Investment Strategies and Evaluation Practice

Comprehensive flashcards covering investment evaluation criteria, share types, investment strategies, debentures, retirement funds, and various investment instruments like property and unit trusts.

What is the relationship between risk and return on investment?

The higher the risk, the higher the return on investment, if it succeeds.

How is Return on investment (ROI) defined in the context of investment efficiency?

It is a tool used to measure the efficiency of an investment, representing what you make over and above your original investment.

How does the investment timeline affect the level of risk an investor can take?

The longer you invest, the greater risks you can take.

What are the two ways a person can become a shareholder in a company?

1. Shares bought directly from the company when they were issued for the first time. 2. Shares bought on the JSE from a previous shareholder.

Define Blue-chip, Black-chip, and Green-chip shares.

Blue-chip: shares in high-end companies with stable financial performance; Black-chip: shares in companies with a high BBBEE rating; Green-chip: shares in companies acting sustainably toward the environment.

What are the characteristics of a Growth investment strategy?

It involves high risk and focuses on long-term capital growth rather than monthly income.

What does a Balanced investment strategy consist of?

It involves medium risk and aims for capital growth and some monthly income using equities and interest-bearing investments like fixed deposits or property.

What is the primary focus of a Conservative investment strategy?

The focus is on generating monthly income while maintaining capital growth, with the majority of investments in property and cash instruments to avoid risk.

What are dividends and are they subject to tax according to the notes?

Dividends are the profit of the company divided among shareholders and they are NOT taxed.

Who are speculators in the share market?

People who buy shares when the price is low and sell them once the price increases (buy low, sell high).

What is a debenture?

A letter of credit (IOU) that a business sells to raise borrowed capital for large projects, which is not secured by assets.

What are the three types of debentures based on their repayment terms?

1. Redeemable debenture (repayable on a predetermined date); 2. Irredeemable debenture (never paid back but interest paid indefinitely); 3. Convertible debenture (converted into shares on a predetermined date).

What is the tax status of interest income from debentures?

Interest income is taxable and the ROI after tax seldom beats inflation.

What is the goal of a Retirement Annuity (RA)?

A policy aiming to provide income (a lump sum and monthly income) when a person reaches the age of $55$, based on the amount and timeframe of investment.

How does a Pension fund function?

Employees in an organization pool contributions with a pension fund administrator who invests the funds to grow and exceed inflation, providing a monthly income upon retirement.

What are three reasons people might not be financially secure at retirement?

Waiting too long to contribute, not considering loss of benefits, living longer due to better health care, spending built-up pension when changing jobs, or increased medical bills.

What is a contribution waiver in an endowment policy?

A signed agreement where the insurance company pays contributions if the investor cannot do so due to disability or unemployment.

What is the annual limit for offshore investments?

The amount is $\text{R1 million}$ a year.

What is a Unit trust?

A basket of shares trading on the stock exchange managed by a fund manager who is responsible for looking after the fund based on the investor's chosen risk profile.

What is the main drawback regarding monthly income for collectibles?

There is no source of monthly income for collectibles.

What is the risk and penalty associated with a Fixed deposit?

It is usually very low risk, but if money is withdrawn before the predetermined date, there is a penalty fee.

What is a Money market account's notice period and timeframe?

It requires a $32$ day notice period for withdrawal and is a short-term investment lasting $1$ month to $1$ year.

What three factors contribute to the risk of property investment?

1. Location; 2. The state of the economy (specifically increasing interest rates); 3. Capital Gains Tax.