Investment

• What is investment?

  the creation of wealth through the use of capital.
• Name the four asset classes and their level of risk.

  1. Cash: Low risk
  2. Property: Moderate to High Risk
  3. Bonds: Moderate risk
  4. Equities: High risk
• what are the characteristics of the asset class: Cash + give a few examples of Cash.

  Low Risk.

  • Offers investors regular interest income.
  • capital is not subject to huge external fluctuations.
  • examples, bank deposits, money market accounts (short term trade in loans with banks and other financial institution)
• What can cash NOT do?

  Cash cannot be used to make a huge fortune, however can Safeguard from losing one.
• Provide the Characteristics of the asset class: Property.

  Moderate to High Risk

  • can keep up with inflation
  • very effective way of gearing investment
  • by using external financing, investors can make a profit out of borrowed money -> this is called a positive leverage effect
• What determines the success of the Property type of investment?

  The success of this type of investment depends on location, political as well as economic environment.
• What is the drawback of the asset class: Property?

  Drawback of the Property asset class is the lack of liquidity -> the safest option is to own a home.
• What is liquidity?

  How quickly an asset can be converted to cash.
• Provide the characteristics of the asset class: Bonds

  Moderate Risk

  • Bonds/gilts are interest bearing securities issued by government or companies in order to borrow money.
  • they offer to pay the lender's interest as well as the lender's capital on a specific date
  • the interest payments can be higher than on cash
• Provide the characteristics of the asset class: Equities

  High Risk

  • this means that investors have obtained part ownership in the companies whose shares they've bought.
• What are owners of shares called?

  Shareholders
• (Equities) Public companies are listed on the stock exchange

  • example, JSE in South Africa
• Equities have the best chance of beating inflation over the long term.
• The longer the time before retirement, the more one should invest in equities.
• What are profits received by shareholders from a company called?

  Dividends
• What are the rules of Investment?

  -The bigger the risk, the bigger the return/reward.

  -The smaller the risk, smaller the return/reward
• Define Diversification.

  means spreading the investment risk between the various asset classes

  (not putting all your eggs in one basket)
• Investment vs Speculation

  Investment

  • long term, saving for the future
  • Moderate risk
  • Investor attitude: cautious & conservative
  • based on fundamental and basic factors

  Speculation

  • generally short term of less than a year
  • High risk
  • aggressive
  • based on individual opinion, market psychology & technical charts
• provide examples of Investment

  • Stock market
  • bonds
  • mutual funds
• Provide examples of Speculation.

  Options, foreign currencies & crypto currencies.
• What is conservative investment? (investment strategies)

  investor is looking for high income with low risks.

  • has more investments in bonds, property and cash.
  • has no investments in shares/equities
• What is Defensive Investment?

  when the investor is looking for a stable income from investment but also wants a growth in capital with low risk.

  • investor will have more investments in bonds, property, and cash.
  • Least investment in shares/equities
• what is the balanced investment strategy?

  The investor wants to see capital growth as well as earn some income from their investments.

  • the investment will be in majority shares and bonds
• what is the growth investment strategy?

  When the investor wants to obtain long-term capital growth with little concern for earning immediate income from investments

  • investments will be majority in shares/equities
• What are the strategies to limit losses?

  1. Stop Loss strategy
  2. Rebalancing
• Explain the Stop loss strategy.

  • designed to limit an investor's loss on a security position.
  • Setting a stop-loss order for 10% below the price at which you bought the stock will limit your loss to 10%.
• Explain Rebalancing.

  • Adjusting your portfolio elements to get back to a point where half is again invested in equities.
• List the different investment opportunities.

  
  

  • Retirement annuities
  • Pension fund
  • Endowment
  • Equities on stock market
  • Unit trusts
  • Cash option
  • Notice deposits
  • Collectibles
  • Off shore investments
  • Debentures
• What is retirement annuities (RA)

  A type of saving plan to provide for retirement.

  • Monthly premium is paid to the plan.
  • A lump sum/monthly pension is received upon retirement age 60-65 years.
  • The amount received is dependant on the size of the contribution as well as how long the contributions were made.
  • Government allows a tax rebate on premiums paid towards an RA.
  • Even if you become insolvent, your RA stays safe.
  • Can be used to build up a post-retirement medical savings fund that has a tax benefit
• What are endowments?

  An endowment fund, quite simply, is money set aside (invested) to earn revenue to fund some type of charitable activity.
• Who are endowments initially invested by?

  Endowment funds are initially invested by donors for certain charitable purposes, example, universities, hospitals, place of worship, community organisation.

  • They are usually established as trusts, which keep them independent of the organizations that they support.
• What do endowment funds consist of?

  Endowment funds consist of cash, equities, bonds, and other types of securities that can generate investment income.
• What is an advantage of Endowments

  Has tax advantage: The income tax rate in an endowment is fixed at 30%, which means that if your income tax rate is more than 30%, your returns will be taxed at a lower rate.

  • Your beneficiaries can receive your investment immediately and there are no executor's fees.
• What is a pension fund?

  Form of retirement savings HOWEVER, an employer joins a pension fund to facilitate the investment of the employees retirement funds.

  • Contributions made by employer AND employee in various combinations.
• What is the intention of Pension funds?

  Intended to generate stable growth over the long term in order to provide pensions for employees when they reach retirement.
• When are pension contributions deducted?

  before calculating taxable income
• Who is south africa's largest pension fund?

  Government Employees Pension Fund (GEPF)
• What are the advantages of Equities?

  • Produces a yield which is higher than most other investment options
  • Returns normally beat inflation
  • Value of shares grows as company expands
• What are the disadvantages of Equities?

  • Volatile markets mean that one may lose your investment
  • Share prices are linked to factors beyond ones control such as political and economic stability of country.
  • It takes a long time to get the best results.
• What is Unit Trust?

  Can be described as a basket of shares traded on the stock exchange.

  • When buying unit trusts the investor will indicate the type of risk profile that he/she wants.
  • Managed by a fund manager that is responsible to look after that specific fund.
  • Can be diversified over various industries on the JSE