INVESTMENTS

DEFINITIONS RELATED TO INVESTMENT

• Money saved – make it grow

• Creation wealth (prosperity) through use

capital

• Amount invested: capital contribution

Monetary (financial) asset purchased

with the idea that the asset will provide

income in the future or will be sold at a

higher price for a profit.

saving vs investing

Saving money is putting money aside on a regular

basis. You spend less money than you earn and put the

rest into the bank. You should have this be an

automatic part of your monthly budget.

• Investing is the way that you will begin to really

grow your money and begin to build wealth. If you keep

your savings in a savings account, the amount of

interest you will earn will be very small.

risk profiling

 Different investment options meet needs of investor.

 Finding best option very difficult.

 DEF:

Investment brokers/companies complete risk profile: type of

investment option

best suit (agree with) personal circumstances.

Create understanding

investor’s tolerance risk (ability

to handle declines in value of inv.)

If expected return is

acceptable.

risk

Losing part of/all investment, or making less profit.

Low , medium, high.

Bigger risk – greater reward

Safer investment (smaller risk), lower return.

roi

Tool – measure efficiency (success)

of investment.

Indicator what investor get back

timeframe

How long want invest? Short, medium, long

term?

Longer period – have mix high-

+ low-risk investments.

More time recover losses

financial position of the investor

 Size of investment relative (compared)

to total wealth

 Greater need for income – more

balanced/conservative choice of

investment.

conservative investment strategies(cautious)

 High degree of income – low risk (maintain

capital investment)

 More bonds/property/cash

 Less shares.

defensive investment strategy(protect capital)

 Stable income – capital growth – low risk

 More bonds, property and cash

 Low shares.

Balanced(stable) investment strategy

 Combination of growth and income –moderate

risk over medium to long term.

 More shares and bonds.

growth investment strategy

 High risk over long term.

 Aim: Long-term capital growth – little concern

current income

 Heavily in shares.

cash

• Money market acc, bank deposits, fixed deposit

• Safe inv. Not make/lose fortune

• Receives regular interest income (payment made bank)

• Capital not subject huge external fluctuations.

Low risk: No guarantee that capital sum be protected

against inflation (inflation weakens value money as time

goes on as a result of rising prices)

• Inflation puts ROI in realistic perspective.

No capital growth potential.

• Income generating inv. – only

grow if interest reinvested.

no capital growth potential

• Example: R1 000 000 in bank in 2020 .

• Interest income 10% = R100 000 per year.

• Interest income per month: R8 300.

• R1 m in bank will only grow if you reinvest the

R100 000.

• If not, the R1 000 000 will decrease in value

because of inflation.

• Inflation rate of 4% = R40 000 p.a. that investment

will decrease with.

• 2030 value R600 000 (R1 m minus R400 000)

• Inflation 6.5% = R65 000 p.a.

• 2030 value R350 000 (R1 m minus R650 000)

property

• Biggest asset – own home / buy-to-let

• Keep up with inflation + effective way of gearing.

Using borrowed money to increase ROI – make profit

(positive leverage effect.)

• Risk: moderate / high.

Depends on location, political and economic

environment

• Drawback: lack of liquidity (cash) : cannot sell quickly

location

 The location of a property is

the most obvious factor that

affects how much a property

is worth.

 Is it close to the city

centre?

 Is it close to public

transport, shops, schools and restaurants?

 People generally want to live close to where

they work and where they enjoy their free time,

so properties in these areas will be more

expensive.

 Then there’s also the fact that some suburbs

simply have a better reputation than others due

to factors such as unemployment or crime

rates.

bonds/gilts

• Interest bearing securities issued by

government / companies (debentures) to

borrow money.

• Bond issuer pays regular interest to

bondholder + repay original investment on

set date in future.

• Moderate risk: Capital sum invested can

fluctuate, interest payment can be higher

than on cash.

equities

 Buying shares – part ownership in company

 Listed on JSE, shares traded freely

• High risk: value of shares is influenced by market

forces beyond the investors’ control

• Best chance beating inflation – long term – invest in

blue chip shares. (major/stable companies)

• High risk profile = large portion of equities.

• Longer time before retirement more invest in equities.

• Capital growth when share value increases +

shareholder share in profit(receiving dividends)

• Financial position: Investor have liquid funds to

invest in shares. (own capital / what you can afford to

lose) and follow JSE requirements for the purchase of

shares.

diversification

• Spreading risk between various asset

classes.

• Include combination FOUR major asset

classes.

• Higher returns over long term than only

invest in conservative investment e.g.

cash.

pension fund

• Retirement savings

• Employer joins pension fund organise employees funds.

• Employer + employee

contribute: % basis

• Common asset pool –

generate stable growth, long term –

provide pension employees end

working years.

• Contributions deducted

before tax.

retirement annuities

• RA – savings plan for retirement. (supplement pension)

• Monthly premium paid in return for a lump sum (1⁄3)

and monthly pension (2⁄3) retire: 55 – 65.

• Payments made monthly/annually for specified term

or until death.

• Amount received – size of contribution(premium)

and how long premiums were made.

• Benefits:

Contributions tax deductible

Disciplined way of saving

endowment policy

• Save for specific purpose

• Long term savings plan-invest monthly

amount specific period (e.g. 10 years)-

insurer pays out on maturity. (full amount)

• Life assurance be added – amount paid out

on death.

unit trusts

• Group investors ‘pool’ their capital to invest.

• Instead of buying shares

yourself, buy units in a

portfolio of shares/bonds.

3 parties

Unit trust Management Company (Manco):

manages investment on behalf of investors.

Trustee company: Bank/insurance co –

safekeeping of portfolio of assets.

Unit holder: you and whole group investors.

• Strategy applied = ‘rand cost averaging’.

Fixed amount invested, same investment, regular

intervals, regardless market conditions. (Price low,

fixed amount buy more units / higher price, less units)

• Three broad categories:

Domestic funds: max 15% invest assets outside

SA

Worldwide funds: 15% - 85% outside SA

Foreign funds: invest more than 85% assets

outside SA

advantages

 Beats inflation – high returns

 Cash in units any time – no penalties

 Small amounts saved

 Dividends reinvested to grow

 Portfolio managed by investment experts

cash options

Fairly safe – inflation erode value

 Money market fund: (word doc money market acc SA)

* Type of unit trust invests in interest-bearing

instruments (issued banks/gov/co) e.g. bonds/debentures

want borrow money.

* Short-term instruments traded money market, maturity

less 12 months.

 Advantages:

Access to money market instruments – small amount

Interest rate higher – bank deposit

Withdraw money any time

Interest rate risk eliminated – average term 90 days – 12 months

notice deposits

Account holder give notice of withdrawal:

• Call account: cash available certain

notice period e.g. 32 day call account

(32 days’ notice to withdraw)

• Fixed Deposit: Money invested fixed

period – may not withdraw before

maturity date. (interest rate higher call account)

collectibles

• Coins, diamonds, stamps, art, antiques with

• Capital gains over medium – long term.

• Attraction: large + active international market

• Disadvantages:

No monthly income

High level of expertise

Expensive and volatile (unstable) capital values

Gold coins – value resting in gold price

Art + antiques difficult to value and transport safely.

Stamps easily transported, very fragile, easily damaged.

off shore investments

• All investments one country – risk increases.

• Good have foreign component – not guaranteed

winner.

• Still choose which asset classes:

Equities

Fixed-interest investments

Property

reason for foreign component in investment portfolio

SA emerging (developing) markets makes currency

+ financial markets volatile (unstable)

Diversification – peace of mind.

Foreign markets offer better value

ROI determined 2 factors: price movements +

exchange rate fluctuations. SA rand depreciates,

wise to invest foreign country

Opportunities may not currently

exist locally

Emigration: start

investing property

debentures/bonds

• Loan to company – earns interest e.g. R100 debenture

of 8%

• Capital invested (R100) paid back pre-determined date

• Advantage: legal obligation to repay capital and

interest.

• Debenture holder –not owner but creditor. (unlike

shareholder is owner)

• Company: source borrowed capital.

• Traded on JSE.

stock market- definition

Provides market for dealing in listed shares/securities.

E.g. Johannesburg Securities Exchange Ltd (JSE Ltd)

Prices based on supply and demand.

Supply and demand

 More buyers than sellers?

High demand, low supply higher prices.

 More sellers than buyers?

Low demand, high supply. More shares available and

prices will drop.

Most buying + selling occurs

electronically.

• Investors buy shares companies – listed on stock

market (why?

• Companies to gain access to more capital.

• Comply strict criteria – protect investors.

• Shareholder – proportionate owner of company.

Shareholders invest in shares with hope that:

 Value shares rise (capital growth). Determined by

demand for shares – determines price

 Form of income – dividend payments.

factors affecting share price

• Supply & Demand

• Confidence in state of economy (Junk

status)

• Confidence in company

• Change in company policy

• State of economy (GDP)

• Government policies

• Financial performance of business

(profitability)

JSE index

 Performance of SM measured by performance index.

 Def: Reflects performance of grouping of shares

(Indices offer an easy way to determine the overall

performance of the stock market, or a segment (sector e.g.

Mining, Banks, Food producers, Financial services, chemicals, oil & gas producers

etc.) of the stock market, over a period of time.)

cost of buying shares

• Stockbroker’s fee (% if value of your trade)

• Marketable securities tax (MST)

• VAT

• Strate levy

• Administrative costs

bull/bear market

• Bull market: Optimistic investors –

price go up (more buyers)

• Bear market: Negative outlook – prices

will go down. (more sellers)

preference shares

Participate in profits before dividends declared to

ordinary and other shareholders.

benefits of equities

Higher return than most other

investments

• Returns most often beat inflation

• Value of shares grow – company

expands

• Shareholders receive dividends.

risk of investing in equities

 Volatile markets – lose investment.

 Share prices linked to factors beyond

control.

 Takes long time get best results.

stop-loss strategy

• Sell share at predetermined price – stop loss.

• You decide % loss prepared to accept- sell

shares reaches that percentage

• E.g. price drop by 10% - predetermined

‘ceiling’ – sell shares.

income tax on interest + dividends

Interest: added to gross income (salary for year)

and taxed at individual tax rate.

• Dividends received: Shareholders taxed at rate of

20% (Withholding dividends tax)