Chapter eight : Investment
3 criteria to evaluate every investment option :
1.Risk: a high risk investment is expected to give a higher return IF it succeeds, but could also mean a big loss (eg. betting
everything on red at roulette).
2.Return on investment (ROI): measures the efficiency of the investment – what the investor gets back over and above what
was invested.
3.Time frame: the longer the period, the more risk the investor can afford to take (20 years old vs 50 years old).
KEY TERMS :
1. Diversification: not keeping all your eggs in one basket – a combination of options spreads the risk.
2. Capital growth: the increase in the value of the investment over time.
3. Blue-chip shares: shares in high-end, well-established companies – lower risk, but a lower ROI.
4. Speculator: buys shares for a quick short-term profit, not for dividends.
A) Investment strategies
1) Growth
a. High risk
b. Long-term capital growth rather than monthly income
c. Eg. JSE shares – blue-chip shares reduce the risk somewhat
2) Balanced
a. Medium risk
b. Capital growth plus some monthly income
c. Mix of equities and interest-bearing investments (fixed deposit, property with rent)
3) Defensive
a. Low risk
b. Mainly monthly income, but some capital growth
c. Property and money in the bank, small amount in equities
4) Conservative
, a. No risk
b. Monthly income while maintaining the capital
c. Mostly property and cash instruments
B) Equities / shares
1) Owning a portion of a company – listed on the JSE or unlisted
2) Where the money goes:
a. Bought from the company when first issued → capital for the business
b. Bought on the JSE from a previous shareholder → money goes to that person, NOT the business
3) Risk:
a. Moderate to high
b. JSE has strict listing rules to protect investors
c. Blue-chip shares = lower risk, lower ROI
d. Speculators take bigger risks for quick profits
4) ROI:
a. Increase in share price (capital growth)
b. Dividends – a share of the profits
c. Together these usually outperform inflation
5) Factors affecting the share price (demand and supply):
a. Confidence in the economy – bull market (optimistic, buy) vs bear market (pessimistic, sell)
b. Government policies (eg. talk of nationalisation)
c. Industry performance (eg. strikes or a World Cup)
d. Financial performance – sales, profits, ratios
e. Confidence in management
f. Social issues – CSR, environmentally friendly, law suits
6) Time frame: long-term (blue-chip). Speculators: short-term
C) Debentures
1) Also called bonds – a loan to a company, a letter of credit (“IOU”) to raise capital for large projects
2) Usually unsecured, but debenture holders rank higher than shareholders if the company is liquidated
3 criteria to evaluate every investment option :
1.Risk: a high risk investment is expected to give a higher return IF it succeeds, but could also mean a big loss (eg. betting
everything on red at roulette).
2.Return on investment (ROI): measures the efficiency of the investment – what the investor gets back over and above what
was invested.
3.Time frame: the longer the period, the more risk the investor can afford to take (20 years old vs 50 years old).
KEY TERMS :
1. Diversification: not keeping all your eggs in one basket – a combination of options spreads the risk.
2. Capital growth: the increase in the value of the investment over time.
3. Blue-chip shares: shares in high-end, well-established companies – lower risk, but a lower ROI.
4. Speculator: buys shares for a quick short-term profit, not for dividends.
A) Investment strategies
1) Growth
a. High risk
b. Long-term capital growth rather than monthly income
c. Eg. JSE shares – blue-chip shares reduce the risk somewhat
2) Balanced
a. Medium risk
b. Capital growth plus some monthly income
c. Mix of equities and interest-bearing investments (fixed deposit, property with rent)
3) Defensive
a. Low risk
b. Mainly monthly income, but some capital growth
c. Property and money in the bank, small amount in equities
4) Conservative
, a. No risk
b. Monthly income while maintaining the capital
c. Mostly property and cash instruments
B) Equities / shares
1) Owning a portion of a company – listed on the JSE or unlisted
2) Where the money goes:
a. Bought from the company when first issued → capital for the business
b. Bought on the JSE from a previous shareholder → money goes to that person, NOT the business
3) Risk:
a. Moderate to high
b. JSE has strict listing rules to protect investors
c. Blue-chip shares = lower risk, lower ROI
d. Speculators take bigger risks for quick profits
4) ROI:
a. Increase in share price (capital growth)
b. Dividends – a share of the profits
c. Together these usually outperform inflation
5) Factors affecting the share price (demand and supply):
a. Confidence in the economy – bull market (optimistic, buy) vs bear market (pessimistic, sell)
b. Government policies (eg. talk of nationalisation)
c. Industry performance (eg. strikes or a World Cup)
d. Financial performance – sales, profits, ratios
e. Confidence in management
f. Social issues – CSR, environmentally friendly, law suits
6) Time frame: long-term (blue-chip). Speculators: short-term
C) Debentures
1) Also called bonds – a loan to a company, a letter of credit (“IOU”) to raise capital for large projects
2) Usually unsecured, but debenture holders rank higher than shareholders if the company is liquidated
