Investment is the creation of wealth through the use of
capital.
The major asset classes and risk:
Four major asset classes:
Cash Property Bonds Equities
Cash: Low Risky
Examples: Bank deposits and money market( short term trade in loans between banks
and other financial institutions) accounts.
Offers investors regular interest income.
Capital is not subject to huge external fluctuations
Cannot be used to male a huge fortune, however can safeguard from losing one.
Property: Moderate to high risk
Can keep up with inflation.
Very effective way of gearing investment.
By using external financing, investors can make a profit out of borrowed money.
This is called positive leverage effect
The success of this type of investment depends on location, political as well as eco-
nomic environment.
Drawback of this asset class is lack of liquidity (how quickly asset can be converted to
cash)
Safest option is therefore to own a home.
Bonds: Moderate Risk:
Bonds/gilts are interest bearing securities issued by government or companies in order
to borrow money.
They promise to pay the lender interest as the lenders capital on a specific date
The interest payments can be higher than on cash
, Equities: High risk:
Means that investors have obtained part-ownership in the company whose shares they
have bought.
Owners of shares are called shareholders.
Public companies are listed on the stock exchange like the JSE in South Africa.
Equities have the best chance of bearing inflation over the long term.
The longer the time before retirement means the more one should invest in equities.
Profits received by shareholders from a company are called DIVIDENDS.
Rule of Investment:
The bigger the risk, the greater the possible reward/return.
The smaller the risk, the smaller the return/reward.
Diversification:
Means spreading the investment risk between the various asset classes.
Simply put it means, not putting all your eggs in one basket.
Risk Profiling:
It is an evaluation of an individual/organisation’s willingness to take risks.
Important for determining a proper investment asset allocation for a portfolio
Used as a way to mitigate potential risks and threats
Decided into:
Risk capacity: ability to take risks. Depends on age, income, dependents.
capital.
The major asset classes and risk:
Four major asset classes:
Cash Property Bonds Equities
Cash: Low Risky
Examples: Bank deposits and money market( short term trade in loans between banks
and other financial institutions) accounts.
Offers investors regular interest income.
Capital is not subject to huge external fluctuations
Cannot be used to male a huge fortune, however can safeguard from losing one.
Property: Moderate to high risk
Can keep up with inflation.
Very effective way of gearing investment.
By using external financing, investors can make a profit out of borrowed money.
This is called positive leverage effect
The success of this type of investment depends on location, political as well as eco-
nomic environment.
Drawback of this asset class is lack of liquidity (how quickly asset can be converted to
cash)
Safest option is therefore to own a home.
Bonds: Moderate Risk:
Bonds/gilts are interest bearing securities issued by government or companies in order
to borrow money.
They promise to pay the lender interest as the lenders capital on a specific date
The interest payments can be higher than on cash
, Equities: High risk:
Means that investors have obtained part-ownership in the company whose shares they
have bought.
Owners of shares are called shareholders.
Public companies are listed on the stock exchange like the JSE in South Africa.
Equities have the best chance of bearing inflation over the long term.
The longer the time before retirement means the more one should invest in equities.
Profits received by shareholders from a company are called DIVIDENDS.
Rule of Investment:
The bigger the risk, the greater the possible reward/return.
The smaller the risk, the smaller the return/reward.
Diversification:
Means spreading the investment risk between the various asset classes.
Simply put it means, not putting all your eggs in one basket.
Risk Profiling:
It is an evaluation of an individual/organisation’s willingness to take risks.
Important for determining a proper investment asset allocation for a portfolio
Used as a way to mitigate potential risks and threats
Decided into:
Risk capacity: ability to take risks. Depends on age, income, dependents.
