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
