3) Understanding simple and compound interest

    Cards (12)

    • 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)