Investment securities Flashcards
Functions of the JSE
-Mobilises the funds of insurance companies and other institutions
-Shares are valued and assessed by experts
-Acts as a link between investors and public companies
-Serves as an indicator of the economic conditions in South Africa
Factors that should be considered when making an investment decision
-Return on investment
-Risk
-Investment period
-Inflation rate
-Taxation
-Liquidity
Short term
Up to 2 years
Medium-term
2-5 years
Long term
More than 5 years
Investment opportunities
-Stokvel
-Managed portfolio
-Venture capital
-Debentures
-Call Deposits
-Life insurance policies
Stokvels
-Established by a small group of people who informally make contributions into a savings fund
Risk:
-Members could be contributing to an illegal financial scheme and could lose all the money available
-The possibility exists that a member would be unable to contribute her monthly savings
-The investment is linked to low risk, and the money of the investor are relatively safe
Managed portfolio
-An investor has the opportunity to make use of a financial advisor to manage all her investments in one portfolio
Risk:
-The risk linked to a managed portfolio is lower over a longer period
-Financial advisors prefer investing funds in the capital market
-The risks linked to investments are spread out because investments are made in several companies
Venture capital
-Investors make funds available to prospective businesses to start a business and they become co-owners of the business
Risk:
-The risks linked to this type of investment could be high if the investor did not familiarise herself with the market in which the business will be operating her business
-Entrepreneurs with limited experience may not be able to manage the business successfully causing the investor to lose all of her investment
Call deposits
-The investor will earn interest at a higher rate as compared to savings account
Risk:
-Low risk as the investment plus the interest will be paid out on the maturity date of the investment
-The interest is compounded daily and this increases the value of the investment
-The interest rate is subject to prevailing market conditions thus increasing the risk of the investment for the investor
Debentures
-Debentures are issued to raise borrowed capital from the public
Risk:
-Debentures have low risk as they need to be paid back
-Companies are liable to repay the original amount of the debenture plus interest which decreases the risk for the investor
-Investor may earn a steady income in the form of interest while preserving their principal amount
Life insurance policies
-An investor makes monthly contributions to an insurance company and is guaranteed a predetermined fixed amount at the end of the period
Risk:
-The risk to the investor is low because payments will be made on the occurrence of a future event
-The investor may lose her money if the insurance company is declared bankrupt before the occurrence of the event insured against
