Busman 142 Chapters 1-7
Chapter 1
Terminology
➔ Financial instrument: collective term to describe all assets/units of capital that are
tradeable and have a monetary value. Emphasis: on tradeability (the ability to transfer
ownership of the asset from one person to another).
➔ Financial security: a type of financial instrument that can be traded on a securities
exchange.
➔ Security: a financial instrument that represents an investment as an owner in a
corporation (stock), a creditor-relationship w/ a corporation or governmental body (bond)
or rights to ownership (represented by an option. Emphasis: guarantee function (the
ability of value papers to serve as a security when applying for loans, overdraft facilities
etc)
➔ Shares: a small “unit of ownership” that the capital of a company consists of.
➔ Bonds: tradable debt instruments which can be issued by corporations (debentures) or
by governments or quasi-government institutes (gilts). They are loans that are repaid on
a future date and a fixed interest is paid periodically to the owner of the bond → on the
repayment date, you receive interest for that year + original loan → so bonds don’t really
offer opportunity for capital gains, but there is a steady, fixed income for investors.
➔ Securities exchange: a company that creates the opportunity for potential buyers &
sellers of a security to come together for trending (eg JSE)
➔ Stockbroker: a regulated professional individual, who buys & sells stocks & other
securities for both individual & institutional clients through a securities exchange or over
the counter, in return of a fee or commission.
➔ Strate (Pty) Ltd: Share transactions totally electronic. South Africa's central securities
depository. An electronic settlement system. Does the job of transferring ownership of a
security after a payment has been effected.
➔ Central securities depository (CSD): an organization tasked w/ keeping records of
ownership for financial instruments such as shares.These records are safely kept in
electronic form to allow daily transfers of ownership (seller → buyer) to take place more
easily & efficiently.
➔ Dematerialisation: the process whereby paper share certificates are replaced w/
electronic records of ownership.
➔ Money market: the total market of all short-term funds traded ie securities w/ a maturity
date of one year or less. This includes all short-term investments such as savings
accounts, day deposits, cheque accounts and short-term loans, such as bank overdrafts
and instalment credit.
➢ Interest rate of money market = determined by surplus/shortfall or short-term
funds.
,➔ Capital market: market where long-term securities are bought & sold. Long term
investments such as fixed deposits & participation bonds and long-term loans such as
mortgages & debentures will determine the capital market interest rate.
➔ Primary market: market where all listed companies and governments sell securities for
the first time.
➔ Nominal value/par value: when a company issues new shares, the initial value at which
they are issued → Companies Act prescribes that all ordinary shares issued after 1 May
2011 no longer have a par value (non-par value shares) value of shares now referred to
as the average issue price.
➔ Rights issue: when a company requires additional capital at a later stage so it issues
more shares (happens in the primary market). These shares are usually issued at a price
lower than the market/issue price.
➔ Prospectus: a document which is issued to provide current & potential shareholders w/
necessary info about new issue of shares, as well as inviting parties to purchase these
new shares → a source of info & an invitation to buy new shares.
➔ Secondary market: the market where shares are traded for the second (or third, fourth or
more) time. They can be traded @ a price higher/lower than issue price → value of
shares on 2ndary market depends on success of the company, decisions made by
management & the future prospects of the company.
➔ Market price: value of the shares traded on the 2ndary market. Determined by supply &
demand.
➔ Blue chips: ordinary shares of companies with an elite investment status. Usually: good
reputation, stable and sound profits; dividend history; healthy growth prospects.
➔ Portfolio: the composition & totality of a person’s investments. An investment portfolio
can consist of: shares, bonds, property, options etc.
➔ Risk: the possibility that actual return will be lower than expected return.
➔ Institutional investors: enterprises w/ large amounts of capital at their disposal with which
they purchase mainly shares & other investments → eg unit trusts, insurance
companies, pension funds.
➔ Unit trusts: basic function → collect small amounts of savings from individuals &
enterprises and then use the large collected amount to purchase & manage a diversified
portfolio of shares & other financial instruments on behalf of small investors. The trust
receives interest & dividends from the shares and cash, then deduct administrative costs
& pay out interest & dividends to the unit holders.
➢ Advantage: they employ specialists who can make sensible purchases & sales of
shares on behalf of their investors → large degree of specialisation
➔ Listing: the right that a company obtains to trade its shares on a stock exchange after
certain prerequisites are met. The company is listed in a certain sector according to its
primary activities
➔ Pre-listing statement: a primary source of info about the proposed listing, not an
invitation to buy additional shares. Can only be issued by public companies.
➔ Dividends: the portion of profit, after tax, that is distributed to shareholders.
➔ Arbitrage: the process of buying a product on a cheaper market and selling it on a more
expensive one, when there are price discrepancies between two markets.
, ➔ Bull market: a period of continuous price increases over the long-term. During this
period, there is strong buying pressure (demand) and prices of most shares increase.
➔ Bear market: period of mainly price decreases over the long-term.
➔ Bull investor: purchases shares during a bull market to keep them for a reasonably long
period of time. As the stock exchange is in a long term period of price increases, the
person will purchase shares so that he can sell them after a couple of years at a capital
profit.
➔ Bull speculator: purchases shares during a bull market. Motive: achieve capital gain in
the short term. Most of the time, he doesn't have the money to pay for these shares. He
sells them within a few days to acquire the money to pay for the purchase.
➔ Bear speculator: operates during a bear market. Game plan: sells shares he does not
own, hoping that the price will drop & he can purchase those shares and deliver the, to
the person who bought them from him
➢ Risk: price of that share may start rising after he sells them, and he will still have
to buy them and deliver them to the person he sold them to.
➔ Stag: speculator that endeavours to make a quick profit out of a new listing as well as a
rights issue. When the shares of a company are listed for the first time, the market price
increases due to certain factors1. Stag will buy shares of an unlisted company right
before listing and sell them immediately at a profit after listing; or he buys cheaper rights
issue shares and sells them at a profit as soon as they are listed.
➔ Corporate actions: decisions by management that have effects on the securities of a
company.
➔ Mandatory corporate action: an event initiated by the board of directors of a corporation
that affects all shareholders. Participation is mandatory
➢ Eg cash dividends; capitalisation issue; subdivisions; mergers.
➔ Voluntary corporate action: an action which shareholders elect to participate in; a
response from shareholders is needed for the corporation to process the action.
➢ Eg rights issue; share buy-back.
➔ Economic investment: the use of the purchasing power of capital to obtain assets used
in the production process.
➔ Financial investment: the process through which the purchasing power of capital reaches
the third parties directly or indirectly via the financial intermediaries
Investment description time-frame risk Expected
type return
gambling When a person makes a High risk No guarantee
decision or executes an activity
w/o knowledge of the outcome.
1
Such as the greater marketability, prominence and status as well as the greater pool of buyers.
, speculation A person ventures money on an Short term risky Considerable
activity expecting a large return 1-2 yrs max return
after a short time / buys assets
with the purpose of selling it
within a short time for a
considerable profit.
investment Purchasing assets to retain so Long term Less risk Reasonable
that it increases in value & 5+ yrs return
provides reasonable return
Investment objectives
objective description
income Eg buy property to gain rental income
speculation Investor purchases an asset to sell it
within a short time at a considerable profit
→ high risk because the value of the
asset can decrease over the short-term.
Capital growth Buy an asset, it will appreciate, sell it later
for profit → pay capital gains tax
Take-over / merger Eg a farmer buys neighbouring farms to
make their farming more efficient.
Control over a raw materials / distribution Eg a manufacturer of shoes buys all shoe
channel stores in the area to exclusively sell his
shoes.
Share prices
1. Bid to buy: buyer's price. The highest price a buyer is prepared to pay for a share.
2. Offer to sell: seller's price. The lowest price a seller is prepared to sell their shares for.
3. Market price: last traded price.
From this you can determine market pressure on a share, eg:
Buyers price: 620
Chapter 1
Terminology
➔ Financial instrument: collective term to describe all assets/units of capital that are
tradeable and have a monetary value. Emphasis: on tradeability (the ability to transfer
ownership of the asset from one person to another).
➔ Financial security: a type of financial instrument that can be traded on a securities
exchange.
➔ Security: a financial instrument that represents an investment as an owner in a
corporation (stock), a creditor-relationship w/ a corporation or governmental body (bond)
or rights to ownership (represented by an option. Emphasis: guarantee function (the
ability of value papers to serve as a security when applying for loans, overdraft facilities
etc)
➔ Shares: a small “unit of ownership” that the capital of a company consists of.
➔ Bonds: tradable debt instruments which can be issued by corporations (debentures) or
by governments or quasi-government institutes (gilts). They are loans that are repaid on
a future date and a fixed interest is paid periodically to the owner of the bond → on the
repayment date, you receive interest for that year + original loan → so bonds don’t really
offer opportunity for capital gains, but there is a steady, fixed income for investors.
➔ Securities exchange: a company that creates the opportunity for potential buyers &
sellers of a security to come together for trending (eg JSE)
➔ Stockbroker: a regulated professional individual, who buys & sells stocks & other
securities for both individual & institutional clients through a securities exchange or over
the counter, in return of a fee or commission.
➔ Strate (Pty) Ltd: Share transactions totally electronic. South Africa's central securities
depository. An electronic settlement system. Does the job of transferring ownership of a
security after a payment has been effected.
➔ Central securities depository (CSD): an organization tasked w/ keeping records of
ownership for financial instruments such as shares.These records are safely kept in
electronic form to allow daily transfers of ownership (seller → buyer) to take place more
easily & efficiently.
➔ Dematerialisation: the process whereby paper share certificates are replaced w/
electronic records of ownership.
➔ Money market: the total market of all short-term funds traded ie securities w/ a maturity
date of one year or less. This includes all short-term investments such as savings
accounts, day deposits, cheque accounts and short-term loans, such as bank overdrafts
and instalment credit.
➢ Interest rate of money market = determined by surplus/shortfall or short-term
funds.
,➔ Capital market: market where long-term securities are bought & sold. Long term
investments such as fixed deposits & participation bonds and long-term loans such as
mortgages & debentures will determine the capital market interest rate.
➔ Primary market: market where all listed companies and governments sell securities for
the first time.
➔ Nominal value/par value: when a company issues new shares, the initial value at which
they are issued → Companies Act prescribes that all ordinary shares issued after 1 May
2011 no longer have a par value (non-par value shares) value of shares now referred to
as the average issue price.
➔ Rights issue: when a company requires additional capital at a later stage so it issues
more shares (happens in the primary market). These shares are usually issued at a price
lower than the market/issue price.
➔ Prospectus: a document which is issued to provide current & potential shareholders w/
necessary info about new issue of shares, as well as inviting parties to purchase these
new shares → a source of info & an invitation to buy new shares.
➔ Secondary market: the market where shares are traded for the second (or third, fourth or
more) time. They can be traded @ a price higher/lower than issue price → value of
shares on 2ndary market depends on success of the company, decisions made by
management & the future prospects of the company.
➔ Market price: value of the shares traded on the 2ndary market. Determined by supply &
demand.
➔ Blue chips: ordinary shares of companies with an elite investment status. Usually: good
reputation, stable and sound profits; dividend history; healthy growth prospects.
➔ Portfolio: the composition & totality of a person’s investments. An investment portfolio
can consist of: shares, bonds, property, options etc.
➔ Risk: the possibility that actual return will be lower than expected return.
➔ Institutional investors: enterprises w/ large amounts of capital at their disposal with which
they purchase mainly shares & other investments → eg unit trusts, insurance
companies, pension funds.
➔ Unit trusts: basic function → collect small amounts of savings from individuals &
enterprises and then use the large collected amount to purchase & manage a diversified
portfolio of shares & other financial instruments on behalf of small investors. The trust
receives interest & dividends from the shares and cash, then deduct administrative costs
& pay out interest & dividends to the unit holders.
➢ Advantage: they employ specialists who can make sensible purchases & sales of
shares on behalf of their investors → large degree of specialisation
➔ Listing: the right that a company obtains to trade its shares on a stock exchange after
certain prerequisites are met. The company is listed in a certain sector according to its
primary activities
➔ Pre-listing statement: a primary source of info about the proposed listing, not an
invitation to buy additional shares. Can only be issued by public companies.
➔ Dividends: the portion of profit, after tax, that is distributed to shareholders.
➔ Arbitrage: the process of buying a product on a cheaper market and selling it on a more
expensive one, when there are price discrepancies between two markets.
, ➔ Bull market: a period of continuous price increases over the long-term. During this
period, there is strong buying pressure (demand) and prices of most shares increase.
➔ Bear market: period of mainly price decreases over the long-term.
➔ Bull investor: purchases shares during a bull market to keep them for a reasonably long
period of time. As the stock exchange is in a long term period of price increases, the
person will purchase shares so that he can sell them after a couple of years at a capital
profit.
➔ Bull speculator: purchases shares during a bull market. Motive: achieve capital gain in
the short term. Most of the time, he doesn't have the money to pay for these shares. He
sells them within a few days to acquire the money to pay for the purchase.
➔ Bear speculator: operates during a bear market. Game plan: sells shares he does not
own, hoping that the price will drop & he can purchase those shares and deliver the, to
the person who bought them from him
➢ Risk: price of that share may start rising after he sells them, and he will still have
to buy them and deliver them to the person he sold them to.
➔ Stag: speculator that endeavours to make a quick profit out of a new listing as well as a
rights issue. When the shares of a company are listed for the first time, the market price
increases due to certain factors1. Stag will buy shares of an unlisted company right
before listing and sell them immediately at a profit after listing; or he buys cheaper rights
issue shares and sells them at a profit as soon as they are listed.
➔ Corporate actions: decisions by management that have effects on the securities of a
company.
➔ Mandatory corporate action: an event initiated by the board of directors of a corporation
that affects all shareholders. Participation is mandatory
➢ Eg cash dividends; capitalisation issue; subdivisions; mergers.
➔ Voluntary corporate action: an action which shareholders elect to participate in; a
response from shareholders is needed for the corporation to process the action.
➢ Eg rights issue; share buy-back.
➔ Economic investment: the use of the purchasing power of capital to obtain assets used
in the production process.
➔ Financial investment: the process through which the purchasing power of capital reaches
the third parties directly or indirectly via the financial intermediaries
Investment description time-frame risk Expected
type return
gambling When a person makes a High risk No guarantee
decision or executes an activity
w/o knowledge of the outcome.
1
Such as the greater marketability, prominence and status as well as the greater pool of buyers.
, speculation A person ventures money on an Short term risky Considerable
activity expecting a large return 1-2 yrs max return
after a short time / buys assets
with the purpose of selling it
within a short time for a
considerable profit.
investment Purchasing assets to retain so Long term Less risk Reasonable
that it increases in value & 5+ yrs return
provides reasonable return
Investment objectives
objective description
income Eg buy property to gain rental income
speculation Investor purchases an asset to sell it
within a short time at a considerable profit
→ high risk because the value of the
asset can decrease over the short-term.
Capital growth Buy an asset, it will appreciate, sell it later
for profit → pay capital gains tax
Take-over / merger Eg a farmer buys neighbouring farms to
make their farming more efficient.
Control over a raw materials / distribution Eg a manufacturer of shoes buys all shoe
channel stores in the area to exclusively sell his
shoes.
Share prices
1. Bid to buy: buyer's price. The highest price a buyer is prepared to pay for a share.
2. Offer to sell: seller's price. The lowest price a seller is prepared to sell their shares for.
3. Market price: last traded price.
From this you can determine market pressure on a share, eg:
Buyers price: 620
