of interest should exceed the rate paid on the bond then the value of the bond could fall below its purchase price
• Debenture


  • A mechanism used by companies to raise funds from the general public in return for a fixed interest rate
  • Provides companies with an alternative means of raising funds without the need to go to banks and other financial institutions
  • Owners of debentures do not become owners of the company or derives the right to share the profits; they become secured creditors
  • The company issuing the debentures uses its assets as security
  • Debentures are not tradable commodities but are good investments in terms of providing a steady income stream
  • The company must complete a prospectus before issuing a debentures
• Unsecured notes


  • Is a form of debenture that is not secured against the assets of the business which increases the risk and thus requires a higher rate of interest to entice investors
  • If the business should be insolvent, the holder of insecure notes would have to line up with all the other creditors to claim the debts owed to them
• Interest


  A payment from a borrower to a lender for an amount above the repayment of the principal sum at a particular rate
• Simple interest


  • A payment of interest at a flat rate of the initial investment
  • Each month's interest is paid in full, so the balance of the loan never accrues
• Compound interest


  A payment of interest that is added onto the initial investment and previous interest earned
• Investment property


  Buying real estate of some type which can provide both a capital gain and an income stream in the form of rent
• Negative gearing


  A strategy used by investors to reduce their taxable income by purchasing property that generates rental income that is less than the costs it incurs
• Risks of owning property


  • The property market is subject to fluctuations
  • Growth rates can vary dramatically according to the location of the property
  • Property prices are dependent on the ability of buyers to pay
  • If interest rates rise, buyer are less willing to pay high prices, meaning the market value of the property may fall
  • Some investors can find it difficult to find a tenant for their property or to achieve their desired rental income
  • Bad tenants can create costs ranging from a loss of rental income to the cost of fixing damage or neglect
  • Property must be viewed as a medium to long-term investment
  • Any profit is then subject to capital gain tax
• Managed property fund


  • An investment option that pools the resources of a number of investors to purchase property
  • It allows investors who cannot afford to purchase property on their own to access this form of investment with a much smaller outlay
  • It allows investors to diversify into a number of property assets
  • The investment is more liquid - investors are able to liquidate their investment much more easily
  • Responsibility for managing the investment rests with the fund, rather than each individual investors
• Investment shares


  • Investors buys shares to buy part-ownership of a business giving the shareholder some say in the running of the company
  • It gives the shareholders access to an income stream in the form of dividends
• Dividend


  A share of the profit earned by a company that is distributed to shareholders
• Franking credit


  Dividend income received by the investor on which the company has already paid tax
• Benefits of owning shares


  • Greater returns
  • Tax benefits
  • Diversification
  • Flexibility
• Risks of owning shares


  • The dividend return dependent on the profitability of the company and the capital gain dependent on the share market
• Rate on Return


  A financial indicator that measures how effectively a business (or investment) has used the funds contributed by the owner, to generate a profit