Investing Flashcards
Memorise
What is the sharemarket?
The place where the buying and selling of shares takes place
Who participates in the sharemarket?
Buyers, sellers, companies and stockbrokers
What is the obligation of companies on the sharemarket?
To keep everyone informed about events that have/will affect share price so no one is disadvantaged
What is a bid?
An offer to buy shares, includes the amount of shares and the price you are willing to pay
What is an offer?
An order to sell shares, includes the amount of shares and the price you are willing to sell for; could be specific or just the best price on the market
What is volume (in commerce)?
How many shares you’d like to buy/sell
What is a share?
Partial ownership of a company
What is a float?
AKA an Initial Public Offering (IPO) from the business itself (primary market)
What is the secondary market?
The sharemarket, where shares that have already been bought from a float are traded
What are dividends?
Payments from a company to its investors
How do you calculate dividend yield?
Annual dividends per share/price per share = return p.a
Are dividends guaranteed?
No, the company could experience a loss or choose to reinvest their profits into the company
How many times a year are dividends paid
2 times
What are the dividend dates called?
Interim and Final
How many days does it take for a transfer of share ownership?
3 days
What is the ex-dividend date?
If you buy shares on or after it, you don’t qualify for the latest dividend
What is the date that dividends are paid called?
Record date
At what time must you be on the register on a record date to receive dividends?
5pm
When should you buy shares to receive dividends?
When they are trading cum-dividend, not ex-dividend
What is investing?
Allocating money or other resources in the expectation of some future benefit (return)
Why do individuals invest?
To grow their wealth so they can achieve a good quality of life in the future; financial gains aren’t always achieved immediately
Why do businesses invest?
Invest for the production of goods/services to provide profit to the owners ASAP
What do businesses invest in?
- Infrastructure, labour, research
- Smaller businesses
How often is profit in a business paid?
Annually
What are the sources of business investment funding?
- Retained and reinvested business profits
- Banks (loans)
- Parent companies/corporations
- Private investors
- Shareholders (trading shares on the ASX)
- Debentures
- Crowdfunding
How do individuals fund their investments?
Savings, Borrowing, Superannuation
What are the advantages of savings?
- no interest needed to be repaid
- less opportunity cost
What are the disadvantages of savings to fund individual investing?
- can’t use the money elsewhere
- limited funds
What are the advantages of borrowing to fund individual investing?
- receive money immediately
- large amount available
What are the disadvantages of borrowing to fund individual investing?
- debt if money is lost
- not everyone is eligible
What are the advantages of super to fund individual investing?
- lower risk of loss
- money from an employer
What does ASX stand for?
Australian Securities Exchange
How popular is the ASX?
It’s in the top 5 exchanges globally
Who regulates the ASX and what do they do?
ASIC protects investors from insider trading
How many companies are listed on the ASX?
2200+
How many sectors of industry are the companies on the ASX divided into?
26
What did the ASX do in 2006?
It listed itself on the ASX (it’s the safest investment option), it was the first exchange to do so
How does the ASX provide performance data?
With ‘indexes’ for each sector
What are the direct investment options?
Cash, Property, Shares
List the direct investment options from safest to riskiest.
Cash, Property, Shares
What type of return do cash investments give you?
Interest
What are some types of cash investments?
- Term deposits
- Government bonds
- Cryptocurrencies
- Foreign currency exchange
What types of return do property investments give you?
Rental income (safer) and House appreciation (higher return)
What are the types of property investments?
Residential and commercial
What are the different ways that shares can give you a return?
Dividends (safer) and share prices fluctuating
What are the different types of shares?
Australian and International
What are indirect investment methods?
A 3rd party makes investment decisions for you
What are some examples of indirect investment methods?
- Fund managers
- Trusts
- Appointed financial service provider
- Superannuation
What is a fund manager, including an EFT?
- People pool money and the return is paid in distributions to members
- Members spilt brokerage fee
What does ETF stand for?
Exchange Traded Fund
What are some examples of an appointed financial service provider?
- Stockbroker
- Financial planner
- Bank
How does a managed fund work?
- People with similar investment goals pool money
- An investment manager trades shares/property/other assets on your behalf
- The investors are paid distributions periodically
List some other investment options.
- Debenture
- Unsecured/secured notes
- Currency exchange
- Futures/options
- International shares
- Cryptocurrencies
What is a debenture?
A fixed term loan with a fixed interest rate given to a company, tied to a physical asset
What is an unsecured note?
A loan you give to a fund, it is not tied to a physical asset and therefore compensates with higher interest rates
What are the 2 types of futures investment?
Commodities and Derivatives
What are commodities?
Investing in a resource eg: buying gold for $1000, the price increases so you sell the gold at $1500 for a profit of $500
What are derivatives?
Investing in the price of commodities, eg: investing $1000 in the price of gold
What is an option?
Instead of buying a product for it to potentially lose or gain value, you pay a small amount for the opportunity to purchase the same product later for the present price. If the price increases you can buy the product at the old price and make a profit, and if the price decreases, you don’t buy the product and just lose your deposit
Where are international shares available?
Through fund managers
What is the crypto market?
An unregulated alternative currency market
What are some important aspects of currency?
- Durable
- Portable
- Fungibe
- Divisible
- Verifiable
- History
- Scarce
- Censorship resistant
What is durability?
Not easily destroyed
What is portability?
Able to be transported and stored
What is fungibility?
Easily interchangeable with another token of equal value
What is divisibility?
Easy to subdivide
What is verifiability?
Quickly authenticated
What is scarcity (in terms of money)?
Not abundant, easy to obtain or produce
What is history (in terms of money)?
Recognised value
What is censorship resistance?
How easy it is for a 3rd party to take it away from you
What are the pros of renting?
- Cheaper (in the short term)
- No maintenance costs/property tax
- Flexible
What are the cons of renting?
- No ownership; risk of eviction
- Rent is not earning an asset
- Changes to the property are difficult
- Dealing with a landlord is annoying
What are the pros of buying a house?
- A place to live; no risk of eviction
- House appreciates in value
- Potential rental income
What are the cons of buying a house?
- Expensive mortgage
- Difficult to buy a first home
- Maintenance/property taxes
What do mortgage repayments consist of?
- Deposit
- Principle repayments
- Interest
What are the unrecoverable costs of a mortgage/house?
- Interest
- Maintenance
- Property tax
What percentage of a house price is a typical deposit?
5%-20%
What is another term for the principal repayment?
Cost of equity
What are the unrecoverable costs of renting?
Rent itself; cheaper in the short term; savings to invest
What are growth assets?
- Assets that grow in value over time
- Profit isn’t achieved until the asset is sold or profit is ‘realised’
How do you calculate the rate of return of a growth asset?
(Profit from investment/Original investment) x (100/period of investment in years)
What are some examples of growth assets?
Blue chip shares, property (house appreciation)
What are income assets?
- Assets that pay profit on a regular basis
- They’re expected to make profit
- The Rate of Return compares annual profit to original purchase price
How do you calculate the rate of return for an income asset?
(profit per annum/original purchase price) x 100
What are income assets also referred to as?
Defensive assets: Aim to provide a steady stream of income
What are some examples of income assets?
Term deposits (interest), shares (dividends), property (rent)
List the investment options from high to low risk.
Shares, property, cash (excluding crypto and foreign currency)
List the investment options from high to low return.
Shares, property, cash (excluding crypto and foreign currency)
How do you mitigate the risk of loss?
Diversify your investment portfolio
How do you diversify your investment portfolio?
- Cash investments, property, shares
- Direct and indirect
- Stable and new businesses
- Income (capital/defence) and growth assets
- Variety of industries
- Australian and international shares/investments
What is negative screening?
Avoiding interest in a company that you deem to be unethical and out of line with your beliefs and values
What is positive screening?
Supporting companies that engage in and support ethical practices important to you
What is ethical investing?
Making investment decisions in line with your beliefs and values
What is an example of positive screening?
Investing in companies that use recycled materials for their products
What is an example of negative screening?
ANZ controversy:
- ANZ is one of the top 4 banks in Australia
- Founded as the Bank of Australasia in Melbourne, 1830s
- Exposed during GFC for funding coal mines, power plants and ports as well as illegal cluster bombs
- Share price dropped rapidly as investors were discouraged from buying
What are the factors influencing investment decisions?
Personal and economic circumstances
What are some examples of personal circumstances that could affect investment decisions?
- Illness, family situations and job loss
- May need to withdraw from a fixed investment/fund to pay bills
- May need to stop regular payments to an investment
What are some examples of economic circumstances that could affect investment choices?
- Global market changes: unpredictable and uncontrollable
- Economic patterns: trade, national security and employment
- National companies with contingency plans for an economic downturn are safer investments
- Assess the future levels of economic activity (profit) of a company before buying shares
What is a ‘high’ in the growth trend of the market called?
Peak
What is a ‘low’ in the growth trend of the market called?
Trough
What is an increase in the growth trend of the market called?
Expansion
What is a decrease in the growth trend of the market called?
Contraction
What are some strategies for making the most of the economic cycle?
Time your entry and exit from the market:
- Buy shares when the price is low and sell them when the price is high to make a profit
- However, it’s hard to predict a peak or trough in reality, but easy to recognise once it’s passed
Determine what kind of investments to make:
- Make low-risk investments such as term deposits in economic contraction and capitalise on high-risk/return investments such as shares when the market begins recovery
Detail the flowchart for analysing the risks of an investment.
Identify all possible risks - Rank risks on the probability of occurrence - Are they acceptable?
Yes: Accept and continue monitoring - Develop further risk mitigation plans
No: Consider a risk avoidance strategy
What are the actions you can take from a risk analysis?
- Avoid the risk
- Reduce the risk
- Manage the risk
- Transfer the risk
How do you avoid a risk?
- Don’t make the investment
- Withdraw from the investment to avoid future loss
- Don’t take the investment avenue
How do you reduce a risk
Diversify investments; this reduces the impact of possible harm
How do you manage a risk?
Record and monitor profits and losses
