Investing

6.2 Reasons For Investing: 

6.2.1 Reasons individuals and businesses invest:

• Investment is when money is spent in order to gain a profitable return. Businesses and individuals may invest, for a variety of reasons such as: 

• Businesses may invest in new machinery, technologies, factories, product initiatives, people ( entrepreneurs), other firms or their own workforces, to increase their profit levels. 

• Individuals invest their savings in order to achieve some future goal. These goals may be short term ( 1-3 years ) medium term ( 4-6 years ) or long term ( over 7 years ). Examples of goals that might lead individuals to look for investment opportunities include t he desire for extra income and future security, to pay for a major purchase, to fund a holiday or to fund a childs education.  

6.3 Financing your investment:

• You can finance an investment in two main ways: through personal savings or by borrowing.

• People who wish to begin investing should first assess their current financial position to avoid over-commiting fund that they cannot afford.

6.3.1 Saving for an investment: 

• The advantage of saving before you invest is that you do not have to pay interest on a loan. However, it takes time to save sufficient funds to make the investment. 

• Before starting to save, it is important to work out how much you are spending and whether there are ways to spend less and save more. Some steps to begin this process include: 

• Writing out a set of financial goals.

• Preparing a weekly budget of likely spending 

• Keeping record each week of income and expenditure and comparing it to your budget. 

• Any surplus funds should be transferred to an investment account that earns higher interest than a regular bank account. 

6.3.2  Borrowing to invest: 

• When borrowing money for an investment, you must first insure that you can afford repayments.

• For example: Personal loans may be secured ( the bank or financial institution retains an interest in the item purchased, such as a boat or car ) or unsecured; and home loans involve a choice of either fixed interest rate or a variable rate.

• A fixed interest rate remains the same for the period of the loan. Fixed interest rate loans give you greater control over your finances because the repayment amoun remains the same for the fixed interest period. However, fixed interest loans cannot usually be paid off before the set date without having to pay a penalty fee. 

• A variable interest rate moves up or down depending on the financial market. Interest rates will vary considerably over time. The Reserve bank of Australia has some control in setting interest rates. 

6.3.3 Income and expenditure account: 

• To determine exactly how much an individual or business has to invest, it is a good idea to prepare a weekly income and expenditure account. This is a continuous record of income earned and money spent during the previous week.

6.3.4 Superannuation as an investment form: 

• Superannuation is a form of compulsory investment that is funded by your employer, who pays a percentage of your wage into a type of savings account. 

• Some people just pay the minimum compulsory percentage of about 9.5%, while others may chose to invest extra income into their superannuation account. 

• You can also invest your superannuation in order to have it make money for you. 

6.4 Range of investment options:

6.4.1 Investment accounts: 

• All banks, building societies and credit unions offer a variety of investment type accounts. These include, cash management accounts, internet management accounts, internet accounts and term deposits. 

• A cash management account is similar to a normal statement savings account in that funds can be withdrawn and deposited whenever you like. 

• The differences are that it will pay a much higher rate of interest and there is usually a substantial minimum amount that must be kept in the account: e.g $5000

• Internet accounts can be accessed only through the internet. The offer high interest rates, and lower fees. THey tend to make excellent investment accounts, but have limitations as an everyday access account. 

• A term deposit is a sum of money deposited with a financial institution that must be left there for a set period of time ( the term ) in order to receive higher rates of interest in return. You cannot withdraw or add to the deposit if you wish. Most term deposits give you the hoicr of when interest is paid, either monthly or when the term the term expires ( this is called ‘at maturity’ ) 

• Term deposits are for people who wish their money to be very safe and who are also seeking a reasonable level of return. 

6.4.2 Shares: 

• Buying shares means buying a certain number of units of ownership in a company. This makes you a shareholder of that company. Some people might buy thousands of shares, others only a few. 

• As the value of the company’s shares goes up or down, so too does the value of the shareholder’s investment. 

• Owning shares allows you to benefit from teh company’s profits, which can be given to you as dividends or as extra shares. You may also benefit from capital growth if the value of your shares increase. 

• Buying and selling shares taks place in the sharemarket. In Australia, such transactions take place through the Australian Securities Exchange ( ASX ) which was formed in 1987 by amalgamating the six capital-city stock exchanges. 

• A Stockbrocker has direct access to the market for trading shares and, for a small fee, acts as an agent who buys and sells shares for the market for others. 

• The Fee is known as brokerage. You can also buy and sell shares online, and there are a number of online stock trading sites that can help you with your investment choices. 

• It is important to diversify your investments so that all your ‘eggs’ are not in one basket if anything goes wrong. 

• There are 2000 companies listed on the ASX 

• Investing in a range of companies spreads the risk. Investing in shares also gives you flexibility. 

6.4.3 Property: 

• Purchasing  a property or apartment tends to be the largest individual purchase a person will make. 

• When your property is sold, any profits from its increase in value are not taxed ( only for ur home ) 

• Apart from owning a home to live in, many people purchase an investment property with the intention of renting it out. This provides advantages including income from the ret, the probability of the property increasing in value ( appreaceating ) and taxation benefits. 

6.4.4 Managed Funds:

• A managed fund is made up of a pool of money that comes from many people who have similar investment goals. A professional fund manager invests money in assets such as shares or property. A managed fund allows a small investor to be involved in the share market and real estate. 

6.4.5 Superannuation: 

• A superannuation fund is a compulsory savings account where each time you are paid over a certain amount, your employer will allocate a percentage of your income into the account. 

• You may also want to pay additional money into your account, because this does have some tax advantages. 

6.4.6 Debentures and unsecured notes: 

• A debenture is a long-term loan issued by a company to raise money. This loan is paid back over a long period of time and at a fixed rate of interest.

• As an alternative to investing in shares, you can invest in a company by buying a debenture - that is, by loaning the company money. 

• Thiis is more secure than investing in shares, because interest payments must be made by the company. They will also include a security that will guarantee the investment even if the company defaults. 

• Unsecured Notes - similar to debentures except that they are not secured against the business’s assets, and therefore present a greater risk to the investors in the note ( the lender ). For this reason, an unsecured note attracts a higher rate of interest than a debenture. 

6.4.7 Cryptocurrency: 

• Digital based finances, traded mostly within the virtual world. Cryptocurrencies were created as an alternative to typical currencies, which are controlled by banks, governments and other financial institutions. 

• Bitcoin is one of the earliest and most well known cryptocurrencies, and is seen to be a desirable investment due to the capped ( Limited ) production available to customers. This means the value of each bitcoin stays high with more unable to be circulate. Cryptocurrencies are a very high-risk investment. 

6.6 Ethical Investments: 

6.6.1 Investing ethically: 

• Ethical investment ( also known as green or conscious or socially responsible investment ) is becoming more common, as people become more aware of the issues and practices of businesses, that can damage our society and the environment. 

• Some examples of issues that might influence the decisions of an ethical investor include: 

•  The type of products a company makes or sells, such as cigarettes, alcohol or gambaling machines - unethical practices

• Evidence of unsafe working conditions

• The company forbidding trade unions 

• Evidence of teh exploitation of child labour 

• Creation of excessive amounts of greenhouse gases 

• Destruction of old growth forests

• Experiments in genetic engineering or animal testing 

• Creation of excess waste 

• Firms affecting the Earth’s biodiversity

• Involvement in nuclear industry. 

• The 2 most comon ways of investing ethically are negative screening and positive screening. 

• Negative screening: Avoids investing in some types of firms, e.g cigarette companies or firms that make alcohol, as well as betting/gambaling 

• Positive screening: Involves investing in those firms that are involved in activities which are deemed desirable, such as renewable energy or healthcare. 

6.7 The Relationship Between Risk and Return:

•  A key factor in investing your money is the rate of return. This is the profit you receive on your investment as a percentage of the original investment. When investing your money, your main aim is usually to maximise the rate of return; that is, to make the most profit possible. 

• The rate of return is given by this equation:

• There are two main categories of investment: 

1. Growth Assests: Such as shares and property, which generally provide a higher return over longer periods. However, these investments are volatile. This means that their prices fluctuate greatly in the short term so they are higher risk.

2. Income or Defensive assets: Such as government bonds and term deposits, which usually provide a lower return but are lower risk - their value does not change dramatically in the short term. The price of every asset will fluctuate. This is the risk of investing - the higher the rate of return, the greater the risk involved. 

• Investment portfolio: Collection of all the investments an individual has. Generally wise to invest in as wide a variety of investment products as possible. This would include term deposits, property, government securities as well as Australian and overseas shares. 

6.8 Factors Influencing an Investment Portfolio: 

• Factors an individual or business considering investing need to consider:
  Risk, return, diversification, as well as short, medium and long-term goals.

6.8.1 Diversification: 

• Diversifying your investments means spreading your money across different investment types in order to spread the risk - this is one of the main principles of investing “Don’t put all your eggs in one basket” 

• Investment history shows that different investment types preform well at different times. No single investment will always be the best, but no single investment type will outperform all others over all periods. 

• By spreading your money across a range of different investment types, the risk of a fall in the value of you overall investments can be reduced. A diversified stratergy generally provides a greater return. 

• An investment portfolio does not have to be fixed. It can be diverse and be changed as needed. 

6.9 Investment planning - maintaining records and monitoring investments: 

6.9.1 Short Term Investment: 

• Usually an investment of less than 3yrs. 

• These investments are normally chosen by people who want ready access to their funds. Generally, most long-term investments have a lower rate of return. This is because of the convenience of being able to convert them to cash in a short period of time

6.9.2 Long-term investments: 

• Those that are held for over 7 years 

• Generaly, the longer the period of investment the higher the rate of return ( Medium investment are those between 3-7) 

6.9.3 Modifying Investments to Maximise Long-term Gains:

• Once you have an investment, it must be actively managed, otherwise you run the risk of losing money. This may involve changing investments in relation to changed personal circumstances, changed economic conditions or the performance of the investments. Generally in times of economic uncertainty, people invest in bank deposits, gold or blue chip shares. 

6.9.4 Maintaining Records and Monitoring Investments of a Hypothetical Investments Portfolio:

• It is important to continually monitor and evaluate your investments. Most people do this by regularly checking their investment records. 

• The three main records that shareholders need to keep are: 

1. The contract note 

2. The CHESS holding statement ( CHESS is the Clearing House Electronic Sub-Register System and it keeps records of all transfers of share ownership ) 

3. Dividend statements

• These records are needed to prove ownership of the shares and for taxation purposes. 

• Buying shares and then selling them for a profit is subject to capital gains tax. Income received as a dividend has already been subject to company tax as it was part of the firm’s profit. Dividends on which company tax has been paid are said to be ‘fully franked’. Therefore, the payment of a dividend does not necessarily increase an individual’s tax bill. 

• The value of shares is calculated by multiplying the last sale price by the number of shares owned. From the total value of her investments, she now must deduct what she owes, such as the amounts owing on her credit card. 

• Online shares can be monitored with an online dealer, such as CommSrc, while non-online share buyers can monitor their investment by creating a watchlist on the ASX

6.10 Managing Investments and Risk Mitigation: 

6.10.1 Personal and economic circumstances: 

• When deciding to invest individuals need to take into account their personal, or economic circumstances. 

• Personal Circumstances: Illness, change in family situation, or losing your job can all mean that investments need to change. You could have your fund in a fixed investment earning interest, which you then need to withdraw in order to pay your bills. Similarly, you might be making regular payments into an investment, which u have to cease.

• Economic Circumstances:

•  Global market changes. Finances of nations around the world change frequently and may follow patterns based upon factors such as trade, employment or national security. Others follow no patterns in times of turmoil.

•  Knowing you are investing in national companies that have contingency plans to counter economic changes means that your cares might be safer in times of financial challenge. 

• The economic business cycle describes the upward and downward movements of the economy over time. Level of economic activity effects wages, consumer spending, production levels, interest rates, and unemployment, the level of economic activity can also lead to variations in investment decisions. 

• Smart investors base their investment decisions on what they think will happen to certain shares in the future. Understanding the economic cycle is useful because investors can use it to try to time their entry into, or exit from, the market. 

• Investors could make a gain by buying shares when prices are lower, and then selling them when prices have recovered. 

• Timing the market is very hard to do in reality, although it is easy to recognise a peak or a trough after it had already happened, but trying to predict one is much more difficult. 

• Paying attention to the economic cycle is also beneficial in determining what investments to make. Smart investors will review their investments whenever they realise that the economic cycle is entering a new phase. 

6.10.2 Risk Mitigation Strategies for Managing Investments: 

• With any investment, making the initial decision and then monitoring the investment needs an approach utilising risk management strategies. If after considering the likely consequences and realising there is a high risk, it is vital to follow through on further risk evaluations or assessments to make sure you don’t lose funds. 

• Investment risk mitigation is the process of developing strategies to reduce threats to your overall financial position. 

• Ultimately, when workling through these strategies it is probable that you will come to one of the following four actions: 

1. Avoid the risk: Entirely remove any chance of loss and don’t take that investment avenue, or withdraw funds to avoid further future loss. 

2. Reduce the risk: Diversify your investments so that ‘all your eggs aren’t in the same basket’. This diversification will mean that there is a reduction in possible harm. 

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

4. Transfer the risk: Frequently done by businesses, where they give ownership to financial managers, advisers and broker. This can also involve insurance to manage risk better, where if there is a big loss there is less responsibility. 

• Individuals and businesses must be aware that when their circumstances change, they may need to vary their investments. Investments could be added to in positive circumstances, or reduced or terminated under negative circumstances. 

6.11 The Role and Responsibilities of the Financial Services Industry: 

 6.11.1: Role of the Financial Services Industry: 

• Many individuals choose to employ specially trained people to assist with their investment decisions. The role of the financial service industry is to: 

• provide individuals and businesses with the tools, advice and guidance to effectively manage their financial resources

• develop and maintain chosen financial systems and provide the relevant training to support operational and reporting needs

• provide advice and oversight on the development and management of investments to ensure long-term financial gain

• ensure transactions are processed accurately, in accordance with laws and policies, and in a timely manner

• provide guidance whenever needed for contingency and continuity planning

• assist in the identification, evaluation and mitigation of risk

• provide financial reports and statutory remittances.

6.11.2: Financial Advice: 

• Financial institutions help individuals in many areas; these include:

•  identifying short, medium and long-term goals

• developing an investment plan

• choosing tax-effective investments

• making the most of your superannuation

• finding out if you're eligible for any government assistance

• working out your insurance needs

• planning for your retirement

• considering your estate planning needs.

• Individuals shoud start by considering whether they need help with a single issue, like consolidation superannuation or choosing investments, or if they are after a more comprehensive financial plan. Businesses will be assisted with any financial decisions they need to make. 

6.11.3 The responsibilities of lenders and advisers:

•  Financial institutions provide a range of advice. Consequently, a a financial adviser must be licensed by ASIC ( corporations act 2001 ) , or be an authorised representative of an organisation licensed by ASIC.

• Responsible lenders obligations include: 

• ASIC = Australian Security  investment commission 

• Responsible lenders obligations include:

• making reasonable inquiries about the consumer’s financial situation

• taking reasonable steps to verify the consumer’s financial situation

• making an assessment about whether the credit contract is suitable based on the information in the first two obligations.

• Additionally, you are trusting the financial adviser with your money. You need to know they are qualified to be using your funds appropriately. 

6.11.4: The Role of Government Agencies - ASIC: 

• The Australian Securities and Investments Commision is an independent Australian government body that acts as Australia’s corporate regulator. 

• ASIC’S role is to enforce and regulate company and financial services laws to protect Australian consumers, investors and creditors. 

• This government agency is important, as its role is to maintain the financial system and monitor investment practices, which directly impacts our nation’s wealth.

6.11.5 Current Issue - Banking Deregulation: 

• Investment opportunities slowly changed in Australia when the federal government started the process of deregulation in 1973, which saw the removal of some of the strict rules regarding how banks operated in Australia.

• This included allowing foreign banks to open branches and a rang of alternative financial institutions, such as building societies, credit unions and superannuation funds arose to compete with the banks, with further changes resulting from teh 2019 Banking Royal Commission. 

• The Australian Prudential Regulation Authority ( APRA) oversees authorised deposit-taking institutions  (ADI’s ): banks, credit unions and building societies. ADI’s are authorised to take deposits from customers under the Banking Act 1959. Deposit-taking instructions pool these deposits. This means they put them together and then lend them to individuals and businesses in the form of loans and mortgages. 

• Online Only Banks: Customers access the bank’s services though the internet, telephone, ATM or via an app on their smartphone. Some popular internet-only banks in Australia include ME bank, ING, Volt Bank and UBank. 

• Banks:

• Provide typical banking services such as internet banking, automatic teller machines ( ATMs ) and financial advice. 

• A bank savings account is an easy and safe place for people to keep their money. This type of account allows you to deposit money and make withdrawals. 

• The amount of interest paid depends on the type of account, the number of times interest is paid into the account each year and the amount of money in the account. 

• Depending upon the type of savings account you hold, your interest earnings could be anywhere from 0.2% up to around 3%. For borrowing, interest payments vary depending on the type of borrowing, and can range between around 3.5% on a variable mortgage and over 13% on some credit cards. 

• Credit Unions: 

• Financial institution that is owned and operated entirely by its members. Provide a range of products and services that are similar to those offered by banks. Include accepting deposits, offering personal and home loans, and providing payment services such as credit cards.

• To open an account with a credit union, you have to be an eligible member. Every credit union has its own rules for determining eligibility, but it sometimes means that you have to belong to an industry affiliated with the credit union or be related to an eligible member. 

• Because a credit union is focused on the financial wellbeing of its members, maximising profit is not its main objective. 

• Building Societies: 

• Building societies are owned and operated by their members. 

• Historically supported their members in purchasing homes. 

• Expanded to offer similar services to banks. Deposit taking, institutions, building societies accept deposits from customers and provide loans and payment services. 

• There are now less that ten building societies in Australia because many of them have been converted to or merged with banks.