Accounting - Different Types of Investment Options Flashcards
What are the two types of return an owner can get through investment?
Capital gain and an Income stream
What is meant by the term “Capital Gain”?
A capital gain is where the value of the asset increases over time so that it can be sold for more than the purchase price.
What is meant by the term “Income stream”?
An income stream where the asset generates some sort of income (such as interest, rent or dividends)
What are the three main types of assets which are used for investment?
- Money
- Property
- Shares
What is meant by the term “bank account”?
Most basic and common for of investment, you put money into a bank or a similar institution.
Advantages for a bank account
- Money is readily accessible
- Virtually no risk of the business losing investment
Disadvantages of a bank account
- There is a very low return (sometime can go into the negative)
What is a term deposit?
Higher rate of interest in return for agreeing to invest for a set term (this can vary from 6 months to five years).
Advantages of a term deposit
- Higher interest rates
- Very secure, which means there is little risk
- Simplicity
Disadvantages of a term deposit
- No access to funds before set term date
- You lose the funds if taken out early + and additional fee for early withdrawal
What is a bond?
Issued by the government when they wish to raise funds by borrowing from the public, usually over a long period of time
Advantages of a bond
- Government owned (means its secure)
- Competitive interest rate (since governments are competing with banks)
Disadvantages of a bond
- If market interest goes above interest on bond, value of bond decreases
What is meant by “property”?
Buying real estate of some type, this can provide capital gain and an income stream
Advantages of buying property
- Can provide both a capital stream and an income stream
- Can be less volatile in comparison to something like stocks
- Can rent out for an income stream
Disadvantages of buying property
- Property market is subject to fluctuations
- if interest rates rise, people won’t be buying houses.
What is meant by “managed property funds”?
Managed fund that pools the resources of a number of investors into one fund that is invested in a range of properties, known as a managed property fund
Advantages of a managed property fund
- Investor who cannot afford to purchase property on their own have access to this form of investment
- Allow investors to diversify into a number of property assets.
Disadvantages of managed property fund
- Time consuming to get right
- A long-term investment to make profit
What is meant by “shares”
You are buying part ownership of a business giving the shareholder, some say in the running of the company
Advantages of buying shares
- Shares outperform other forms of investment
- Have to pay less tax on the profits because they have already been taxed
- A large variety of choices of shares
Disadvantages of buying shares
- Dividends (a share of the company’s profits) depends on the profit of the company, if company does bad no profit
- There are fluctuations in the daily shares market
What are debentures?
Used by companies to raise funds. Means the company doesn’t have to go to a bank.
Advantages of a debenture
- Higher rate of return to entice new investors
- Fixed interest rate
