Ch12 - Investments Flashcards
Business Ventures
Describe/Explain/Discuss the JSE functions
- Primary function is to provide a market in which securities can be bought and sold freely within a legal and regulated framework
- The JSE creates opportunities for businesses to raise capital
- By channeling resources and facilitating trading, the JSE raise capital
- The JSE stimulates productive economic activity and contributes to building the economy
- It is the link between the investors and entrepreneurs
- Enables financial institutions to invest their surplus funds in shares
- It serves as an indicator of economic conditions
Outline/Mention/Describe/Explain/Discuss factors that must be considered when making investment decisions
- Return on investment
Refers to income from the investment, namely interest, dividends or capital appreciation (growth/increase) on the original amount invested.
- Risk
Refers to the chance that the invested amount may reduce in value/lost in total over a period of time, due to unforeseen circumstances.
- Liquidity
An amount of capital could be invested in a type of investment that can easily be converted to cash.
- Taxation
A good investment will yield good after-tax returns.
Income tax implications must be considered in order to ensure a high net after tax return.
- Inflation rate
Inflation refers to a decrease in the value of money due to rising prices.
- Investment period
This refers to the duration of the investment which may influence the return on investment.
The investment period will depend on a customer’s personal needs.
- Investment planning factors
Some investments offer a low income on invested capital, but it could be a safer investment than one that promises a higher income.
Examine opportunities with a history of good return.
- Budgets
Investors can determine the amount of surplus money that can be invested.
Investors must budget for unforeseen costs.
- Volatility/Fluctuations on investment markets
Fluctuation in national and international economic trends should be considered.
The level of volatility will determine the amount of returns.
Explain/Discuss/ Analyse/Evaluate (positives/negatives) of the following form of investment:
Government/RSA retail savings bonds
Positives
- Guaranteed returns, as interest rate is fixed for the whole investment period.
- Investment may be easily accessible, as cash may be withdrawn after the first twelve months, subject to penalties.
- No charges/costs/commissions payable on this type of investment.
Negatives
- Retail bonds cannot be ceded to banks as security for obtaining loans.
- A minimum of R1 000 must be invested, which may be difficult for some small investors to accumulate.
- Retail bonds are not freely transferable amongst investors.
- Investors need to have valid SA identification/should be older than 18 years.
Explain/Discuss/ Analyse/Evaluate (positives/negatives) of the following form of investment:Unit trusts
Positives
- Managed by a knowledgeable fund manager to buy shares on the stock exchange.
- Safe investments, as it is managed according to rules and regulations.
- A small amount can be invested per month.
- Easy to invest in, as investors simply fill in several forms or invest online
- Easy to cash in when an investor needs money.
Negatives
- If blue chip companies growth path declined the growth of the unit trusts will also be affected.
- Unit trust holders are not allowed to borrow against their investment.
- Not appropriate for short term investments.
- Not advisable if investors want to avoid risks at all costs
Explain/Discuss/ Analyse/Evaluate (positives/negatives) of the following form of investment:
Shares
Positives
- Holding a higher number of shares may result in higher proportional dividend pay-outs.
- Can be freely transferred/traded on the JSE.
- Shareholders’ liability to the debt of the company is limited to what was invested/Shareholders have limited liability for company debts.
- Holders have voting rights at the annual general meeting (AGM).
Negatives
- Holders may receive less dividends/no dividends when company profits are low.
- Companies have no legal obligation to pay dividends to shareholders.
- Risk may be high, as investment may be lost when companies are liquidated.
- Dividends declared may be determined by the management/directors of the company/business.
Explain/Discuss/ Analyse/Evaluate (positives/negatives) of the following form of investment:
Fixed deposit
Positives
- Interest is earned at a fixed rate regardless of changes in the economic climate.
- The investor can choose the investment period.
- It has a low risk as investors are guaranteed a final payment.
Negatives
- The investor cannot withdraw their funds before the maturity date.
- May not outperform the effect of inflation over long term.
- Low return compared to other investments.
Elaborate on the risk factor of:
Government/RSA Retail savings bonds
- Very low risk investment - low return on investment
- Only way you can lose your investment is in the case of political or economic chaos (war)
Elaborate on the risk factor of:
Unit Trusts
- Similar risks to those of shares, but to a lesser degree as the companies have proven track records
- If companies dont continue on their growth path it will affect the unit trust and will not render the expected returns
Elaborate on the risk factor of:
Shares
Shares have low/medium risk over a long term/investment period depending on the chosen type of shares. e.g.
- Ordinary shares have the highest risk as the investor may lose the full or part of the investment when the company is dissolved/bankrupt/liquidated.
- Preference shareholders’ risk is lower, as they have preferential claims on the assets of the liquidated company/may receive some compensation before ordinary shareholders.
Elaborate on the risk factor of:
Fixed Deposit
- Very low as the investor will receive what was promised.
- The interest rate is usually fixed, the return will not be affected by market fluctuations.
Name/Explain types of shares
Ordinary shares
- Standard shares with no special rights or restrictions.
- Shareholders may receive higher dividends when the company has made large profits.
Preference shares
- These shares enjoy preferred claim on company assets in event of bankruptcy/liquidation.
- A fixed rate of return is paid on this type of share.
Founder shares
- Shares that belongs to shareholders who started the company.
Bonus shares
- Shares that are issued to existing shareholders as compensation for loss of dividends.
Explain/Discuss the impact of ordinary shares.
Advantages
Disadvantages
- The more shares the higher the dividend pay-outs potentially
- There is limited liability on the investment (you can only loose the value of your shares)
- Ordinary shareholders have a vote at the General Meetings
- Ordinary shares can be traded on the JSE
- The dividends are paid out after the preference share dividends
- There is a higher risk
- There is no legal obligation to pay dividends to shareholders
Name/Outline/Explain/Discuss types of preference shares.
Participating preference shares
- Shareholders are guaranteed minimum fixed dividends.
- They are entitled to shares in any surplus company profits.
- They have preferential rights over ordinary shares on repayment when the company closes down.
Cumulative preference shares
- Shareholders are entitled to receive minimum fixed dividends
- They receive dividends not previously paid out when profits were too low.
Non-cumulative preference shares
- Shareholders are not compensated for past dividends that were not paid out when profits were low.
Redeemable preference shares
- Shares can be redeemed/bought back at the option of the issuing company, either at fixed price on a specified date/over a certain period of time.
Convertible preference shares
- Shares are converted into predetermined number of ordinary shares on the date specified when the preference shares were issued.
Outline/Mention the rights of preference shares
- Receive dividends regardless of how much profits are made.
- Receive a fixed rate of return/dividend.
- They are paid first/enjoy preferential rights to dividends.
- They have a preferred claim on company assets in the event of bankruptcy/ liquidation of the company.
- Receive interim and annual reports.
- They only have voting rights at the Annual General Meeting under particular circumstances/for certain resolutions.
Differentiate/Distinguish between ordinary and preference shares.
Ordinary shares
Preferences shares
- Ordinary shares only receive dividends when profit is made.
- Some of these types of shares receive dividends regardless of profit made.
- Normally the higher the profit the higher the dividends
- A fixed rate of return is paid on these type of shares.
- Shareholders are the last to be paid, if the company is declared bankrupt.
- Shareholders have a preferred claim on company assets in the event of bankruptcy.
