Investing Flashcards
Define Capital gain
Occurs when the sale price for an asset is greater than the initial cost.
Define Capital loss
Occurs when the sale price for an asset is less than the initial cost.
Define Collateral
An asset promised to a lender in case the borrower is unable to meet the loan repayments.
Define Equity
The value of an investment less the amount of money owing on the investment.
Define Ethical investing
Investing in assets that are considered to be morally sound
Define Gearing
Borrowing for the purpose of investment, e.g mortgage to purchase a house.
Define Income
Regular payments from an investment
Define Equity loan
A loan where the equity in an asset is used as collateral for the loan that is taken out to buy further assets.
Define Unit trust
An investment where a number of individuals place their money with a professional manager who manages the total fund on their behalf.
Define Diversification
Spreading investments over a range of asset sectors with the aim of reducing risk.
Define Dividend
An investor’s share of a company’s profit.
Define Return
The amount of money received from an investment each year
Define Risk
The level of uncertainty associated with a particular investment. Higher the risk, higher the return theoretically
Define Term Deposit
Money invested for a fixed period of time, interest is paid at regular intervals.
Define All Ordinaries Index
Measurement of the average movements in the share price of a selection of major Australian companies.
Define Comparison Rate
A true rate of interest. It includes both the interest rate and any fees and charges.
Define Saving is what
storing something for later use
Define Investing is what
using resources in the anticipation of creating even more resources.
Gearing is when:
loans are given for investing. If income gained from the investment is less than the repayments this is negative gearing.
What does negative gearing do
- Often used as a way of reducing an investors taxable income while building up repayments.
- Occurs when the deductions associated with an investment are greater than the income within a financial year.
- Loss that is made on the property can offset against any income the investor has from employment or other investments
Advantages and Disadvantages of negative gearing
Advantages
•You can purchase an asset that may increase in value over time.
•You can reduce the amount of tax you are required to pay.
•Investment in property helps to increase the stock of housing for those who rent accommodation.
Disadvantages
•The asset may not increase in value or could actually fall in value.
•The property you purchase may prove difficult to rent while you keep making loan repayments.
•Interest rate increases.
•Loss you need to reduce tax has to be funded out of your other sources of income.
What is home equity
- Homeowners can use the equity in the home they own
- Equity Loan. Bought home in 2000 for $300,000. To finance your purchase you borrowed $200,000.
- You used your savings $100,000 to pay the balance. At this point your equity in the home is $100,000. Four years later, thanks to the property boom, your home is worth $500,000. Therefore, your equity is now $300,000.
- Banks will lend you money using the $300,000 equity in your home as collateral.
What is ethical investing
- Negative screening is choosing not to invest in particular companies because you consider them unethical. Include tobacco or guns/alcohol.
- Positive screening is investing in companies that are socially responsible. This can include waste recycling, social support.
- Issues with ethical investing include the fact that by doing this you could make reduced returns, certain investments
- Financial Services Reform Act ’01 (Cwlth) requires Product Disclosure statements for financial products involved in investing to show environmental, social or ethical considerations taken into account.
What are the 4 investment option, and the risk ratings
Cash-low
Sharemarket-high
Property-medium high
Fixed Interest-low
