Investment Flashcards
Saving
The setting aside of income for future use.
Investment
Capital formation. “Additions to the nation’s stock of buildings, equipment and inventories.”
The act of investing
The use of resources that have been freed from current consumption to develop goods or assets that will produce earnings or add to future production.
What must be done in order for saving to be economically valid?
Money must be invested
Two types of investment (from an individual)
- Investment in the means of production
- Purely financial investment
Explain: Investment in the means of production
Providing money to a company who will invest the money.
Explain: Purely financial investment
Only title transfers without constituting an addition to productive capacity.
Two primary ways in which an investment can increase
- Payments in return for the use of money. (Interests or dividends)
- Increase in the capital value of the asset.
Two ways in which governments borrow:
- Bonds (Long term)
- Bills (Short term)
Primary distribution (of securities)
The issue of shares or bonds to the public. (This first sale of shares or bonds is in the primary market, and the money received goes to the company.)
A secondary market
A market that comes into existence when investors in the primary market need to sell their shares or bonds.
Different types of investments
- Property
- Corporate bonds
- Government bonds
- Equities and equity-based investments
- Money market instruments
Key characteristics of an asset:
S: Security
Y: Yield (Return):
- Nature of return (real, nominal, fixed or linked to inflation)
- Expected return vs other asset classes
- Correlation of returns with other asset classes
- Currency of returns
S: Spread/volatility
T: Term
E: Expenses
M: Marketability (and Liquidity)
T: Tax (amount and timing)
“Real” asset
An asset who’s returns are linked to inflation
“Fixed” asset
An asset whose returns are fixed in absolute money terms
Term of an asset
Timing of proceeds expected from an asset: The later the proceeds are expected to be received, the longer the term.
Marketability of an asset
How quickly it can be sold without moving the price
Liquidity of an asset
How quickly and easily an asset can be converted to cash
Two types of government bonds:
- Fixed interest bonds
- Index-linked bonds
Fixed interest bonds
Provide payments that are fixed in monetary terms
Index-linked bonds
Provide payments that increase in line with changes in an inflation index.
Gross redemption yield
The internal rate of return gross of tax that will be earned by holding the bond until maturity.
Loan capital
Long-term borrowings of a company.
Debentures
Part of the loan capital of companies.
The bond-issuing company provides some form of security to holders of the debenture.
Money-market instruments
Tradable, short-term debt issued by governments, banks of companies.