Topic 12 Investment
securities
Overview
This topic explores what an investment is, the kinds of investments available to businesses
and individuals and the returns that an investor can expect.
Types of investment opportunities
Assurance v Insurance
Returns of investments
• Yield/earnings
• Calculating simple and compound interest
1 A range of available business investment opportunities
1.1 Distinguish between assurance and insurance
The term insurance refers to cover for a possible event such as theft or a fire. Assurance is
cover for an event that is certain to happen, such as retirement or death. Pension and
provident funds are forms of assurance.
1.2 Compulsory and non-compulsory insurance
Non-compulsory insurance is any insurance that is not compulsory to have. Compulsory
insurance is any form of insurance required by law, such as U.I.F., unemployment insurance.
1.3 Viability and relevance to both individuals and businesses
It is important that businesses and individuals have protection against possible risks and
losses. Insurance companies sell protection in the case of loss or damage in the form of an
insurance policy.
1.3.1 Viability and relevance for individuals
Insurance and assurance products offer many benefits for individuals. They can be forms of
saving, protect people and their dependants against loss of income and restore them to the
1
,same financial position they were in before an unexpected event occurred. In some cases
individuals can borrow against policies.
1.3.2 Viability and relevance to businesses
Insurance and assurance products offer many benefits for businesses. They can be forms of
saving, protection for the firm and its employees against loss of income and can restore it to
the same financial position it was in before an unexpected event occurred. In some cases
businesses can borrow against policies. Insurance can protect the business from claims
made by members of the public.
2 Types of investments
An investment is an asset or item that is purchased with the hope that it will generate
income or appreciate in the future.
Investments can be categorised as low risk, moderate risk or high risk. The rule of investing
is that the bigger the risk you take, the greater the possible reward.
Examples may include:
• Shares
• Property
• Savings
• Stock options.
2.1 Business investments
You can invest in an existing business by buying shares or by starting a new business.
2.1.1 The Johannesburg Stock/Security Exchange
The Johannesburg Stock Exchange (JSE) is a world-class securities exchange. It has operated
as a marketplace for the trading of financial products for more than 120 years to connect
buyers and sellers in four different markets: equities, equity derivatives, commodity
derivatives and interest rate products.
The JSE is one of the top 20 exchanges in the world and is a member of the World
Federation of Exchanges (WFE).
The JSE also provides companies with the opportunity to raise capital through its two main
boards: Main Board and AltX. In addition, the JSE is a major provider of financial
information. The JSE is a fully electronic, efficient, secure market.
2
, 2.1.2 Types of shares
The basic types of shares are:
• Preference shares
These shares are more expensive because the owner is entitled to preferential
dividends. In the first instance, the shareholder is guaranteed a fixed dividend based
on the par value of the share. In the second instance, preferential shareholders
receive dividends first.
• Ordinary shares
Ordinary shares are less expensive than preferential shares. Shareholders of ordinary
shares receive dividends after preferential dividends have been paid.
• Founding shares
These shares are assigned to the founding members and promoters of the company.
They will only receive dividends after everyone else is paid.
• Bonus shares
Sometimes a company will decide to retain the profits for expansion of the business.
In this situation, they will not pay shareholders a dividend, but they may issue bonus
shares in place of the dividend. This means that shareholders own more shares and
will collect more dividends in the future.
2.1.3 Unit trusts
Unit trusts offer a simple, and effective way of saving money. Unit trusts are collective funds
that allow private investors to pool their money in a single fund, thus spreading their risk
across a range of investments, getting the benefit of professional fund management, and
reducing their dealing costs. Unit trusts are open-ended in contrast to investment trusts,
which are closed funds. Different trusts have different investment objectives: investing for
income or growth, in small companies or large, and in different geographical regions.
Reasons for investing in unit trusts include:
• They are already well-diversified: Unit Trusts buy into a wide variety of shares and
bonds thus, risks are well diversified
• Less Stress : They are managed by professional Fund Managers.
• You can invest all over the world. Unit trusts are invested all over the world in
various business sectors, giving more opportunities
• You only need a small amount of investment to start with
• Redemption is immediate. If you sell your stocks, it joins the queue awaiting to be
bought by other investors.
• It is relatively safe. Because they are well diversified, risks are smaller. Fixed Income
unit trusts are very safe and in the long run, these still perform better than your
fixed deposits.
• Good returns. Over the long term, unit trust investment can reap very handsome
returns.
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securities
Overview
This topic explores what an investment is, the kinds of investments available to businesses
and individuals and the returns that an investor can expect.
Types of investment opportunities
Assurance v Insurance
Returns of investments
• Yield/earnings
• Calculating simple and compound interest
1 A range of available business investment opportunities
1.1 Distinguish between assurance and insurance
The term insurance refers to cover for a possible event such as theft or a fire. Assurance is
cover for an event that is certain to happen, such as retirement or death. Pension and
provident funds are forms of assurance.
1.2 Compulsory and non-compulsory insurance
Non-compulsory insurance is any insurance that is not compulsory to have. Compulsory
insurance is any form of insurance required by law, such as U.I.F., unemployment insurance.
1.3 Viability and relevance to both individuals and businesses
It is important that businesses and individuals have protection against possible risks and
losses. Insurance companies sell protection in the case of loss or damage in the form of an
insurance policy.
1.3.1 Viability and relevance for individuals
Insurance and assurance products offer many benefits for individuals. They can be forms of
saving, protect people and their dependants against loss of income and restore them to the
1
,same financial position they were in before an unexpected event occurred. In some cases
individuals can borrow against policies.
1.3.2 Viability and relevance to businesses
Insurance and assurance products offer many benefits for businesses. They can be forms of
saving, protection for the firm and its employees against loss of income and can restore it to
the same financial position it was in before an unexpected event occurred. In some cases
businesses can borrow against policies. Insurance can protect the business from claims
made by members of the public.
2 Types of investments
An investment is an asset or item that is purchased with the hope that it will generate
income or appreciate in the future.
Investments can be categorised as low risk, moderate risk or high risk. The rule of investing
is that the bigger the risk you take, the greater the possible reward.
Examples may include:
• Shares
• Property
• Savings
• Stock options.
2.1 Business investments
You can invest in an existing business by buying shares or by starting a new business.
2.1.1 The Johannesburg Stock/Security Exchange
The Johannesburg Stock Exchange (JSE) is a world-class securities exchange. It has operated
as a marketplace for the trading of financial products for more than 120 years to connect
buyers and sellers in four different markets: equities, equity derivatives, commodity
derivatives and interest rate products.
The JSE is one of the top 20 exchanges in the world and is a member of the World
Federation of Exchanges (WFE).
The JSE also provides companies with the opportunity to raise capital through its two main
boards: Main Board and AltX. In addition, the JSE is a major provider of financial
information. The JSE is a fully electronic, efficient, secure market.
2
, 2.1.2 Types of shares
The basic types of shares are:
• Preference shares
These shares are more expensive because the owner is entitled to preferential
dividends. In the first instance, the shareholder is guaranteed a fixed dividend based
on the par value of the share. In the second instance, preferential shareholders
receive dividends first.
• Ordinary shares
Ordinary shares are less expensive than preferential shares. Shareholders of ordinary
shares receive dividends after preferential dividends have been paid.
• Founding shares
These shares are assigned to the founding members and promoters of the company.
They will only receive dividends after everyone else is paid.
• Bonus shares
Sometimes a company will decide to retain the profits for expansion of the business.
In this situation, they will not pay shareholders a dividend, but they may issue bonus
shares in place of the dividend. This means that shareholders own more shares and
will collect more dividends in the future.
2.1.3 Unit trusts
Unit trusts offer a simple, and effective way of saving money. Unit trusts are collective funds
that allow private investors to pool their money in a single fund, thus spreading their risk
across a range of investments, getting the benefit of professional fund management, and
reducing their dealing costs. Unit trusts are open-ended in contrast to investment trusts,
which are closed funds. Different trusts have different investment objectives: investing for
income or growth, in small companies or large, and in different geographical regions.
Reasons for investing in unit trusts include:
• They are already well-diversified: Unit Trusts buy into a wide variety of shares and
bonds thus, risks are well diversified
• Less Stress : They are managed by professional Fund Managers.
• You can invest all over the world. Unit trusts are invested all over the world in
various business sectors, giving more opportunities
• You only need a small amount of investment to start with
• Redemption is immediate. If you sell your stocks, it joins the queue awaiting to be
bought by other investors.
• It is relatively safe. Because they are well diversified, risks are smaller. Fixed Income
unit trusts are very safe and in the long run, these still perform better than your
fixed deposits.
• Good returns. Over the long term, unit trust investment can reap very handsome
returns.
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