Topic 6 Flashcards
What are the 4 main asset classes
An asset class is for investors to categorise and understand risk and return better
first one is cash, this is any liquid account such as savings or deposit accounts. the return on this is usually through interest at low and variable rates also low risk mainly for those in need of security.
second one is equities, this is shares or ownership stakes in companies which is usually high risk with high rewards as the price of shares are very volatile but in return can have a high yield making this suitable for long term investors willing to lose all their investment through risk.
thirdly is property, this is an investment which is moderate to high risk which allows the investor to have more stable growth and rental income however the market can fluctuate along with maintenance costs and liquidity issues
Forth and final investment would be fixed interest security this would be refering to bonds which can either be government or corporate issued with monthly fixed rate interest payouts. this can either be low or high risk depending on the bond, if it was gonverment issued it would be classed as low risk compared to corporate as they have a higher chance of default.This is used for income focused investors.
Are there any more asset classes besides the four mentioned above
yes, such as fine art/wine and collectables but theses are very high risk so is traditionally not looked at as a viable option
What are investment principles
Known as the trade off as higher risk investments can return greater yields however is the risk worth it along with the knowledge that all the investment made can be lost. along with this economic cycles can influence the way a investment performs for example bonds in a downturn and equities in growth.
finally diversification is important when investing as this will diversify the risk of the investment and can make it more stable.
Why do people choose deposit based investments
Deposit based investments are those offered by banks mainly such as saving accounts.
On reason why people choose this investment is capital security meaning that for risk adverse individuals this investment is very low risk and offers security along with the steady rate of interest it wil help to hold their purchasing power as inflation can corrupt their investment while also benefitting from protection of up to 85,000 from the banks if they fail.
Another reason would be liquidity and convenience which is that for short term investors its ver easy to access the investments they’ve made as well as not having to announce their withdrawal allowing ease while. This type of investment is also used by institutions for the reasons that it is so convinient.
What is the difference between capital and money
In an investment view capital is looked at as funds which are put to the side for future use as it generates wealth whereas money is just used for day to day purchases and expenses.
What is a current account
This account is used for daily transactions by most individuals where their salary, direct debits and their bills will regulated in this account along with the feature of overdrafts for short term loans and all of the finances stored or withdrawn from this account can be done through debit and credit cards and ATMs, nowdays mostly managed online.
What is a basic bank account
This account is a simplified version of a current accounts as it is targeted at low income earners limited with no overdraft and can be used for daily expenditures and bills
What is an interest bearing current account
This account is very similar to a normal current account however this account requires monthly deposits to earn interest and are a subscription based account however it is normally offset by the benefits which are available
What is an instant access saving account
These account are very low start rate e.g. £1 with immediate access to the accounts wealth as well as a steady rate of interest linked with the banks basic rate but if opened online can offer slightly higher rates due to the low maintenance cost.
What is a restricted access account
This account is for those individuals whom do not need access to their funds regularly as they can only access the account a certain amount each year in exchange for higher rates of interest as well as this they can be other variants of this account where notice is needed before the withdrawal or where the money is locke in for a period of time with no withdrawal e.g. 1-5 years but the less access to the funds usually means higher interest rates.
What is a packaged current account
These are accounts with additional benefits such as insurance for a monthly or yearly fee
This may include holiday or phone insurance as well as other perks but the account holder may be required to deposit each month or direct debits.
What is national saving and investments
This is a government backed investment and saving initiative that offers guaranteed returns at low interest rates and low risk and they are backed by the government.
They include:
direct saver accounts which have no fixed terms and taxable interest min deposit £1.
income bonds which are gov issued min deposit of £500 with monthly payments from interest
Direct and junior ISA accounts which are tax free saving accounts for under 18+ and 18+ no access until 18 for junior
premium bonds comes with no interest but allow participants to win up to 1,000,000 each month
green saving bonds which are fixed rate 3+ year interest bonds for 16+
Guaranteed Income and Growth Bonds: Fixed returns for 1- or 3-year terms, currently unavailable for new customers but renewable by existing holders.
What is depositor protection
This is basically a fail safe for all banking customers which are protected for up to £85,000 to insure peace of mind for if the banks ever fail and their money will be lost this prevents that.
What is an offshore account
An offshore account is a bank account or an investment account which is usually held outside of the country of residence to the investor, they are usually held within tax haven countries such as the Cayman islands due to their favourable tax policies and benefits usually allowing for greater investment returns and allowing the investor to benefit from reduction in tax liabilities.
What are the benefits of an offshore account
There are three main benefits to an offshore account the first being tax reductions as the tax haven countries are known for having no tax liabilities such as capital gains tax inheritance tax ect
the second being currency flexibility as it allows the account holder to chose other currencies to invest in and hold in their accounts and gaining from favourable stronger currencies
finally the privacy available to those in these countries are greater than those in their home countries as it allows for the individual to hide their investments and incomes as the account holders accounts are not public limiting information given out.
what are the drawbacks to an offshore account
There are two major drawbacks which can come along with offshore accounts one being that if the account is held in the currency of the country the account is in not the account holders home currency then the inflation and fluctuations can dampen investments
Even though the accounts are held in these tax haven countries there are many policies and regulations in place from the uk and usa are demanding accounts be shown from their citizens to prevent tax evasion.
The uk citizen is made to pay tax on their worldwide income whereas those who are not only have to pay tax on the income made in the uk.
Explain in detail what cash ISA’s are
An ISA is a low risk investment set by the government for 16+ or 18+ for other types of ISAs which allows the investor to invest without tax on the interest which they have made.
There are two types of ISAs which an individual can invest in one being a ISA which is instant access allowing the investor to take and deposit as they will in and out of the account whereas the other ISA is a period of 1-3/5 years which is a fixed rate.
With these ISAs there is a limit of £20,000 max each year.
What are Gilts and what types of Gilts are there
Gilts are basically government issued bonds which are used to raise capital at a fixed rate of interest they are very appealing to the risk adverse investor as have a very little chance of default.
There are 4 types of Gilts he first being a short term Gilt which is a gilt that will reach maturity at 5 or less years making the yield lower but the risk is also low.
The second is a medium dated gilt which will reach maturity from 5-15 years providing a moderate yield.
The third is a long dated gilt which is a 15+ years and offers the highest yield as it is the longest period in which the money is tied up
finally index linked gilts are bonds which are adjusted by inflation each month unlike the other gilts providing a greater true yield compared to the initial investment.
What are the key details and concepts to Gilts
Gilts can be sold on the secondary markets for prices which can fluctuate with interest rates as when interest rates are high the price of a Gilt will drop and vice versa these Gilts can be sold cum dividend or ex dividend meaning if its sold before or after the most recent payment which can affect the price of the gilt.
The income from the Gilts are usually paid all at once meaning that the tax paid on these can be tax free if the saving or personal account haven’t been used however they are exempt from capitals gains when selling the gilts.
Name some other fixed interest security
- Local authority bonds, these are similar to gilts in the way that they are gov issued and tied to gov assets but they are not guaranteed in the way that Gilts are making them more risky
- Permanent interest bearing shares- These are shares which indefinitely pay out interest to the holder at a fixed rate by building societies however they are quite risky as they will only be paid out after the depositors are if the building society fails. If the building society demutilizes by turning into a bank then they will roll over to the bank secured by their assets.
- corporate bonds- these are similar to the bonds issued by the gov however they are issued to raise capital for corporations and will often come with higher interest rates also they will be paid back at maturity date however some corporations offer a convertible bond turning the bond into shares but there can also be secured and unsecured increasing/decreasing risk
- Eurobonds- these are issued bonds from gov or multinational corporations to help raise easy/cheap capital as they issued in currencies that is not theirs but this carries risk from currency fluctuation.
What is a structured deposit
Structured deposits are investments which are not guaranteed pay out of interest as it is tied to a certain index which will determine the pay out as the performance of this index will influence the return such as the stock exchange index and the investment will be tied to a stock, this will usually have predetermined limits are returns only when the target is reached.
This type of deposit usually guarantees the initial investment back however there might not be any interest. This type of deposit is good for those who are conservative and do not mind the lack of liquidity as there may be penalties for early withdraws.
What is alternative finance
Alternative finance references non traditional ways to gain finances outside of the traditional financial institutions such as crowdfunding, peer to peer lending and investment based platforms. This is a new way to gain capital and loans and is particularly attractive for start ups and early businesses as they can offer less harsh loans and a greater way to find a way to fund their growth.
What are the types of crowdfunding
- donation based crowdfunding- this is normally used by charities and local projects to raise funds as this entails the individual will not get a return from their ‘investment’ as it is seen to be charitable and they have faith in the leader of the project/charity to use the funds in its intended basis and is not regulated by the FCA.
- Rewards based crowdfunding- this is a similar crowdfunding to donation based as the return for the ‘investers’ is not monetary and is more in the form of early access or unique experience for the product/project, this is usually implemented by start ups to gain knowledge on interest in the product/project and is also not regulated by the FCA.
3.Loan based crowdfunding- This is essentially peer to peer lending which directly connects the borrows to lenders cutting out the banks usually for higher rates of return along with both options to have immediate access with lower rates of return or to commit the funds for longer periods of time for higher rates of return.
This type of funding is regulated by the FCA with full transparency of transactions and fees in order to keep the platform legit but is not backed by the financial services compensation scheme which means the lender is at risk if the borrow defaults.
- Investment based crowdfunding- this crowdfunding is for investors with the intention of high risk high reward as these investments are shares/stakes in businesses which are usually start ups or in the early phases which makes the investment inherantly risky and the full investment could be lost due to high failure rates of start ups.
This type of investment is FCA regulated and does advice new investors as if the FCA deems the portfolio/experience of an investor is not great enough then they can only invest 10% of their investable assests.
