INVESTMENT: SECURITIES
Factors to be considered when making investment decisions
Return on Investment (ROI)
Refers to income from the investment
High risk investments yield high returns
Risk
Refers to possibility that the invested amount may be lost over a period of time due
to unexpected circumstances
Generally there will be a direct link between risk and return
Inflation rate
People are affected by a high inflation rate because their money/purchasing power
decreases
ROI should be higher than the inflation rate
Investment Period
Refers to the duration of the investment, which may influence the ROI
Longer the investment, the more interest that will be earned
Liquidity
An amount of capital could be invested in a type of investment that can easily be
converted into cash
Describes the ease and speed with which investors can convert an investment into
cash
Forms of investments
HIGH RISK
Shares
Companies sell a portion of their ownership to shareholders in the form of shares
1. Ordinary Shares
Only receive dividends when profit is made
Normally the higher the net profit, the higher the dividend
2. Preference Shares
Fixed rate of return
Shareholders have preferred claim on company assets in event of liquidation
Participating PS
Guaranteed minimum fixed dividends
Entitled to share in any surplus company profits
Non-participating PS
Will not get extra dividends in case of surplus profits
Entitled to receive only a fixed rate of dividend every year
Cumulative PS
, Shareholders are compensated for past dividends that were not paid out when
profits were too low to declare dividends
Non-cumulative PS
Shareholders are not compensated for past dividends that were not paid out when
profits were low
3. Founder Shares
Issued to founders and promoters of the company
They receive dividends after all other shareholders were paid
4. Bonus Shares
Gifts/Payments in the form of shares to shareholders
Issued as compensation for unpaid dividends
Only receive dividends if there is profit
LOW RISK – Guaranteed a return
Fixed Deposit
Money is deposited in a bank account for a pre-determined period at a FIXED
interest rate
LOW TO MEDIUM RISK – Is spread throughout fund
Unit Trusts and this lowers risk for ALL investors
A collection of investment options made up of shares in different companies.
The money of a large number of investors is combined in a fund, which is managed
by a fund manager
LOW RISK
Government Retail Bond
Offers citizens the opportunity to invest in bonds so as to encourage
saving/investment
Interest earned and paid into savings TWICE a year
2, 3, 5 year bond available
Min. R1000 / Max. R1 mil may be invested
Impact
Advantages:
Guaranteed returns, as interest rate is fixed for the whole investment period.
Interest rates are market related and attract more investors.
Interest can be received twice a year.
Interest is usually higher than on fixed deposits.
, Negatives:
Retail bonds cannot be ceded to banks as security for obtaining loans
A minimum of R1 000 must be invested , which may be difficult for some small
investors to accumulate.
Retail bonds are not freely transferable among investors.
Functions of the JSE
Serves as a link between investors and companies
Keeps investors informed by publishing share prices in newspapers and other media
daily
Serves as a barometer of economic conditions
Allows small investors to buy shares in large companies
Calculations
ROI:
Return divided by the initial investment made
SIMPLE AND COMPOUND INTEREST:
A=P(1+i. n)
A=P¿
INVESTMENTS: INSURANCE
Factors to be considered when making investment decisions
Return on Investment (ROI)
Refers to income from the investment
High risk investments yield high returns
Risk
Refers to possibility that the invested amount may be lost over a period of time due
to unexpected circumstances
Generally there will be a direct link between risk and return
Inflation rate
People are affected by a high inflation rate because their money/purchasing power
decreases
ROI should be higher than the inflation rate
Investment Period
Refers to the duration of the investment, which may influence the ROI
Longer the investment, the more interest that will be earned
Liquidity
An amount of capital could be invested in a type of investment that can easily be
converted into cash
Describes the ease and speed with which investors can convert an investment into
cash
Forms of investments
HIGH RISK
Shares
Companies sell a portion of their ownership to shareholders in the form of shares
1. Ordinary Shares
Only receive dividends when profit is made
Normally the higher the net profit, the higher the dividend
2. Preference Shares
Fixed rate of return
Shareholders have preferred claim on company assets in event of liquidation
Participating PS
Guaranteed minimum fixed dividends
Entitled to share in any surplus company profits
Non-participating PS
Will not get extra dividends in case of surplus profits
Entitled to receive only a fixed rate of dividend every year
Cumulative PS
, Shareholders are compensated for past dividends that were not paid out when
profits were too low to declare dividends
Non-cumulative PS
Shareholders are not compensated for past dividends that were not paid out when
profits were low
3. Founder Shares
Issued to founders and promoters of the company
They receive dividends after all other shareholders were paid
4. Bonus Shares
Gifts/Payments in the form of shares to shareholders
Issued as compensation for unpaid dividends
Only receive dividends if there is profit
LOW RISK – Guaranteed a return
Fixed Deposit
Money is deposited in a bank account for a pre-determined period at a FIXED
interest rate
LOW TO MEDIUM RISK – Is spread throughout fund
Unit Trusts and this lowers risk for ALL investors
A collection of investment options made up of shares in different companies.
The money of a large number of investors is combined in a fund, which is managed
by a fund manager
LOW RISK
Government Retail Bond
Offers citizens the opportunity to invest in bonds so as to encourage
saving/investment
Interest earned and paid into savings TWICE a year
2, 3, 5 year bond available
Min. R1000 / Max. R1 mil may be invested
Impact
Advantages:
Guaranteed returns, as interest rate is fixed for the whole investment period.
Interest rates are market related and attract more investors.
Interest can be received twice a year.
Interest is usually higher than on fixed deposits.
, Negatives:
Retail bonds cannot be ceded to banks as security for obtaining loans
A minimum of R1 000 must be invested , which may be difficult for some small
investors to accumulate.
Retail bonds are not freely transferable among investors.
Functions of the JSE
Serves as a link between investors and companies
Keeps investors informed by publishing share prices in newspapers and other media
daily
Serves as a barometer of economic conditions
Allows small investors to buy shares in large companies
Calculations
ROI:
Return divided by the initial investment made
SIMPLE AND COMPOUND INTEREST:
A=P(1+i. n)
A=P¿
INVESTMENTS: INSURANCE
