Chapter 1: Investment Concepts Flashcards
Gambling
Decisions made / activities executed without any knowledge of what the outcome will be.
Speculation
The venture of money on an activity with the expectancy of a large return after a very short time period.
A degree of knowledgeableness applies.
Investments
Purchasing assets with the purpose of retention for a considerable period of time for it to increase in value and provide a reasonable return for the investor.
2 Basis of distinction between investment and speculation
- Term
- Motive
Minimum time period of investments
At least 5 years.
Real return
The return after inflation has been considered.
The nominal return less approximately the inflation rate.
Most important reasons for investing:
- Speculation
- Income
- Capital growth
- Take-overs and mergers
- Control over a raw material/distribution channel
Arbitrage
The process of buying a product on a cheaper market and then selling it on a more expensive market.
Bull market
A period of continuous price increases over the long term.
During this period there exists strong buying pressure (demand) and prices of shares will increase.
Bear market
A period of mainly price decreases over the long term.
Bull
A person that purchases shares during a bull market with the intention of keeping them for a reasonably long period.
Bull Speculator
A person that purchases shares during a bull market. His motive, however, is to achieve a capital gain in the short term.
Bear Speculator
Active during a bear market.
He tries to sell shares that he does not possess, hoping that the price will drop, so that he can purchase the required shares at a lower price (in order to deliver the shares to the person to whom he sold them).
Stag
A speculator that endeavours to make quick profit out of new listings as well as during a rights issue.
Blue Chips
Ordinary shares of companies with an elite investment status.
These companies that have built up a good reputation over the long term by maintaining a stable and sound profit and dividend history as well as providing healthy growth prospects.
Second Tier Stocks
Ordinary shares of companies that don’t yet qualify as blue chips, but have the required growth potential to eventually reach the high investment status of blue chips.
Diversification
The process of being risk-averse and purchasing the shares of various companies to be placed in a share portfolio.
Dividends
The portion of the profit after tax that is subdivided amongst shareholders.
Preference shareholders are first to receive dividends, followed by ordinary shareholders
Cum Dividend
Inclusive of the right to the dividend.
Ex dividend
Exclusive of entitlement to the dividend.
Fundamental Analysis
The valuation of a company and its shares.
Technical Analysis
The study of all market information, to aid the investor with the TIMING of his investment.
Institutional Investors
Enterprises with large amounts of capital at their disposal with which they mainly purchase shares and other investments.
Investment & Unit Trusts
Funds whose function are to collect small amounts of savings of individuals and enterprises and then use the large collected amount to purchase and manage a diversified portfolio of shares, stocks and bonds on behalf of the small investors.
The trust then receives interest/dividends that - after subtracting their admin costs - they pay out to their shareholders.
Advantages of Investment/Unit trusts
- Individuals who want to invest small monthly amounts cannot purchase a variety of the top companies’ shares.
- It is better to combine the money from many investors to collectively purchase a good distribution of top quality shares.
- They can employ specialists who can make sensible purchases / sales.
Listing
The right that a company obtains to trade its shares on the stock exchange after certain prerequisites are met.
4 Company decisions to influence the number and value of shares.
- Capitalisation issue
- Stock split
- Rights issue
- Buy-back of shares
Capitalisation issue
Shareholders receive further shares in the company - free.
The shares are financed by the company’s reserves.
The purpose of a capitalisation issue
To provide shareholders with an opportunity to share in the prosperity of the company.
Stock split
Existing shares are subdivided into 2+ shares.
Purpose of a stock split
To make shares more affordable - increasing the tradeability of the shares.
Share Consolidation
The opposite of a stock split. A number of shares are consolidated into one share.
Purpose of consolidation
Often done when the market price of a share becomes very low:
- Directors might be worried that the low price might give the impression of a badly run and cheap company.
- To reduce the number of small shareholders, reducing admin costs (distribution of notices/statements).
Rights Issue
Present shareholders obtain the right to purchase further shares in the company.
Purpose of a rights issue
To obtain additional capital (financing).
Letter of allocation
A letter to confirm that the shareholder has a right to purchase new shares in the company.
Letters of allocation can also be listed on the exchange.
Purpose of a share buy-back
- Would lead to an increase in the earnings per share for the remaining shares without the company working harder to generate more profit.
- The principle is to use excess cash.
Money Market
The total market of all short-term funds traded.
Includes short-term investments - savings accounts, day deposits, cheque accounts, short-term loans.
Capital Market
The culmination of long-term funds.
Includes fixed deposits, participation bonds, mortgages, debentures.
Odd lots
Shares (in groups) of less than 100.
Portfolio
The composition and totality of a person’s investments.
Prospectus
A document issued to provide current and potential shareholders with the necessary information concerning a new issue of shares.
Pre-listing statement
A document issued when a company complied with all requirements for listing on a stock exchange and plans to do so in the future.
Risk
The possibility that the actual return could be lower than the return he expected to realise.
Share
The small subdivisions making up the capital of a company.
Nominal value / par value
The initial value at which a company issued its shares.
Market price
The value at which the shares are traded.
It is determined by the supply of and demand for the specific company’s shares.
Share certificate
The document that a company issues to its shareholder as proof of the number of shares in the company owned by that person.
Share price
The market price of the share (at which it is traded).
Buyers price
The highest price buyers are prepared to pay for shares.
Sellers price
The lowest price at which sellers are prepared to sell their shares.
Market price
The price at which the last transaction took place.
Stocks and bonds
A collective term describing all value paper which are tradeable.
Tradeability
The ability to transfer ownership of the asset from one person to another.
Guarantee function
The ability of value papers to serve as guarantee/security when applying for loans, overdraft facilities etc.
Gilts
Normally issued by state and semi-state institutions.
Gilts are loans that must be repaid on a future date, with a fixed interest rate that must be paid periodically to the owner.
Strate
An electronic settlement system that achieves secure electronic settlement of share transactions on the JSE.
Strade Limited
The approved Central Securities Depository (CSD) for equities in South Africa in terms of the Custody and Administration of Securities Act.
Dematerialisation
The process whereby paper share certificates are replaced with electronic records of ownership.
Underwriting
When a large financial institution undertakes to buy all the shares which are not sold during the rights issue at the issue price.
For this service (assurance), the financial institution charges and underwriter’s fee.
Savings
A portion of income that is not spent.
Economic investment
The use of the purchasing power of capital to obtain assets to be used in the productive process.
Financial investment
The process through which the purchasing power of capital reach the third parties directly or indirectly via the financial intermediaries.
Two groups of financial intermediaries
- Money market
- Capital market
Money market
Funds are available and utilised over the short term.
Capital market
Funds are available and utilised over the long term.
JSE Listing requirements regarding buy-backs
- Limited (per financial year) to a maximum of 20% of the company’s shares issued at the time that the authorisation is given.
- Buy-backs may not be done at a price that exceeds the weighted average of the market price of the company’s shares on the JSE for more than 5 business days immediately preceding such buy-backs by more than 10%.
- The quantity and price at which buy-backs were done must be announced with every 3% that is bought back.
