3) Understanding simple and compound interest

• Differences between ordinary and preference shares

  Ordinary shares

  • Shareholder only entitled to receive return on his investment when company makes a profit and declares a dividend.
  • A higher dividend is payable to the shareholder if the profits are higher.
  • Shareholder receives standard shares with no special privileges.
• Differences between ordinary and preference shares

  Preference shares

  • Shareholders of certain type of preference shares are entitled to dividend payment regardless of whether the company declares a dividend payment or not.
  • The shareholder will receive a fixed rate of return regardless of the amount of the profit.
  • The shareholder receives special privileges in terms of dividend payments.
• The rights of ordinary and preference shareholders

  Rights of ordinary shareholders

  • Shareholder must be allowed to vote for the directors of the company.
  • Attend the Annual General Meeting to learn about the company's performance.
  • Shareholders has right to participate and vote at the Annual General Meetings of the company.
• The rights of ordinary and preference shareholders

  Rights of preference shareholders

  • Investor is entitled to receive dividends irrespective of profit levels of the company.
  • They only have voting rights at the AGM under particular circumstances.
  • Full disclosure must be made to the investors by providing them with copies of all financial reports.
• Investment concepts

  Debentures

  • Investor lends certain amount of money to a company for a certain period.
  • Companies that require additional funding may access debentures on the JSE.
  • Financial instrument that allows companies to borrow money from public.
• Investment concepts

  Dividends

  • Return on an investment in shares which is paid regularly by a company to its shareholders.
  • Dividends are decided and managed by the company's board of directors and approved by the shareholders through their voting rights.
• Investment concepts

  Capital gain

  • Refers to growth in value of property/ assets in relation to the original amount invested over certain period.
  • Investor compelled to pay tax to SARS on the additional amount of growth of the property/ assets over some time.
• Investment concepts

  Simple interest

  • Refers to the amount of interest earned based on the original investment of the investor.
• Investment concepts

  Compound interest

  • Refers to amount of interest earned based on original amount invested, as well as interest earned in the preceding years that were added to original amount invested.
• Understanding simple and compound interest

  Simple interest

  • Interest earned on the original amount only.
  • Value of the original amount remains the same for the duration of the investment.
  • Return on investment is lower than the return on investment of compound interest.

  Compound interest

  • Interest earned on the original amount invested, and the interest earned in the preceding years is added to the original amount invested
  • Value of the original amount increases as additional interest is added in subsequent years.
  • Return on investment is higher than the return on investment of simple interest.
• Calculating simple and compound interest

  The following formula is used to calculate simple interest:

  • Interest = P x r x t, where:
  • P - is the principal/ original amount of the investment
  • r - is the interest rate
  • t - is he period of the investment
• Calculating simple and compound interest

  The following formula is used to calculate compound interest:

  • P x (1 + i)n - P, where:
  • P - is the principal/ original amount of the investment
  • r - is the interest rate
  • n - is the number of investment periods
  • i - interest rate per period (expressed as a decimal; for example, 5% would be 0.05)