Topic 6: Direct Investments: Cash and Fixed Interest Securities Flashcards
What are the main financial asset classes?
- Cash (ie money held in deposit accounts)
- Fixed interest securities (eg gilts, corporate bonds)
- Equities (company shares, held directly or via a collective investment)
- Property (eg buy to let)
- Alternative investments (fine wine, works of art or antiques.
Why do people choose deposit-based investments?
The most widely used type of direct investment is a deposit account and the
most familiar example is the bank or building society savings account.
Investors place money in deposit‐based savings accounts for several reasons.
- Security of capital
- convenience
What is capital?
In the case of a savings account, capital is the cash that is deposited. It differs from ‘money’ in the sense that it is being used to generate wealth rather to purchase goods and services.
What are the two basic accounts offered by banks and building societies?
- current accounts, for everyday money needs;
- savings accounts, where money not required for day‐to‐day spending is set aside.
Explain traditional current account?
A current account is a transactional account into which an individual can have their salary or wages paid. There are then a range of ways in which money can be drawn from the account or used to pay regular bills; these include a debit card (which can also be used to withdraw cash), a cheque book, electronic transfer such as faster payments, standing orders and direct debits.
It may be possible to arrange an overdraft and to operate the account via the internet or phone, without the need to visit a branch office.
Explain basic bank account?
A basic bank account is a simplified current account designed to encourage people who have not previously had an account to open one. These accounts are aimed at people (typically those on low income or receiving state benefits) who might not otherwise be able to open a current account.
The accounts are able to receive money by a wide variety of methods but the methods of withdrawing money are limited. Cash can be obtained with a card from ATMs and in‐branch over the counter. Payments can be made by direct debit but no cheque books are issued on these accounts and there is no overdraft facility.
Explain interest-bearing current accounts?
They provide investors with immediate access to their funds without loss of interest, in addition to the usual current account services such as a cheque book, ATM facilities and overdrafts.
It can be possible to earn interest and receive cashback on spending on household bills. To earn these benefits there are normally requirements in terms of a minimum amount to be paid into the account each month and a certain number of direct debits being paid out. Such accounts may also carry a monthly fee.
Explain packaged current accounts?
A packaged current account offers the holder a range of ancillary benefits such as breakdown cover, mobile phone insurance and travel insurance in return for a monthly or annual fee. A packaged current account may also enable the holder to open other accounts that offer preferential rates of interest
Explain Instant access savings accounts?
An instant access account can normally be opened with as little as £1 and the account holder can have immediate access to their savings. As there are few limitations on the account, the interest rate paid is comparatively low and is usually linked to the bank’s base rate. Such accounts may be suitable for short‐term ‘emergency’ funds.
Explain Restricted access accounts?
If access to an account is restricted, the provider has certainty that the funds are available to it for a longer period. Rates are therefore higher on this type of account than on an instant access account.
Access may be restricted by:
- limiting the number of withdrawals that can be made each calendar year;
- requiring a minimum period of notice be provided before funds can be drawn (a notice account);
- specifying an agreed period during which the saver may not access their money (a term account).
What is Depositor Protection?
Savings in UK bank and building society accounts are protected by the FSCS, up to a level of £85,000 per investor per financial services provider.
What is National Savings and Investments (NS&I)?
National Savings and Investments (NS&I) offers a range of saving and investment products backed by the government. The risk associated with the products is very low because the government guarantees the return of capital invested.
There are NS&I products to suit most types of investor, with different terms, interest rates and taxation.
What are Cash ISAs?
Individual savings accounts (ISAs) are a form of tax‐free personal savings scheme. One form of ISA is cash (also known as a cash ISA): it is a means of obtaining tax‐free interest on a bank or building society deposit account, subject to certain limits and regulations.
What are offshore accounts?
The term offshore is usually applied to any investment medium, whether it is a bank or building society account or some other form of investment, which is based outside the UK in a country that offers a more advantageous taxation of investments. Such countries (sometimes referred to as tax havens) include the Channel Islands, Luxembourg and the Cayman Islands.
The interest on an offshore deposit is paid gross. A UK resident must declare the income to HMRC and may have to pay tax on it. However, if the country where the investment is held has a reciprocal tax treaty (double taxation arrangement) with the UK, and the interest has already been taxed overseas, tax relief may be available on some or all of it.
In what way can Offshore investment potentially expose an investor to greater risk than a similar onshore investment?
- The account might not be denominated in sterling; if the investment is to be converted back to sterling at some point, its value might be affected by unfavourable exchange rates.
- Not all offshore accounts are protected by investor protection schemes. Investors should check what protection is available through local regulatory regimes.
