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Business Studies Grade 12 > Chapter 8: Investment > Flashcards

Chapter 8: Investment Flashcards

1
Q

Risk

A
  • Usually high risk investments will reap high rewards if they succeed and will have a large loss if they do not
  • Investor must select the level of risk they want relative to the type of investment option that’s best for them at that time
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2
Q

Diversification

A
  • A combination of investment options are used to spread out the risk over different assets
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3
Q

Risk Profiling

A
  • Determining investment time frame- the longer the better
  • Financial position: It is important to look at future investment risk when the decision is taken considering the size of the investment in relation to the total wealth of the investor’s portfolio
  • Risk and return considerations: The higher the risk the higher the return
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4
Q

Return on investment

A
  • A tool used to describe the efficiency of the investment
  • Used as an indicator of how much the investor will gain above what they invested
  • Formula: return/investment(cost)
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5
Q

Timelines on investments

A

The longer the time period the person has on their investment, the more risk they can afford to take because they have more time to recover from any potential losses

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6
Q

Investment strategies

A
  • Growth investment
  • Balanced investment
  • Defensive investment
  • Conservative investment
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7
Q

Growth investment strategy

A
  • High risk
  • Long-term capital growth rather than monthly income
  • Shares on JSE may be considered (Blue-chip reduces risk factor)
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8
Q

Balanced investment strategy

A
  • Medium risk
  • Long-term capital growth with some monthly income
  • Some equities and interest bearing investments like fixed deposits or investing in property for monthly rent income
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9
Q

Defensive investment strategy

A
  • Low risk
  • More focused on monthly income but also want capital growth
  • Investment in money in the bank and property, smaller investment in equities
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10
Q

Conservative investment strategies

A
  • Does not want risk
  • Monthly income while maintaining capital amount of investment
  • Investments are mostly in property and cash instruments
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11
Q

Major Asset Classes and Risk

A
  • Cash
  • Bond
  • Property
  • Equities
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12
Q

Major asset classes and risk

Cash

A
  • Low risk
  • Market money accounts, bank deposits
  • Offers regualry interest income
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13
Q

Major Asset Classes and Risk

Property

A
  • Moderate to high risk
  • Biggest asset in an investment portfolio
  • Lack of liquidity
  • Effective way of gearing your investment
  • Gearing investment: Making a profit out of borrowed capital, turning borrowed capital into own capital
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14
Q

Major Asset Classes and Risk

Bonds

A
  • Moderate risk
  • Investor pays lender interest
  • They promise to pay back the lender’s capital by a certain date
  • Debentures
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15
Q

Major Asset Classes and Risk

Equities

A
  • High risk
  • Shares and stocks
  • Investor has part-ownersip in the company
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16
Q

Investment options/instruments

A
  • Equities
  • Fixed Property
  • Debentures
  • Retirement Annuities/Pension funds
  • Endowments
  • Offshore investments
  • Unit trust
  • Collectibles
  • Notice Deposits
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17
Q

Investment Options/instruments

Equities/shares

A
  • Shares in a company listed on the JSE(some companies are unlisted)
  • Owners of equities all own portion of the business
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18
Q

Equities/shares

Ways to become a shareholder(two main methods)

A
  • Shares were bought when they were being issued the first time, buying a share means you contribute capital to the business
  • The share is bought from a previous shareholder, the money is given to the seller of the share not the business
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19
Q

Equities/Shares

Risk

A
  • Moderate to high risk, eventhough the JSE has strict rules to listing a company on stock exchanges to try to reduce their risk and protect investors
  • Blue-chip shares: Shares from high-end companies that have a lower risk than other companies. ROI is usually higher
  • Investors usually take lower risks than people speculating with shares
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20
Q

Equity/shares

ROI

A

Factors that contribute to ROI:
* Increase in share price
* Dividends
* Shareholders will buy shares in hopes that the shareprice will increase (shareprice depends on demand and supply)
* Shareholder will hope that good dividends will be paid out

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21
Q

Equities/Shares

Factors that determine demand for a share

A
  • The level of confidence in the economy, better economy = more optimism(Bull market), bad economy = pessimism, selling shares(bear market)
  • Government policies and new legislation will influence economy, that will influence share price. ie: nationalism
  • Performance of the industry of the company: better performance=optimism, lower performance=pessimism
  • Financial performance of the business
  • The public’s confidence in the management team
  • Social issues surrounding the company, ie: image, CSR, environmental impact
  • Legal issues, ie: law suits
  • Media coverage
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22
Q

Equities/Shares

Time Frame of investment

Investor vs People who speculate shares

A
  • Investor: People who prefer to invest their money without the short-term need for huge capital gains. They will invest in blue-chip shares where the capital growth is long-term and they will use the dividends to pay for more blue-chip shares
  • People who speculate: They buy shares in companies that will have a quick and significant increase in share price, they aren’t concerned with dividends so they will sell the share as soon as the share price goes up
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23
Q

Investment options/instruments

Debentures

A
  • A letter that a business sells in order to raise borrowed capital for a project
  • Not secured by specific assets so if business cannot pay it back the lender will not have preferential claim to assets. So people will hestitate to buy debentures from companies will high risks of liquidation
  • Debentures are paid back with interest rates, high risk businesses will have to offer higher interest rates to convice people to buy it
  • Debenture holders may sell the debenture at any time to someone else that’s interested on the JSE
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24
Q

Debentures

Types of debentures

A
  • Redeemable debenture: Is repayable by a predetermined date
  • Irredeemable debenture: Is never paid back but will last indefinitely while the holder is paid interest
  • Convertible debenture: Will be converted into shares at a predetermined date in future
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25
Q

Debentures

Risk

A
  • Debentures are sold at fixed interest rates, so if the interest rates decrease at banks, the holder benefits as their rates are now higher than banks, but if it increases they miss out on higher rates from banks, if debenture is sold at variable interest rate there is no risk
  • The risk is directly linked to the business’s financial position and the degree of risk of the project they need the debenture for
  • Risk is higher than bank investments but lower than share investments
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26
Q

Debentures

ROI

A
  • There’s an increased potential for ROI because business is legally obligated to pay interest, but in shares, a company is not obliged to pay dividends if the financial position of the business does not allow
  • There is no capital growth, only a steady stream of interest
  • Because it is an unsecured debt, business must offer higher interest rates to compensate for higher risk
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27
Q

Debenture

Time frame of investment

A
  • Can be used as long-term instruments to earn interest until debenture is paid out
28
Q

Investment options/instruments

Retirement Annuities and Pension Funds

Retirement Annuities

A
  • A policy that aims to provide an income to the person once they turn 55
  • A premium must be paid and when the RA pays out it will be paid out as a lump sum and a monthly income
  • The amount of money the RA is will depend on the period of time that the premiums were paid and how high they were
  • Government encourages RA by providing tax relief
29
Q

Investment Options/Instruments

Retirement Annuities and Pension Funds

Pension

A
  • When employees belonging to a pension fund pool all their contributions with a Pension fund administrator
  • Administrator invests the contributions to make them grow and exceed inflation
  • When people retire they receive a monthly income from the fund
  • Contributions are deducted from salaries before tax income is calculated
30
Q

Retirement Annuities and Pension

ROI

A
  • ROI depends on the decisions that the fund administator makes when handling the investments
  • Inflation will influence ROI
  • ROI is not guarenteed
  • Administrative costs and management fees will reduce ROI
  • ROI are written as predictions so they always seem more attractive than they actually are
31
Q

Retirement Annuity/Pension Fund

Time frame

A

Shouls be started as soon as possible and maintained for 40-45 years that an employee will earn a salary

32
Q

Investment options/instruments

Endowments

A
  • A long-term investment that can be contributed as either a lump sum payment or as monthly payments
  • Investor can get the payment either when the investment matures(5-10 yrs) or in the event of death where the next of kin will have it
33
Q

Endowments

Risk

A
  • Investor can choose which risk profile they want, either a high risk like equities or lower risk like cash
  • If the investor makes monthly contributions they can apply for a Contribution waiver
34
Q

Endowments

Contribution Waiver

A
  • If the investor becomes sick or disabled and thus cannot work and contribute to their investment, then the insurer can pay their contribution for them
  • It is a form of risk management that the insured can take out in the case of difficult circumstances
35
Q

Endowments

ROI

A
  • ROI will depend on risk profile chosen
  • Management and admin fees are deducted that will reduce the ROI
36
Q

Endowments

Time Frame

A

5-10 years, making it a long-term savings plan

37
Q

Investment options/instruments

Offshore Investments

A

Investments made in a different country

38
Q

Offshore investments

Risk and ROI

A
  • Depends on the exchange rate
  • Level of risk increases if all investments are in one country(diversification)
  • Foreign investment is not certain and you must choose which asset class to invest with
  • ROI depends on investment because you choose asset class
39
Q

Offshore investments

Time Frame

A
  • May be long-term or short-term
  • May be limited by how much money is allowed to be taken out of the country every year
40
Q

Offshore investment

Advantages

A
  • Allows for diversification
  • Foreign markets may offer better value than SA markets
  • International markets offer investment opportunities that may not exist in SA
  • You can invest in another country before you emigrate to it because it would allow you to not be limited by how much money you are allowed to take out of the country a year
41
Q

Investment options/instruments

Unit Trust

A
  • A group of investors who pool their shares together instead of investing themselves
  • Investor will indicate the type of risk they want
  • The investment can be diversified over various industries on the JSE or between various companies within a particular industry
  • Can be bought with a lump sum or monthly contributions
42
Q

Unit trust

Three parties to a Unit Trust

A
  • Unit trust management company (manages investments onn behalf of investors)
  • Trustee company (bank or insurance company that is responsible for the safekeeping of the portfolio asset)
  • Unit holder (group of investors)
43
Q

Unit Trust

Risk

A
  • Risk will depend because it can be innvested highly inn equities and international markets, or lowly in money market instruments
44
Q

Unit Trust

ROI

A
  • A good unit trust will exceed inflation over a medium term of 3-5 years
  • Rate of return will depend on investment chosen and how well the fund manager invested the money
45
Q

Unit trust

Time frame

A

Medium to long term

46
Q

Unit trust

Rand cost averaging

A

A strategy that means that a fixed amount of money can be invested regulary in the same investment regardless of market conditions

47
Q

Unit Trust

Three categories of unit trust

or rand cost averaging??

A
  • Domestic funds: invest a maximum of 15% of assets outside SA
  • Worldwide funds: invest between 15% and 85% of assets outside SA
  • Foreign funds: invest a minimum of 85% of assets outside SA
48
Q

Investment options/intruments

Collectibles

A
  • Could be stamps, coins, jewellery, art, etc
  • The collectibles market in SA is limited but technology is broadening it slowly
  • Must have a good understanding of the market of the that the items belongs to
49
Q

Collectibles

Risk

A
  • High risk
  • Must have a really good knowledge on the items
  • Any kind of damage drastically diminishes the value
  • Value is only as good as demand
50
Q

Collectible

ROI

A
  • Value will increase over time
  • There is no monthly income
51
Q

Collectibles

Time frame

A
  • Market is not volatile and usually shows growth over time
  • Can make a profit over a short period of time but it’s very rare
52
Q

Collectives

Advantages

A

There is a global market for collectibles

53
Q

Collectibles

Disadvantages

A
  • Art and antiques are difficult to transport and value
  • Expensive
  • Requires high level of expertise
  • No monthly income
54
Q

Investment options/instruments

Notice Deposits: Fixed deposits

A
  • Investor deposits money for a fixed amount of time (interest rates are higher than call-account)
55
Q

Fixed deposits

Risk

A
  • Low risk
  • Something bad can only happen to the money if the bank is liquidated
56
Q

Fixed deposits

ROI

A
  • Interest rate will depend on how much money was invested and for how long
  • The longer the time period and the more the money the higher the interest
  • Does not usually exceed inflation
  • There’s only capital growth if the interest if re-invested (capitalised). Cumulative interest is then earned on the original deposit and the interest that was re-invested
  • If the investor decides to have their interest paid out to supplement income there’ll be no capital growth
  • Because the risk is so low there is also low return
57
Q

Fixed deposit

Time frame

A
  • Can be from a year to more than 10 years
  • The longer the better
58
Q

Notice Deposits

Money Market Account

A
  • Short-term investment
  • They are very liquid so it’s easy to gain access to them in the short-term
  • An example is a call account
59
Q

Money market account

Risk and ROI

A
  • Low risk so low returns
  • Offer better interest than savings accounts
60
Q

Money market accounts

Time Frame

A
  • Short-term investment option ranging from a month to a year
61
Q

Notice deposits

Call Account

A
  • A type of money market account where the cash is available with a certain notice period being given
  • Money is invested indefinitely until it is to be withdrawn within a certain notice period
62
Q

Investment options/instruments

Fixed Property

A
  • Refers to land and buildings
  • Can be residential or commercial property
63
Q

Fixed Property

Risk

A
  • Risk is associated with location
  • Risk is increased if economy is doing badly and interest rates increase, making it more difficult for homeowner to pay mortgage bond
  • Keep in mind capital gains tax
64
Q

Fixed property

Capital Gains Tax

CGT

A
  • Whenever a property is sold, any profit made on the sale is taxed
  • Does not usually apply to a primary residence but to additionally property one might own
  • Also when someone disposes of an asset
  • Taxed at 20%
  • Capital gain or loss: The difference between the selling price of the asset and the cost when it’s purchased
65
Q

Fixed Property

ROI

A

It is a good investment because :
* Property owner can charge rent on their additional properties that they invested in
* Property value increases over time if the are it’s in doesnt depreciate
Tax can decrease ROI

66
Q

Fixed Property

Time Frame

A

Long-term

67
Q

Investments and taxation

A
  • Income on investments is taxable
  • Interest earned on investments is added to gross income and taxed within your individual tax rate

Business Studies Grade 12 (9 decks)

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