Component 1 (investment concepts) Flashcards
gambling?
no knowledge of outcome of decision
speculation?
promise of great returns but is very risky
investment?
reasonable return, less risky
investment vs speculation?
term:
investment = long term (5 + years)
speculation = short term (1-2 years)
motive:
investment: require reasonable return
speculation: require considerable return
investment objectives?
speculation: buying asset with goal to sell for substantial profit within 1 year, high risk
income: buy asset with aim to generate income e.g. buy property to rent out
capital growth: original investment eventually increases (reason why we pay capital gains tax), purpose = protect purchasing power of capital
take-overs and mergers e.g. buy neighbouring farm to farm more effectively
control over raw materials/ distribution channel e.g farmer purchases neighbouring farm primarily to obtain access to river
financial instruments?
collective term that describes all assets, or units of capital, that are tradeable
real or virtual documents that represent a legal agreement
emphasis is on tradability of the value of paper (ability to transfer ownership)
financial securities?
type of financial instrument which can be traded on securities exchange and that represents:
- investment as owner in corporation (stock)
- creditor relationship with corporation/ governmental body (bond)
- rights of ownership (option)
emphasis on the guarantee function of financial and other assets
shares?
small units of ownership that the capital of the company consists of
originated due to:
- seeking large amounts of money
- seeking limited liability
share certificate?
document issued to shareholder as proof of share ownership
disappeared due to dematerialisation
shares are purchased electronically and are held in electronic record
bonds?
tradeable debt instruments
can be issued by corporations (debentures), governments and quasi-government institutions (gilts)
characteristics of bonds?
-loans that must be repaid on future date (maturity date)
- fixed interest (remuneration) must be paid periodically to owner
- market price dependent on fluctuations in interest rates
gilts?
debit instruments issued by state and semi-state institutions
securities exchange?
a company creates the opportunity for potential buyers and sellers of a security to come together for trading
stockbrokers?
regulated professional individual, who buys and sells stocks and other securities for both individual and institutional clients in return for a fee/ commission
strate?
STRATE = Share Transactions Totally Electronic
- electronic settlement
- worked together with Central Securities Depository Participant (CSDP) to convert share certificates to electronic record
dematerialisation?
process whereby paper share certificates are replaced with electronic records of ownership
converion started in 2001
money market?
total market of all short-term funds (short-term investments and short-term loans) traded (1 year of less)
surplus/ shortfall of funds will influence money market interest rates
capital market?
market where long-term securities are bought and sold
long-term investments will determine the capital market interest rates
primary market?
where listed companies and governments sell securities for the first time
new shares are issued at initial value (IV).
IV?
referred to as nominal value or par value
reflected in SFP
IV in SA?
Companies Act prescribes ordinary shares issued after 1 May 2011 no longer have par value
non-par value shares: value of share is referred to as the average issue price
additional capital required?
more shares issued/ sold to existing shareholders and public = right issue
prospectus?
document issued to provide current and potential shareholders with necessary info concerning new shares, as well as inviting interested parties to purchase the new shares
all companies publish a prospectus
secondary market?
once new shares have been issued and bought by investors, these investors can keep them or trade them
trading takes place in secondary market -> can trade shares at value higher or lower than original issue price - determined by success of the company, quality of decisions made by management, and prospects of company
market price?
determined by the supply of and demand of the specific company’s shares
share price?
the price at which a share is traded in the secondary market (market price)
3 minimum prices generally provided?
- bid to buy (buyers’ price): highest price buyers are prepared to pay
- offer to sell price (sellers’ price): lowest price sellers are prepared to sell
- market price (last traded price): price at which last transaction took place
blue chips?
ordinary shares of companies with an elite investment status
good reputation over long-term by maintaining:
- stable and sound profit and dividend history
- providing healthy growth prospects
portfolio?
composition and totality of person’s investments
diversification?
invest in different companies and sectors/ industries to spread risk
different instruments with different risk profiles (shares, bonds, property, etc)
greater spread of portfolio over different investment instruments = lower risk
risk?
possibility that actual returns realized on investment may be lower than expected
institutional investors?
enterprises investing with large amount of capital (shares and other investments)
e.g. insurance companies
unit trust?
pooling (collection) of money:
- collect small amounts of savings from individuals and companies and then invest the large amount into a diversified portfolio which is done and managed on their behalf
advantages:
- good distribution of top-quality shares (blue chips)
- managed by trained and specialized investment professionals
listing?
right that company obtains to trade its shares on stock exchange after certain prerequisites are met
listed in certain sector according to its primary activities (core business)
company’s shares can be listed on more than one stock exchange simultaneously
pre-listing statement?
- document issued after company complied with all requirements for listing on JSE
- source of info about proposed listing
- not invitation to buy additional shares (not prospectus)
- can only be issued by public companies
arbitrage?
product traded on two or more markets: risk free profit made from short-term price differences (exchange rates - currency)
buy product on the cheaper market and sell it on the more expensive market
arbitrage steps?
- determine whether a mispricing exists
- determine how to exploit the mispricing
- determine profit to be made
arbitrage transactions result in market price reaching equilibrium
bull market?
period of continuous price increases over long-term
exists strong buying pressure (demand) and prices of most shares will increase
bear market?
period of mainly price decrease over long-term
bull investor?
- buy shares at a low price
- keep for long-term
- sell after a few years
- make a profit
bull speculator?
motive is to achieve short-term capital gain
sells shares to obtain funds to pay for purchase of shares
bear speculator?
sells shares not in his possessions
hoping prices will continue to drop (short sales)
stag speculator?
makes quick profit from new listings and rights issue
