UNIT 4: Investing Flashcards
What is investment? How do different investments methods result in different returns? Name 3 things good investment decisions require?
Investment Overview
- Investment involves turning savings or extra money into something more.
- Different investment methods offer different returns depending on the risk.
- Good investment decisions require informed options, realistic budgeting, and accurate planning.
Reasons for Investment
- Businesses invest in new machinery, technologies, factories, product initiatives, and employees to increase profits.
- Individuals invest their savings to achieve short-term, medium-term, or long-term goals.
- Goals may include extra income, future security, major purchases, education, or a comfortable retirement.
- Individuals also invest in their own education to achieve their goals faster.
Name 3 ways to gain money for investment.
Financing Investments
Saving for Investment
* Avoids interest on loans, but requires time to save enough funds.
* Steps include writing financial goals, preparing a weekly budget, and keeping a weekly income and expenditure record.
* Any surplus funds should be transferred to an investment account earning higher interest than a regular bank account.
Borrowing to Invest
* Ensures affordability of repayments.
* Personal loans can be secured or unsecured, and home loans can have a fixed or variable interest rate.
* Fixed interest rate loans offer greater control over finances but can’t be paid off without a penalty fee.
* Variable interest rates fluctuate with the financial market, affecting investment.
Income and Expenditure Account
* A weekly income and expenditure account helps determine investment amount.
Nadia’s Financial Challenges and Investment Options
- Nadia, a homemaker with a $1000 debt, decides to create a savings plan.
- She makes a careful budget and cuts back on expenses, achieving a positive bank balance within a month.
- Despite the potential for savings, Nadia is hesitant to leave her money in the bank.
- She considers buying shares online using an internet broker, but is unsure of the risks and the potential for high-risk investments.
- A colleague suggests investing in a managed fund, but Nadia is unsure.
- She considers property investment, but her mother emphasizes the importance of superannuation.
- She is confused about the difference between debentures and unsecured notes, which are better for repaid investments.
- Nadia seeks professional help from Best Practice Financial Planning Service.
Retirement Plans of Terry
- Terry, a panel beater, started paying into his superannuation fund at 18.
- As Terry’s circumstances changed, he adjusted his contributions to ensure his future.
- Terry plans to retire at 65, expecting a lump sum of over one million dollars.
- He plans to invest this money in shares and high-interest bank deposits.
- The dividends and interest from this will help maintain his lifestyle and cover a holiday each year.
- Terry and his wife plan to sell their large 4-bedroom home and buy a smaller unit, with the remaining funds to ensure their happiness.
Name 7 investment strategies? Define each strategy with advantages and disadvantages.
Investment Strategies and Overview
- Property: The largest investment most people make, often involving purchasing their own home or apartment. Advantages include no rent payments and tax-free profits from property value increase.
- Managed funds: A pool of money from similar investors invests in assets like shares or property.
Example: Warren Buffett: The world’s richest investor, estimated at US$81.3 billion, with an average return of 19% since 1965. Despite his wealth, he is generous, having donated over US$27 billion to charity. - Superannuation: A compulsory savings account where employer allocates a percentage of income to the account.
- Debentures and Unsecured Notes: Long-term loans issued by a company to raise money, paid back over a long period at a fixed interest rate.
- Cryptocurrency: Digital-based finances traded mostly within the virtual world, created as an alternative to traditional currencies.
- Bitcoin: One of the earliest and most well-known cryptocurrencies, seen as a desirable investment due to its high value and high-risk nature.
Name 8 investment methods? 3 types of accounts?what are he advantages of each disadvantages? What is buying shares? In what platform in Australia?
Investment Options Overview
- Investment options include investment accounts, shares, property, managed funds, superannuation, debentures and unsecured notes, and cryptocurrency.
- Cash management accounts offer higher interest rates and a minimum deposit amount.
- Internet accounts offer higherl interest rates, few statements, and lower fees.
- Term deposits are money deposited with a financial institution for a set period to receive higher interest rates.
- Term deposits are for those seeking a safe investment and reasonable return.
Shares
- Buying shares means buying a certain number of units of ownership in a company.
- Shares can be bought or sold in the sharemarket, with the Australian Securities Exchange (ASX) being the main platform.
- Buying and selling shares occurs through a stockbroker who acts as an agent for others.
- The Australian sharemarket offers a wide choice of companies in various sectors, allowing diversification and quick access to money.
What are debentures? Whata re Unsecured Notes? What is Bitcoin? What is cryptocurrencies? Disadvantages and advantages of each method?
Debentures and Unsecured Notes Overview
- Debentures: Long-term loans issued by a company to raise money, paid back over a long period at a fixed interest rate.
- Unsecured Notes: Similar to debentures but not secured against the business’s assets, presenting greater risk to investors.
- Bitcoin: One of the earliest and most well-known cryptocurrencies, seen as a desirable investment due to its capped production.
- Cryptocurrencies are digital-based finances, traded mostly within the virtual world.
- Bitcoin is a high-risk investment due to its limited production and high value.
What is property investment?managed funds? Superannuation? Give advantages and disadvantages?
Investment Strategies in Property and Superannuation
- Property: The largest investment most people make, often involving purchasing their own home or apartment. Advantages include no rent payments, tax-free profits from property value increase, and potential rent income.
- Managed funds: A pool of money from similar investors, managed by a professional fund manager, allows small investors to participate in the share market and real estate.
- Warren Buffett: World’s richest investor, estimated at US$81.3 billion, with an average return of 19% since 1965. Despite his wealth, he is generous, having donated over US$27 billion to charity.
- Superannuation: A compulsory savings account where employer allocates a percentage of income to the account. Additional funds may be added for tax advantages.
What is closing price? What is recorded of a share everyday in a share market chart?(5) what are sharemarket charts? Purposes?
Share Market Overview
- The closing price refers to the price at the close of trade.
- The change in price from the previous day’s close is also recorded.
- The volume of shares traded during the day is also recorded.
- The highest bid to buy and lowest offer to sell a share is recorded at the close of trade.
- The dividend yield is calculated daily by dividing the annual dividend per share by the share price.
- The price/earnings ratio of a share is calculated daily by dividing the share price by the company’s annual earnings per share.
- The 52-week high and low represent the highest and lowest sales recorded during the past year of trading.
- Sharemarket charts provide important information for investors, economists, and advisers in their sharemarket analysis.
How to understand sharemarket charts?
Understanding Sharemarket Charts
Step 1: Identify the Chart Type
* Different charts divide listed companies into indices for comparison.
* Some charts show performance of top 20, 50, 100, 200 or 300 listed companies.
* Other charts indicate the general picture in stock exchanges worldwide.
Step 2: Understand Column Headings
* Use an Economics dictionary, glossary or key to understand each column.
Step 3: Look at the Data
* Each listed company has a unique three-letter symbol.
* Use a ruler to read across the columns accurately.
* A ‘+’ sign in front of a ‘Move’ number indicates a share’s value rose or fell.
Step 4: Analyze the Data
* Examine the size of changes in data for a share from one period to another.
* Look for trends in the movement of shares.
* Compare shares to see how well or poorly one has performed against others.
Step 5: Make Predictions
* Consider whether a trend will continue, change pace or direction.
* Apply knowledge of current economic events to judge their likely effects on particular shares.
What are the 5 things considered before making an investment in a portfolio? What is diversification? What are the advantages of diversification? Disadvantages?
Factors Influencing an Investment Portfolio
- Risk, return, diversification, and short, medium, and long-term goals are key considerations in investment portfolios.
- Diversification involves spreading money across different investment types to spread risk.
- No single investment type will always outperform all others, and a diversified strategy generally provides a greater return.
- Commodity is a golden rule of investing, and investments should be funded from surplus money.
- A case study of Greg and Julie demonstrates the importance of a balanced portfolio, versus a ‘chaser’ approach.
- Greg’s strategy involved buying and selling assets cheaply, selling best performing assets at high prices, and returning the portfolio to its original 25% weighting for each type of asset.
- This strategy was less stressful and usually more successful.
What is Ethical Investments? What are the common issues influencing ethical investment?(4).
What are the two types of ethical investment methods?approximately how many children are victims of child labour? Give examples of countries? Give a main reason for this? What is the key factor in investing?
What are the 3 types of assets?
What should be included in an investment portfolio?
Ethical Investments Overview
Investing Ethically
* Ethical investment involves investing in companies whose products, policies, and practices align with personal beliefs and values.
* Common issues influencing ethical investment decisions include unsafe working conditions, prohibition of trade unions, child labor exploitation, greenhouse gas emissions, destruction of forests, genetic engineering experiments, waste creation, and involvement in the nuclear industry.
* Negative screening and positive screening are common ethical investment methods.
Child Labour in Developing Countries
* Child labour is a significant ethical issue, with over 218 million children under 18 working illegally in child labor.
* High incidence of child labour in countries like Nigeria, Malawi, India, Pakistan, and Bangladesh.
* Poverty is the main cause of child labour, with poor parents sending their children to work due to economic necessity.
Role of Risk and Return
* The rate of return is a key factor in investing, with the aim to maximize the profit.
* Investment categories include growth assets (shares and property) and income or defensive assets (government bonds and term deposits).
* An investment portfolio should include a wide variety of investment products, including term deposits, property, government securities, and shares.
What are short term investments? Long term investments? What is the need for active managements of investments?
Investment Planning and Monitoring
Short-Term Investments
* Typically less than three years, chosen for immediate access to funds.
* Generally have a lower rate of return due to convenience of conversion to cash.
* Case Study: Laila, a well-paid worker, chose a short-term investment for her upcoming baby.
Long-Term Investments
* Holded for over seven years, generally higher rate of return.
* Case Study: Dov, a generous inheritance recipient, decided to invest the money long term for higher return.
Modifying Investments to Maximize Long-term Gains
* Active management of investments is crucial to avoid loss.
* Changes may involve changing investments due to personal circumstances, economic conditions, or performance.
* Example: Nadi Suri, who bought shares in Lucky Oil Ltd and Big Retail Ltd, should have sold some shares to increase Lucky Oil Ltd’s price.
Maintaining Records and Monitoring Investments
* Regularly check investment records, including contract note, CHESS holding statement, and dividend statements.
* These records are needed to prove ownership and for taxation purposes.
Examples of diversification of investments
Diversified Investment Portfolios: A Case Study
Ethan’s Diversified Portfolio
* Ethan, a part-time worker, invested $5000 in a fixed-term savings fund, high-risk shares, and lower-risk shares.
* He sold his car for $4000 and combined the remaining $2000 to achieve his travel goal.
* After a year, his fixed savings made interest profits of $50, high-risk shares made profits of $400, and low-risk shares returned $100.
* He decided to withdraw all three investments to enroll in tertiary education, but his financial advisor advised him to invest the money for a year to ensure a return.
Natalie’s Nail Shop Case Study
* Natalie, owner of a successful nail shop, saved $200,000.
* She plans to open a second store in the long term but is unsure of staff training for both stores.
* After careful consideration, Natalie decides to invest the money for a year to have more funds for future use.
What is investment tracking?
Understanding Investment Management and Risk Mitigation
Investment Meltdown and Taxation
* The 2008 Global Financial Crisis (GFC) led to significant losses for many, particularly self-funded retirees.
* Capital gains tax applies to buying and selling shares, while dividends are taxed as part of the firm’s profit.
* Dividends paid on which company tax has been paid are ‘fully franked’, meaning dividends do not necessarily increase an individual’s tax bill.
Investment Tracking
* Investors need to monitor their investments to make informed decisions.
* A simple investment tracker is used to compare investments in January and February.
* The value of shares is calculated by multiplying the last sale price by the number of shares owned.
Bank Deposit Guarantees
* The Australian federal government guarantees deposits up to $250 000 at Authorised Deposit-taking Institutions.
* Joint accounts have each person’s guarantee up to $250 000.
Managing Investments and Risk Mitigation
* Personal and economic circumstances must be considered when investing.
* Changes in income or business competition can affect investment strategies.
* Income insurance can help maintain financial obligations.
* Global market changes can be difficult to counteract.
What is the economic cycle? Importance of time management in the market? 5 risk mitigation strategies for managing investments? 4 actions risk mitigation?
Understanding the Economic Cycle and Investment Strategies
Understanding the Economic Cycle
* The economic cycle describes the upward and downward movements of the economy over time.
* The level of economic activity affects wages, consumer spending, production levels, interest rates, and unemployment.
* Investors base their investment decisions on the future impact of economic activity on company profits and share prices.
Time Management in the Market
* Understanding the economic cycle helps investors time their market entry or exit.
* Investors may buy shares when prices are lower and sell them when prices recover.
* During a recession, investors might invest more in bonds due to their less volatile nature.
* When the economy is about to recover, they might switch back to shares.
Risk Mitigation Strategies for Managing Investments
* Identify all possible risks.
* Rank the risks on probability of occurring.
* Develop further risk mitigation plans.
* Accept and continue monitoring.
* Consider a risk avoidance stance.
Four Actions in Risk Mitigation
* Avoid the risk.
* Reduce the risk.
* Manage the risk.
* Transfer the risk.
* Be aware of the need to vary investments based on changing circumstances.
