Topics 4 & 5 - Investments Flashcards
two main types of investor
The defensive investor - focused on conserving capital. their main emphasis is on avoiding any serious mistakes or losses, and also on freedom from effort, annoyance and the need for making frequent decisions.
The second type, the enterprising or aggressive investor - is characterised not by speculation, but by their willingness to devote time and care to the selection of sound and attractive investments even though they may not be fully trained experts in the field
Very conservative
Household income is unstable and insecure.
No tolerance for loss of capital.
Investing time frame is 2 years or less.
Cash 60%
Fixed interest 30%
Growth investments 10%
Conservative
Household income is somewhat unstable and insecure.
Able to tolerate no more than 5% decline in capital value.
Investing time frame is between 2 and 4 years.
Cash 20%
Fixed interest 40%
Growth investments 40%
Balanced
Household income is fairly stable and secure.
Able to tolerate a 10% decline in capital value.
Investing time frame is between 4 and 6 years.
Cash 10%
Fixed interest 30%
Growth investments 60%
Aggressive
Household income is substantially stable and secure.
Able to tolerate a 15% decline in capital value.
Investing time frame is between 6 and 8 years.
Cash 5%
Fixed interest 15%
Growth investments 80%
Very aggressive
Household income is very stable and secure.
Able to tolerate regular fluctuations of 20% or more in capital value.
Investing time frame is between 8 and 10 years.
Cash 5%
Fixed interest 10%
Growth investments 85%
main investment choices:
cash
fixed interest
property
shares/equities.
The main types of fixed-interest securities are:
- term deposits — issued by banks
- debentures — issued by corporations
- government and semi-government bonds — issued by governments to fund or help pay for major public projects
- corporate bonds or notes — issued by large public companies to fund business expansion. Corporate bonds usually offer a higher interest but have less security behind them. Sometimes corporations issue hybrid securities which have characteristics of both equity and fixed-interest securities. Convertible bonds/notes, for example, commence as bonds but can be converted into equity at a future date. These types of securities have higher risk than government or corporate bonds as they are less secured.
property investments can consist of
rental properties (residential, commercial, industrial or rural);
listed property trusts known as real estate investment trusts (REITs); and
unlisted property trusts
Definitions of risk
The chance of loss of capital
The chance of loss of purchasing power
The variability of returns
positively correlated
We can say that the returns of these companies tend to move together in the same general direction. When one performs well, the other performs well. When one performs badly, the other performs badly. We can say that the returns from such companies are positively correlated.
negatively correlated.
Comparing the performance of companies in the building and construction industry with companies reliant on exports, we may find that when one company performs well, the other performs badly. We could say that the returns of these companies tend to move in the opposite direction. That is, the returns from these companies are negatively correlated.
correlation coefficient
The statistical measure which determines the extent to which two companies are positively or negatively correlated is called the correlation coefficient. This measure can take any value between +1 and −1, where +1 indicates that the companies move in exactly the same direction together. A portfolio consisting of two such shares would be just as risky as the individual shares.
correlation coefficient of −1
ould indicate that the two companies move counter-cyclically to each other. When the returns on one share rise, the returns on the other share fall, and vice versa.
efficient frontier
The curved line that represents the optimal mix of return and risk for a portfolio of investments given a required level of risk.
standard deviation
A measure of the riskiness of an investment.
The essential features of most fixed-interest securities are that:
- the interest rate, which is the price of the loan of the funds to the borrower, is set at the start of the loan period
- the face value (the principal) is fixed.
- Interest is payable at the start, during or end of the period.
the fixed-interest markets are normally divided into two major classes
the money market where securities of up to one year’s duration are traded and the capital market where longer-dated securities are traded.
some securities are easily traded later in secondary markets. Secondary markets
secondary markets, we could say, trade in secondhand securities, but there is no discount for pre-loved goods, merely a price agreed upon according to quality
discount securities
First, we will consider the bonds that do not pay a coupon or interest payment but are referred to as discount securities.
coupon securities
Second, we need to consider the form of fixed-interest security that pays a coupon or interest payment at predetermined times. These are known as coupon securities.
if the prevailing interest rates fall below the coupon rate
a seller can also make a gain on the sale
The ASX requires companies to satisfy its regulations before they can be listed and traded.
For example, companies are required to meet the continuous disclosure rules so that the market can be fully informed of any significant events that might affect the decision making of investors about holding shares in that particular company.
The market price of traded shares is determined
by the interaction of demand and supply, and the market is highly susceptible to movements of capital to and from Australia.
Preference shares
Preference shares may be ordinary, cumulative, participating or redeemable. Preference shareholders have preference over ordinary shareholders with respect to claims on profits, dividends and the firm’s assets should the company be wound up or liquidated. Holders of these shares usually have limited voting rights and shares have a fixed rate of return or dividend.
Deferred dividend shares
are shares issued on the understanding that dividends will not be payable until a future specified date when a particular project becomes profitable.
Many factors are likely to affect the price of shares.
interest rate levels inflation taxation theoretical price levels earnings and dividends quality of management company reports and announcements profit reports changes in commodity prices industry events government policy and announcements takeover activity economic expectations domestic and international economic fluctuations.
There are two broad approaches to the analysis of share prices
Fundamental and Technical
Fundamental analysis
uses objective measures to analyse a company’s current financial situation. It also attempts to forecast the effects of future events on those measures.
