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LIBF Unit 2 > Topic 2 - Savings + Investment Products > Flashcards

Topic 2 - Savings + Investment Products Flashcards

1
Q

Why do ppl save for long periods of time?

A
  • make a decision now to save out of current income to finance a M/LT need, want or aspiration
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2
Q

What are the 2 main ways ppl can use their savings or investment fund when it matures in the future?

A
  • can hope for capital growth + cash in the investment to receive a lump sum: can use to finance their planned project
  • can use their fund for income: investment will pay out regular amount that can be used as part of monthly income
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3
Q

What are the 2 ways ppl can put away their surplus money + earn a return on it?

A
  • savings products
  • investment products
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4
Q

What is the risk relationship of using savings + investment products?

A
  • saver may lose money, but may earn a higher return
  • saving products < risky than investment products
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5
Q

Where are savings accounts held?

A
  • financial services providers:
    • banks
    • building societies
    • credit unions
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6
Q

Why is the capital sum a saver deposits into a savings account not at risk?

A
  • savers won’t get back less money than they paid in
  • if provider fails: deposits up to £85,000 protected by FSCS
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7
Q

Who are investments suitable for?

A
  • ppl prepared to invest for the M-LT
  • hope capital value grows + income higher than using a savings product
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8
Q

Why are investment products a higher risk?

A
  • value at any time depends on performance of assets the money has been placed + on general movements in financial markets
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9
Q

What is a portfolio?

A
  • the diff. LT savings + investment products an investor chooses
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10
Q

What does the FTSE 100 index do?

A
  • lists the 100 biggest companies on London Stock Exchange
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11
Q

What is a volatile investment?

A
  • an investment where the value varies often + widely
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12
Q

What financial services providers have LT savings + investment products?

A
  • banks
  • building societies
  • NS&I
  • post office
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13
Q

What are friendly societies?

A
  • mutual organisations offering their members a wide range of financial products
  • e.g. ST savings accounts (some provide LT savings, investments, life insurance, pensions + annuities)
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14
Q

What do insurance companies provide?

A
  • range or LT investment products: incorporate life assurance + pensions
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15
Q

What do pension funds do?

A
  • accept ppl’s savings throughout working lives + invest the money so savers will eventually have a pension to finance their retirement
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16
Q

What are investment products divided into?

A
  • those aiming to grow the money over time
  • those that provide a regular income from the money invested
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17
Q

What do investment companies take into account when helping a person?

A
  • their attitude to risk
  • the amount to be invested
  • the length of time they can invest it
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18
Q

What are types of investment providers offering packaged products that can be tailored for the private investor?

A
  • unit trusts
  • open-ended investment companies (OEICs)
  • investment trusts
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19
Q

What do portfolio managers do?

A
  • look after a portfolio (e.g. shares + bonds) for customers w a big sum to invest
  • make investment decisions for investor to try to meet an agreed investment objective
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20
Q

What do stockbrokers do?

A
  • carry out deals for ppl who want to buy + sell shares, bonds + other products
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21
Q

What does a fixed-term saving account do?

A
  • allows ppl to put money aside for a fixed period, that earns a higher rate of interest w/o taking lots of risk
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22
Q

What are bonds?

A
  • fixed-term savings accounts
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23
Q

How long are the maturity periods available for fixed term savings accounts?

A
  • usually 6 months - 5 yrs
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24
Q

What are fixed-term savings accounts useful for?

A
  • saving money in the medium term for ppl needing to save a medium-sized lump sum
  • need discipline of a product that doesn’t allow them to spend the money
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25
Q

What do NS&I offer?

A
  • small range of savings accounts (more ST)
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26
Q

What did NS&I offer in the past?

A
  • a number of bonds + other LT savings products
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27
Q

What type of bonds did NS&I use to offer?

A
  • Children’s bonds
  • an income bonds account
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28
Q

What are NS&I Children’s Bonds?

A
  • can be bought for a child <16 by a parents, legal guardian, grandparent, great-grandparent
  • bonds pay fixed interest rate for a set term
  • min. investment = £25, max. = £3000 per child per issue
  • can be cashed early: penalty = 90 days interest
  • withdrawn from general sale, existing bonds still earn interest
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29
Q

What is an Income Bonds account?

A
  • designed for >16s
  • calculates interest daily
  • min. deposit = £500
  • holds up to £1M
  • can manage account online, by phone or by post
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30
Q

Why are NS&I seen as being less risky than those offered by other providers?

A
  • 100% backed by UK gov.
  • returns not high + don’t offer potential for big rewards that some investors seek
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31
Q

What is an investment?

A
  • a process where ppl w surplus funds lends their money to companies + govs. that want to borrow it over a long period
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32
Q

What are the main categories of investment product?

A
  • stocks + shares
  • stocks + shares ISA
  • corporate + gov. bonds
  • property
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33
Q

How can ppl invest their money themselves?

A
  • by choosing + buying specific assets (e.g. shares or property)
  • not good for small investors: don’t have enough money to spread risk over range of assets
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34
Q

What can funds be?

A
  • specialist companies or can be provided by banks
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35
Q

What is a share (equity)?

A
  • a part-ownership in a company
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36
Q

Where do most ppl buy shares?

A
  • in a company listed on the stock market
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37
Q

Where can shares be bought?

A
  • directly from company (if a new issue of shares)
  • on stock market from previous owner
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38
Q

What is the risk taken when someone sells their shares?

A
  • may be selling when share values have fallen (values rise + fall)
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39
Q

What do shareholders hope to receive?

A
  • capital growth
  • dividends
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40
Q

What are dividends?

A
  • a share of the annual profits made by the company
  • paid on regular basis, usually 1/2 yr or yearly
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41
Q

Why are shares quite a high-risk investment?

A
  • offer potential of both capital growth + income (high reward)
  • also my be no dividends + share price may fall (if company does badly): no return + suffers capital loss
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42
Q

What is the FTSE 100 known as?

A
  • the ‘footsie’
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43
Q

What is the FTSE 100?

A
  • a series of figures showing movements in the value of shares of the 100 biggest companies listen on the London Stock Exchange
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44
Q

What do stocks + shares ISAs allow ppl to do?

A
  • put money into diff. types of investment on a tax-efficient basis
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45
Q

What are ppl advised about stocks + shares ISAs?

A
  • to only use them if they’re willing to tie their money up for at least 5 yrs
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46
Q

Why should ppl only use a stocks + shares ISA if they’re willing to tie their money for at least 5 yrs?

A
  • as value of the ISA fluctuates w changes in market values + investor needs time to take advantage of periods when values rise
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47
Q

What are the 2 things an investor can do when buying a stocks + shares ISA?

A
  • buy a readymade product from a provider + let provider manage the investment for them
  • choose + buy their own shares + put them into an ISA ‘wrapper’
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48
Q

What does using an ISA ‘wrapper’ mean?

A
  • can set aside shares up to permitted limit for ISAs
  • receive a tax-free return on these shares regardless of other investments they have
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49
Q

What are stocks + shares ISAs tax-efficient?

A
  • free of UK income tax + capital gains tax that would have been paid on an investment outside an ISA
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50
Q

Who do investors have to pay charges to?

A
  • their financial advisers
  • the fund managers in the investment company they use
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51
Q

What are tax-free savings plans also sometimes called?

A
  • tax exempt savings plans
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52
Q

What do companies, govs. + other bodies do when they need to borrow money?

A
  • issue bonds
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53
Q

How do companies, govs. + other bodies borrow money?

A
  • investors lend money to issuer by purchasing bonds (so are creditors)
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54
Q

What are all corporate + gov. bonds?

A
  • a way where the issuing bank or company can borrow money from purchasers of bonds
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55
Q

What is the difference between fixed-term savings bonds + corporate + gov. bonds?

A
  • FTSB: type of LT savings account where capital sum is safe
  • C+GB: traded on a financial market + so values fluctuate
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56
Q

How long are bonds normally issued for?

A
  • specific period of time
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57
Q

What happens at the end of a period when a bond is issued?

A
  • bond matures + issuing company or other body repays capital value of bond
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58
Q

How do bondholders receive income?

A
  • in form of interest on their bond
  • usually at a fixed rate + twice a yr
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59
Q

What does the market in bonds allow holders to do?

A
  • sell bonds before maturity if they want their money back
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60
Q

What are the best-known bonds?

A
  • ‘gilt-edged bonds’ or ‘gilts’
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61
Q

Who issues ‘gilt-edged bonds’ or ‘gilts’?

A
  • UK gov.
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62
Q

Why are ‘gilt-edged bonds’ or ‘gilts’ regarded as v. safe?

A
  • it’s extremely unlikely UK gov. will be unable to repay its capital or to keep up interest payments
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63
Q

What does property mainly refer to?

A
  • land + buildings: normally means residential property (houses + flats) or commercial property (office blocks)
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64
Q

Who can include property in their investment portfolio?

A
  • both individuals + companies
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65
Q

Why is property seen as a good investment proposition?

A
  • property prices tend to move up in the LT
66
Q

Why is property a risky investment?

A
  • prices can fall in an eco. downturn + it’s not easy to sell the asset at this time
67
Q

Why do many ppl see their own house or flat as part of their LT investment portfolio?

A
  • on retirement they can sell it, downsize to a smaller property + invest cash difference to give an income
68
Q

How do some ppl buy additional properties?

A
  • by taking out a buy-to-let mortgage
69
Q

How do ppl benefit from buying additional properties?

A
  • can rent them out to give an income, which they hope covers mortgage repayments
    • can benefit from any inc. in the capital value of the properties
70
Q

How is buying additional properties seen as in the current eco. circumstances?

A
  • quite risky + buy-to-let mortgages are more difficult to access since financial crisis
71
Q

What commodities can ppl also invest in?

A
  • gold + silver
  • works of art
  • antiques
  • fine wines
72
Q

What may investing in other assets inc. commodities offer?

A
  • v. high capital gains but are risky
73
Q

Who is suitable for investing in other assets inc. commodities?

A
  • v. wealthy ppl
  • ppl experienced in these areas + know what they’re buying
74
Q

What is seen as the safest asset and why?

A
  • gold as its relatively scarce, durable + tends to keep its value
75
Q

Why have gold prices been high since the beginning of the financial crisis?

A
  • uncertainties ab. the eco. + poli. situation
76
Q

What affects the price of gold?

A
  • the view on prices taken by those who trade in existing gold
  • it’s overall supply
77
Q

What technical study carried out by the United Nations’ International Seabed Authority has been reported?

A
  • new tech. has been dev. to make it possible to extract nodules of gold + other metals from seabed
78
Q

What do many ppl who want to invest over the LT, have no knowledge of?

A
  • how to go ab. purchasing shares, bonds, property or commodities
79
Q

How can ppl discuss their needs + receive advice from a financial services provider?

A
  • meet w a customer relationship manager at their branch
  • telephone a call centre
  • browse providers website
80
Q

Who offers investment fund products?

A
  • all major banks + insurance companies
  • some building societies + friendly societies
81
Q

What do providers use to combine various assets into funds?

A
  • their extensive networks
  • their specialist investment managers
82
Q

What do providers set certain limits on?

A
  • amount of the investment
  • time period of maturity
  • sometimes age of the investor
83
Q

What do providers make clear ab. investments?

A
  • they’re more risky than savings + the value of a fund can fall as well as rise
84
Q

What are collective firms also known as?

A
  • fund management firms
85
Q

What are collective investment firms?

A
  • specialist organisations carrying out investment for clients, who are individuals w money to invest
86
Q

Why are collective investment funds sometimes called ‘pooled investments’?

A
  • as money contributed by many ppl is put into a common pool + investments are made out of that money’s
87
Q

How might an individual investor contribute to a collective investment fund?

A
  • by paying in a lump sum
  • by making regular payments into fund
88
Q

What is the pool of money, from a collective investment fund, used for?

A
  • to invest in many diff. investments, including a wide range of shares, bonds + other assets
89
Q

What does contributing to collective investment funds mean ab. an investors risk?

A
  • it’s spread or diversified across many diff. holdings
90
Q

What do collective investments inc.?

A
  • unit trusts
  • investment trusts
  • OEICs
91
Q

What do collective investments offer?

A
  • various combinations of growth + income
92
Q

What do some funds allow the individual investor to choose?

A
  • types of company they want to put their money into
93
Q

What are advantages to an individual investor from using collective investments?

A
  • risk is reduced
  • can take advantage of expertise of investment manager
  • cost of hiring services of a skilled fund manager is shared w all investors
  • fund managers deal w £M’s worth of investments + can negotiate: dec. dealing costs for their investors
  • wide choice of investment funds + collectives
94
Q

Why is an advantage of using collective investments, dec. risk?

A
  • as the fund invests in a large number of diff. types of company
  • so impact of 1 investment falling in value is less severe
  • if 1 company does badly, others may do better
95
Q

Why can a small investor not take much advantage of ‘diversification’?

A
  • as they don’t have enough money to buy a min. amount of many individual stocks + shares
96
Q

How does the investor taking advantage of expertise of the investment manger, an advantage of using collective investment?

A
  • it means the individual doesn’t have to research particular companies or understand financial info to find out which companies to choose
97
Q

What is the most common form of collective investment in the UK?

A
  • unit trusts
98
Q

What type of investors do unit trusts appeal to?

A
  • those wanting to buy shares but are too small/inexperienced to invest on their own
99
Q

What is a unit trust established under?

A
  • a trust deed
100
Q

How is a trust deed entered into?

A
  • by managers of the unit trust + the trustees
101
Q

What are the managers of the unit trust responsible for?

A
  • investing the funds
  • valuing the assets
  • fixing the price of units
  • offering the units for sale + buying units back from unit holders
102
Q

What are the trustees of the unit trust responsible for?

A
  • ensuring managers comply w terms of trust deed
  • hold + control trust’s assets on behalf of unit holders
  • collect income from assets + distribute income to unit holders
103
Q

What are unit trusts?

A
  • unitised funds, w each unit representing a proportion of the fund’s total asset value
  • open ended: more units can be created when more money is invested
  • not allowed to borrow money
104
Q

What are investment trusts?

A
  • public limited companies
  • not unitised funds
105
Q

What do investment trusts do?

A
  • issue shares which are purchased by investors + traded on the stock market
106
Q

What is the money they receive from the share issues used for?

A
  • to trade in stocks + shares of other companies + in certain other investments (e.g. commodities)
107
Q

What is the number of shares investment trusts issue, limited by?

A
  • the investment trust’s rules + can’t easily be inc. so are described as ‘closed-ended’
108
Q

How is an investment trust diff. to a unit trust?

A
  • not unitised funds
  • allowed to borrow money
109
Q

What must a person do to invest in an investment trust?

A
  • buy its shares, + to cash in the investment, they must sell the shares
110
Q

What are the 2 levels of risk an investor takes when investing in an investment trust?

A
  • the shares the investment trust company has invested in might fall in value
  • the shares of the investment trust company itself might fall in value
111
Q

What does OEICs stand for? 

A
  • Open-ended investment company funds
112
Q

What are OEICs?

A
  • a pooled collective investment vehicle
  • they’re a cross between unit trusts + investment trusts
113
Q

What do OEICs do?

A
  • issue shares (number can vary + can be created or liquidated)
114
Q

What does the number of shares an OEIC issues vary according to?

A
  • the number of buyers + sellers in the market
  • expands as people invest + shrinks as they withdraw their money
115
Q

Who are OEICs managed by?

A
  • an authorised corporate director (role similar to a manager of a unit trust)
116
Q

What is the depository responsible for?

A
  • overseeing the operation of the company + for making sure that it complies w the requirements for investor protection
117
Q

What is the role of a depository equivalent to?

A
  • that of a trustee of a unit trust
118
Q

What do insurance companies offer?

A
  • various types of life cover
119
Q

What is term assurance?

A
  • an insurance plan that runs for a fixed period of time + pays out a lump sum if insured person dies during term
  • not an investment policy
120
Q

What is an endowment policy?

A
  • a life insurance contract that pays a lump sum after a specified term or if the insured person dies before this date
  • a type of LT savings vehicle
121
Q

What are endowments used for?

A
  • to provide a lump sum to pay of a mortgage/other LT debt
  • can also be used to fund a specific event in the future
122
Q

What happens if an endowment policy is surrendered before maturity?

A
  • insured person is likely to lose quite a lot of money
123
Q

What is an annuity?

A
  • a product that provides an income for ppl when they retire
124
Q

How does a person buy an annuity?

A
  • by using a lump sum which they have alr saved, usually via a pension plan or some other investment vehicle
125
Q

What does an annuity provide a person with?

A
  • a guaranteed income for a fixed number of yrs or until the holder dies
126
Q

What are annuities that are index-linked?

A
  • they rise w inflation
  • cost more
127
Q

What security does an annuity give the holder?

A
  • security of knowing what their annual income will be until they die
128
Q

What is a personal pension?

A
  • a type of investment fund
  • a LT savings plan that is tax-efficient + is purchased by an individual throughout their working life to save for their retirement
129
Q

What can pensions be subdivided into?

A
  • occupational + individual pension plans
130
Q

What similar principle do both types of pensions operate on?

A
  • ppl pay money into a fund, which uses money to invest in assets + to provide them w a retirement income
131
Q

Who operates occupational pensions?

A
  • employers: who may pay contributions into them for their employees
132
Q

What are the 2 main types of occupational pension?

A
  • final salary schemes
  • money purchase schemes 
133
Q

What do final salary schemes do?

A
  • pay an employee a pension based on number of yrs they’ve worked for employer + linked to amount of salary at the time they retire.
134
Q

What do most financial salary schemes require?

A
  • employee to make regular contributions from their salary + employer has to make payment to ensure agreed benefits can be paid at retirement
135
Q

Why are many financial salary schemes being closed down?

A
  • pose a greater risk to employer
136
Q

What are money purchase schemes?

A
  • where employee pays into pension plan over the working life
  • scheme is invested + provides employee w resulting lump sum on retirement 
137
Q

What does the amount of money an employee received form a money purchase scheme depend on?

A
  • how well scheme has performed
  • employee can then take pension pot + use it to purchase an annuity to provide an income in retirement
138
Q

What’s re money purchasing schemes also known as?

A
  • defined-contribution
139
Q

Who do money purchasing schemes pose a greater risk to?

A
  • employee, as doesn’t know size of final pension pot
140
Q

What are personal pension plans?

A
  • long-term money-purchase products
  • helps customers build up a pot of money: can use to buy income on retiring
  • tax efficient: tax relief at basic rate of income tax on payments made into plan
141
Q

What is the max. annual amount a non-taxpayer can pay + receive the tax relief?

A
  • £2880
142
Q

What is the max. pension contributions a taxpayer will get a tax relief on?

A
  • £40,000 (annual allowance)
143
Q

What is auto-enrolment in workplace pensions?

A
  • when workers must be automatically enrolled by employer into a workplace pension scheme (have option to leave)
144
Q

What pension schemes must the employer choose out of?

A
  • National Employment Savings Trust (NEST)
  • qualifying Workplace pension scheme w benefits broadly = to or better than those of NEST
145
Q

What is NEST?

A
  • large trust-based, defined-contribution, multi-employer pension scheme: aim to ensure majority of workers are involved in an occupational pension
146
Q

What is NEST open to + why?

A
  • employed ppl
  • makes it easy for working ppl to save: single retirement pot that they can continue to contribute to (even if they move jobs)
147
Q

What is the state pension?

A
  • regular payment made by gov. to ppl when they reach state pension age
  • must have paid/or been credited w sufficient NI contributions
148
Q

What is the current state pension age?

A
  • 66
149
Q

Why does the state pension age continue to inc.?

A
  • to keep pace w inc. life expectancy
  • to compensate for inflation
150
Q

When are ppl eligible for the full state pension under the new rules?

A
  • if they have 35 qualifying yrs of NI contributions
  • (old rule = 30yrs)
151
Q

What is the general rule w risk + reward?

A
  • the higher the risk in a product the higher the rate of return (motivates ppl to put money into it)
152
Q

What are dividends?

A
  • a share of profits paid by company to its ordinary shareholders
153
Q

What are the 2 half-yr payments of a dividend called?

A
  • interim dividend
  • final dividend
154
Q

What doesn’t have a fixed rate of dividends?

A
  • ordinary shares
  • company decides % each yr based on profit made
155
Q

Why are dividends risky?

A
  • company may not make enough profit (no dividend)
  • may receive high % in good yr
156
Q

What are preference shares?

A
  • carry fixed % rate of dividend
157
Q

What is capital gains tax?

A
  • a tax on any profit made when someone disposes of an asset 
  • tax levied on gains (not money received for assets)
158
Q

What are capital gains tax not applied to?

A
  • someone’s main home, car or personal possessions disposed of for max. £6000
159
Q

What is the annual exempt amount?

A
  • annual tax-free allowance for capital gains tax
160
Q

What are the capital gains tax bands?

A
  • basic rate: 10%
  • higher rate: 20%

LIBF Unit 2 (10 decks)

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