2.5 Investment Products - Assets

Question 1

What is investment?

Answer 1

A process by which people with surplus funds lend their money to companies and governments that want to borrow it over a long period.

Question 2

Name the main categories of investment product

Answer 2

Stocks and shares.
Stocks and shares NISA.
Property.
Corporate and government bonds.

Question 3

How can people invest their money themselves?

Answer 3

By choosing and buying specific assets, eg shares/ property

Question 4

Do people usually choose to invest their money themselves?

Why?

Answer 4

No.

• don’t have enough money to allow them to spread their risks over a well diversified range of assets.
• lack of knowledge.
• lack of time to select suitable shares/properties and to track their performance on a daily basis.

Question 5

Who do people often choose to hand over their money to?

Answer 5

A specialist investor, either a collective or a fund.

Question 6

What are shares also known as?

Answer 6

Equities.

Ordinary shares.

Question 7

What is a share?

Answer 7

A part-ownership in a company

Question 8

Where can shares be bought?

Answer 8

Directly from the company (if it is a new issue of shares).

On the stock market from a previous owner.

Question 9

What will someone who buys shares pay?

Answer 9

They will pay the market price at the time but this price will change subsequently and may rise or fall.

Question 10

How do shareholders get a return on their share?

Answer 10

Capital growth.

Dividend - a share of the annual profits made by the company.

Question 11

What is a dividend? How often is it paid?

Answer 11

A share of the annual profits made by the company.

Paid usually half-yearly or yearly.

Question 12

Are shares high risk or low risk investments?

Why?

Answer 12

High risk.
Because they offer the potential of both capital growth and income -> high reward. Yet there also may be no dividends and the share price may fall -> capital loss.

Question 13

What does a stocks and shares NISA allow a person to do?

Answer 13

Put money into different types of investment on a tax-efficient basis

Question 14

Does every adult in the U.K. Have a NISA allowance each tax year?

Answer 14

Yes

Question 15

What can someone do with their NISA allowance?

Answer 15

Either invest the entire amount in a stocks and shares NISA, or split it between a cash NISA and a stocks and shares NISA in any proportion they like

Question 16

What should someone who uses a stocks and shares NISA be willing to do?

Answer 16

Willing to tie their money up for at least five years

Question 17

How can the investor select and buy a stocks and shares NISA?

Answer 17

• They can buy a readymade product from a provider and let the provider manage the investment for them.
• They can choose and buy their own shares and put them into what is known as a NISA ‘wrapper’.

Question 18

What does using a NISA ‘wrapper’ mean?

Answer 18

Means they can earmark shares up to the permitted limit for NISAs, and receive a tax free return on these shares, regardless of any other investments they may have.

Question 19

Are stocks and shares NISAs tax efficient? Why?

Answer 19

Yes.

They are free of uk income tax and capital gains tax that would have been paid on an investment outside a NISA.

Question 20

Do investors have to pay charges for their stocks and shares NISA? Who to?

Answer 20

Yes.

Charges to their financial advisers and to the fund managers in the investment company they use.

Question 21

Bonds are issued by….

Answer 21

Companies
Governments
Other bodies that need to borrow money

Question 22

How do bonds work?

Answer 22

Investors lend their money to the issuer by purchasing the bonds.
But they are lending money to the company.
This means they are ‘creditors’ and not ‘part-owners’ as shareholders are.

Question 23

Is a fixed term savings bond a type of short-term or long-term savings account?

Answer 23

Long term

Question 24

Is the capital sum safe, in a fixed-term savings bond?

Answer 24

Yes

Question 25

Bonds issued by ………… are traded on a financial market and their values fluctuate

Answer 25

The government and companies

Question 26

Are bonds usually issued for a specific period of time?

Answer 26

Yes

Question 27

Do bondholders receive a fixed rate of interest?

Answer 27

Yes

Question 28

What does ‘property’ refer to?

Answer 28

Land and buildings…

• residential property.
• commercial property.

Question 29

Is property seen as a good investment proposition? Why?

Answer 29

Yes.

Property prices tend to move upwards in the long term

Question 30

Is property seen as risky? Why?

Answer 30

Yes.

Prices can fall in an economic downturn and it is not easy to sell the asset at such a time.

Question 31

How can people earn income from their property?

Answer 31

Downsizing on retirement and investing the profit.

Renting out properties.

Question 32

Give examples of commodities that people can invest in

Answer 32

Gold
Silver
Works of art
Antiques
Fine wines

Question 33

Does investing in other assets including commodities offer the potential for very high capital gains?

Answer 33

Yes

Question 34

Is investing in commodities risky?

Answer 34

Yes

Question 35

Investing in commodities is suitable for…..

Answer 35

Very wealthy people who are experienced in these areas and know what they are buying.

Question 36

What is seen as the safest asset? Why?

Answer 36

Gold.

It is relatively scarce.