Summary

Summary Business Management 142 notes

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Course
Business Management 142 (BUSMAN142)

Institution
Stellenbosch University (SUN)

I used all of the lectures as well as the notes we were given in class to summarise the semesters work for the whole module. These are well summarised and understandable notes, perfect for studying for A1, A2 or A3.

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Uploaded on October 26, 2022
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busman
142
business
business management
stellenbosch
a1
a2
a3
stellies
notes

Institution
Stellenbosch University (SUN)
Course
Business Management 142 (BUSMAN142)

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Business Management 142

Chapter 1 - Investment concepts
Terminology

Gambling: no knowledge of outcome of decision
Speculation: promise of great returns but high risk
Investments: reasonable return, less risky

Di erence between investments and speculations
- Term: Investment = long term/5+ years, Speculation = short term/1-2 years
- Motive: Investment = require a reasonable return, Speculation = require a considerable
return

Objectives of investments

1. Speculation: Buying asset (property, stocks, options, cattle) with a goal to sell it for a
substantial pro t within 1 year

2. Income: Buy asset with aim to generate income (property – rental, shares – dividend,
xed deposit – interest)

3. Capital Growth: e.g. Buy a house and sell after 10 years for more, capital increased by
the di erence. Purpose is to protect purchasing power of capital

4. Take overs and mergers: e.g. Buy a neighbouring farm – farm more e ectively

5. Control over raw materials or a distribution channel: Set of interdependent organisations
involved in the process of making a product/service available for use/consumption

Financial Instruments

- Collective term for all tradable assets or units of capital
- Ability to transfer ownership is a requirement

Financial Securities
- a nancial instrument that represents:
1. Investment as an owner in corporation (share)
2. Creditor relationship with corporation or governmental body (bond)
3. Rights to ownership (option)

Shares

Shares: Small units of ownership that the capital of a company consists of
- Originated due to companies seeking limited liabilities and seeking lots of capital
Share certi cate: document issued to prove ownership of a share
Dematerialisation: Switching from paper-based to electronic

Bonds & Gilts

Bonds: tradable debt instruments

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, - Can be issued by corporations (debentures) or Governments (gilts)
- Loans that must be paid by the maturity date
- Fixed interest must be paid periodically to owner
- Market price of bonds that can be sold depends on interest rates

e.g. Eskom has gilts

Securities exchange

Company that creates a platform/opportunity for buyers and sellers to trade shares/bonds
e.g. Johannesburg Stock Exchange

STRATE

STRATE = share transactions totally electronic
- O er trading of securities on JSE facilitated by a stockbroker
- Ownership is transferred between buyers and sellers
- Record keepers
Money market and capital market

Money market: Market for all short term funds traded
- Surplus or short falls in uence money market interest rates
e.g. short term loans, money market funds

Capital market: Market of all long term funds traded
- in uences long term interest rates
e.g. xed deposits, mortgages, debentures

Primary and Secondary markets

Primary market: Where listed companies and governments sell securities for the rst time

- Initial issue value: nominal value / par value
- Average issue price is used instead in South Africa
- Prospectus: Information on new issues of shares and invitation to subscribe
Secondary market: Trading takes place in this market after shares have already been
bought initially

- Market price: determined by supply and demand
Share price

Share price/market price: Price at which shares are traded in the secondary market

- Bid: buyers price, highest they’re willing to pay
- O er: sellers price, lowest they’ll sell at
- Last: market price, last traded price of a share
These prices help to see trends e.g. 620 bid, 630 o er, 610 last has un upward trend

Blue chips: Ordinary shares that have elite investment status
- good reputation over a long period because they maintain: stable and sound pro t /
dividend history & have healthy growth prospects

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, Portfolio and diversi cation

Portfolio: composition of a persons investments e.g. shares, bonds, properties, options etc.

Diversi cation: Investing in di erent companies and / or sectors
- Include investments that have di erent risk pro les in the portfolio

Even if company A goes wrong your
diversi ed portfolio can still make a pro t

Risk: Possibility that the actual returns realised on an investment may be lower than the
expected return

Institutional investors and trusts

Institutional investors: enterprises investing with large units capital e.g. insurance
companies, pension funds, mutual funds

Unit trusts: pooling of money - collect small amounts of savings from individuals and
companies and invest large amounts in a diversi ed portfolio
- Advantage: managed by trained investment professionals
Listing
Listing: Right a company obtains to trade its shares on a stock exchange after certain
requirements are met

IPO: Initial public o ering

Pre-listing statement: Document issued after a company complied with all JSE listing
requirements. It is a source of information about a proposed listing and not an invitation to
buy additional shares.

Arbitrage
Arbitrage: product traded on 2+ markets, risk-free pro t made from short term price
di erences on the di erent markets. E.g. buy product on the cheaper market and sell it on
the more expensive market.

Steps:
1. Determine whether a mis-pricing exists
2. Determine how to exploit the mis-pricing
3. Determine the pro t to be made

Example: JSE: Share worth R140, NYSE: Share worth $7.85, exchange rate $1 = R17.40

Q: Which exchange should you buy shares? What will the pro t be?

A: JSE: R140 per share, NYSE: 7.85 x 17.40 = R136.59 per share
Buy on the NYSE, sell on the JSE
Pro t = R3.41

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, Bull and bear markets

1. Bull market: Period of continuous price increase over the long-term. Strong buying
pressure / demand. Prices of most shares increase

Bull: Buys shares at low price, keeps them for a long period and sells after a few years to
make a pro t

Bull speculator: Sell shares to obtain funds to purchase shares, achieve short term capital
gain

2. Bear market: Period of mainly price decrease over the long term

Bear speculator: Sells shares not in their possession, hoping prices will continue to drop
(shorting / short sales)
e.g. I sell 1000 shares I don’t own for R5 per share to X, share price drops and I buy 1000
shares from somewhere else for R4 per share and give the shares to X. (Pay 4000, sold for
5000, keeps 1000 pro t)

Stag: Speculator who makes a quick pro t from a new listing or a rights issue (company
gives shareholders the option to buy more shares)

Corporate actions
Corporate actions: Decisions made by management that have e ect on securities issued

Mandatory corporate actions: participation of shareholders is mandatory e.g. dividend,
capitalisation (bonus) issues, subdivision (stock splits) and mergers

Voluntary/elective corporate actions: Shareholders elect to participate e.g. rights issues and
share buy-backs

INVOLUNTARY
1. Dividends:

Dividends: portion of pro t after tax, subdivided amongst shareholders
- preference share and ordinary shares
- Interim after 6 months + nal dividend = total dividend for year
Timeline of dividends
1. Announcement/Declaration - 13 days before record date
2. Cum-Dividend - Buy shares cum dividend: including right to dividends
3. Ex-Dividend: 1 business day after end of cum-dividend payment date
4. Record date: Company closes register on a Friday for mandatory corporate actions
5. Payment date: Dividends paid into account

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