Investing

What is investment?

 When money is spent in order to gain a profitable return 

Why do businesses invest?

• Increase profit levels

  • New machinery, tech

  • Factories

  • Entrepreneurs

why do individuals invest?

• To achieve a future-goal

  • Short term (1-3 years)

  • Medium term (4-6 years)

  • Long term (7+ years)

• May want extra income, fund children’s education or a comfortable retirement

• Can invest in own education to get a higher-paying job

What are the two ways you can finance an investment?

Personal savings or borrowing 

• Most people use savings for smaller investments and take a bank loan out for larger investments 

What are the two types of interest rates?

Fixed interest rate - remains the same for the period of the loan. Greater control over your finances, however have to pay a penalty fee if you pay late. 

Variable interest rate - moves up and down depending on the financial market. 

What are the 6 types of investment options?

1. Investment accounts

2. Property

3. Managed funds

4. Superannuation

5. Debenture and unsecured notes

6. Cryptocurrency

What are investment accounts?

• Banks offer a vareity of investment-type accounts

Cash management accounts: Big minimum amount that must be kept in there, but you get a higher rate of interest

Internet accounts: Only can be accessed through internet, high rates of interest and lower fees, but have limitations as an everyday access account

Term deposit: Sum of money you deposit that is left there for a set period for more interest, can’t be withdrawn. 

What are shares, where does it take place?

• Buying a certain number of units of ownership in a company 

  • As value of company goes up, so does value of the shares 

• Also can get dividends or extra shares 

• Buying and selling shares takes place in the sharemarket (ASX)

• Stockbroker: direct access to market for trading scares, can act as an agent to buy and sell shares for a

What are the advantages of investing in property?

• Don’t pay rent

• Not taxed on profits of selling house

• Can rent property out 

What are managed funds?

• Pool of money that comes from people who have similar investment goals 

  • Professional fund manager invests money in assets (property, shares)

What is a superannuation?

• Compulsory savings account

• Can put additional money into account for tax advantages

What are debentures and unsecured notes?

Debenture:

• You loan company money 

• Fixed rate of interest over a long period of time 

• Even if company fails, you get your money back

Unsecured notes:

• Similar to debentures

• Not secured against business’s assets

  • Higher rate of interest

  • May not get money back

what is cryptocurrency

• Digital-based finances, mostly traded through virtual world 

• Alternative to typical currencies, not controlled by other institutions

• E.g. Bitcoin

  • Desirable investment because limited production of Bitcoin

• High-risk

What are ethical investments?

• companies or organisations who align with their own beliefs and values 

how do investors screen companies to make ethical investments?

Negative screening - avoiding investing in some types of firms e.g. alcohol

Positive screening - actively investing in firms that do desirable activities e.g. healthcare

What is the rate of return and how do you calculate it?

Rate of Return - profit you receive on your investment as a percentage of the original investment (you want to make the rate of return as BIG as possible)

What are the two types of assets?

1. Growth assets - risky investment with high return e.g. shares

2. Income assets - lower risk with low return e.g. government bonds

What is diversification and why is it good?

Diversification - Spreading your money across different investment types in order to spread the risk

• Different investments perform well at different times

• By putting your money all into one investment, you could lose all your money

  • Spreading your money means risk is reduced

  • Usually provides a greater return 
    

What personal circumstances need to be taken into account when investing

• Illness, family situation or losing your job 

  • May need to withdraw money from account to pay bills

  • Cease regular payments to investment

• Income insurance to counteract this, only get 80% of your income from insurance company

What economic circumstances need to be taken into account when investing?

• Economic activity influences what shares you buy

• Can affect company’s profits (predict the future)

• Understanding economic cycle is useful

  • Easier to time the market 

  • Helps determine investments to make (recession = low risk bonds)

What are the four actions when identifying risks?

1. Avoid the risk: Don’t do investment, or withdraw funds

2. Reduce the risk: Diversify investments 

3. Manage the risk: Monitor and record your profit and losses

4. Transfer the risk: Give ownership to financial manager, adviser or broker, or invest in insurance

ARMT - bts 💜

Role of financial services indsutry

• Provide tools, advice and guidance to manage financial resources

• Develop and maintain chosen financial system

• Provide advice and oversight on investments

• Assist with risk

Role of financial institutions

• Identify short, medium and long-term goals

• Develop strategies to achieve financial goals

• Develop an investment plan

• Planning for retirement

• Making the most of a superannuation 

Responsibilities of Lenders and advisors

• Financial advisors must be licensed by ASIC or an authorised organisation licensed by ASIC

• Lenders (banks) must make sure that customers are able to pay back the loan

  • Reasonable steps to inquire and verify financial situation

Role of government agencies - what is ASIC

• ASIC (Australian Securities and Investment Commission) is an independent Australian government body that acts as Australia’s corporate regulator

• Enforces and regulates company and financial services laws to protect Australian consumers, investors and creditors

What is deregulation

• 1973 federal government started process of deregulation

  • Alternative financial institutions like building societies, credit unions and superannuation funds competed with banks

what is the legislation related to ADI’S (authorised deposit-taking institutions)?

• authorised by the Australian Prudential Regulation Authority (APRA)

  • Authorised deposit-taking institutions (ADIs) can take deposits from customers under the Banking Act 1959

What do banks provide?

• Provides a wide-range of financial services 

  • Accepting deposits

  • Offering credit-cards

  • Investment and savings account

• Also provides banking services

  • Financial advice

  • ATMs

  • Internet banking

• Bank savings account is a safe place to put your money where you can deposit money and make withdrawals

  • Bank accepts savings at a lower interest rate and lends at a high interest rate to make a profit 

What are credit unions?

• Financial institution owned and operated entirely by its members 

• Provides similar range of products and services to a bank

• Have to be an ‘eligible’ member

  • Might mean you have to be in a certain industry or affiliated to an eligible member

• Focused on member wellbeing, not profit

What are building societies?

• Owned and operated by their members 

• Historically help members in purchasing homes

  • Recently offering similar services to banks 

  📊 Less than 10 in Australia because most have converted to or merged with banks