Lecture 5 - Investing Options For Individuals Flashcards
Purposes of saving
Defers consumption today for consumption in the future Saving usually needs a purpose: Feeling safe For rainy days and opportunities A particular goal, e.g good retirement Leaving inheritance for children
Different savings products
Pensions, ISAs and other savings Most important factors: Interest rates (AER fixed vs variable) Inflation rate (nominal vs real) Time horizon (fixed vs instant access) Taxation (personal savings allowance)
Financial protection
Since the collapse of Northern rock in 2007:
From 2017, limit returns to €100,000/£85,000 per person, per regulated financial institution
Amount is double for joint accounts
Warning
Be careful with European banks
Not all uk savings are uk regulated
An instruction is not the same as a bank
Halifax and bank of s for land are sister banks
But they treated as a single institution, meaning the limit for the saver is £85,000
Limits are separate for RBS and Natwest
Being treated as a separate institutions, meaning the limit for the saver is €100,000 for each bank
Start saving early
When you save money, it earns interest
When you add that interest to your savings, you earn compound interest
Interest added on top of the interest you earn is added to your investment which accumulates more quickly over time
The longer you save, the better
Saving vs investing
Savings =
Putting money aside for spending in the future
Generate income on top of amount deposited
Low risk but low return
Investment =
Various options for seeking return on your savings
Income as well as capital gains and losses
Value can rise or fall, hence higher risk
Investing vs speculating
Investing =
You would expect a return
Dividend, interest or rent
Perhaps there may be a rise in capital value
Speculating:
Gamble: either win or lose, no income
Anticipate future increase/decrease in value or prices
Options are where you buy the right but not the obligation to buy/sell
Speculating
You hope for a positive return, with a use by date of 3,6,9 months of more
Options can be traded
If the price goes the wrong way, you can either sell for less than you paid, or hold to the end in the offchance it might increase
You can pay a fraction of the total cost, giving you reasonable leverage for your outlay
That is your only risk, which can be partially mitigated by selling
Super speculating
This is extreme stakes gambling - you get massive leverage
You need to be really good at anticipating an ultramodern short term increase/decrease in prices or value
Some trading companies will offer you extremely high leverage on your bet, such as 2% of the full value of the trade
Prices can go up as well as down, and it can happen extremely quickly
If the prices drops below the funds you have pledged, you can either withdraw from the position or you can double up your position to increase your support. This will increase your leverage but also increase funds at risk
If you have insufficient funds to cover a sudden reversal of price, you could not only lose all your money, but you could also be liable for the cost of closing the position.
Gold
Bull points
The precious metals value tends not to move in line with other assets such as shares and property
Therefore viewed as offering the best insurance against inflation and other assets that could potentially derail global stock markets
Bear points
- gold pays no income, therefore it is difficult to value
- gold is extremely volatile. The price of gold has had a rocky ride since 2012. Currently trades at $1,320
What can you trade in
Precious metals Semi-precious metals Base metals Jewels Commodities Currency Share packages Bond packages Financial instruments Extreme high risk for direct trading - reduced risk for options You can reduce risk by paying the full sum for the trade which also reduces your leverage
Lending investments
Savings accounts ISAs Bonds Premium bonds Government securities Pensions
Ownership investments
Real estate
Shares
Exotic choices, paintings, wines
High return
Anything high risk
Anything involving speculation
Anything involving super speculation
Low returns
Savings accounts ISAs Bonds Government securities Pensions Real estate Shares Exotic choices
Savings accounts
Very low return, low risk
Regular rate of interest over a short fixed period
Repayment of full principal at the end
In the event of liquidation, covered by government guarantee scheme
Pretty boring, but safe
ISAs
Limit for ISA contributions in the 2017/18 tax year is 20,000
Often a low return, but zero risk if within the Government Guarantee Scheme
You can only open one can Cash ISA per year
Interest is tax free
Repayment of full principal at the end
You can switch your ISA to another provider if they agree to do that
New Help to Buy ISA for first time buyers
Premium bonds
Investment between £100 and £50,000
Monthly prize draw
Winnings between £25 and £1 million
Chance of winning £1 million 27.3 billion to 1
Tax-free
Low return, likely to win less than interest rate
Low risk, backed by the treasury (cover £85,000)
Government securities
Usually a low return, low risk
Purchase price usually reflects market interest rate
Some are perpetual
Some are fixed term and the capital will be repaid in full at face value
Price fluctuates based on market interest rates
10 principals of personal finance
Bee protection is knowledge Nothing happens without a plan The time value of money Taxes affect personal finance decisions Importance of liquidity - things can go wrong Waste not, want not. Smart spending Protect yourself against major catastrophes Risk and return are paired Mind games and your money
Transaction motive
Savings motivation stems from the transactions motive and a need to provide funds for housing, holidays or retirement
Precautionary motive
In the uk there is a system of benefits tag provide a measure of support during difficult times but even so people need savings to protect their standard of living in the event of illness or unemployment
Speculative motive
Take advantage of good investment opportunities as the time that they arise.
