Topic 9: Factors to be considered when making an investment decision

Question 1

Return on investment?

Answer 1

• Refers to income from investment namely interest
• Higher risk investments have higher returns
• Net return after tax must be higher than the inflation rate

Question 2

Risk?

Answer 2

• The degree of uncertainty about earning a ROI
• Higher the risk,higher the return
• Different investment oppertunities have different risks

Question 3

Liquidity?

Answer 3

• Rate at which the investors can turn the investment into cash
• The easier it is to turn the investment into cash the higher the liquidity
• The more difficult it is for an investment to be turned into cash the lower the liquidity

Question 4

Taxation?

Answer 4

• A good investment will yield good returns after taxation
• Some investments have tax benifits for the investor such as annuities
• The investor must make provisions for income tax payable to SARS

Question 5

Inflation rate?

Answer 5

• Return on investment must be higher than the inflation rate
• Rising inflation decreses the purchasing power of money
• Investors seek invesments where the ROI is more than the inflation rate

Question 6

Investment period?

Answer 6

• Refers to the duration af an investment
• Investment can be short- medium- or short term
• Long term investments are usually linked to higher returns