A summary of business management 142 work. A document with all you will need to easily do well in the module. The summary includes diagrams, tables and graphs for a better understanding. It is well laid out and contains all the information necessary.
Investment concepts
INTRODUCTION
Gambling: no knowledge of outcome of decision.
Speculation: promise of great returns but very risky.
Investments: reasonable return, less risky.
INVESTMENT SPECULATION
TERM Long term [5 years +] Short term [1 – 2 years max]
INVESTMENT OBJECTIVES
Speculation: Buying asset [property, stocks, options, cattle] w. goal to sell it for a
substantial profit within 1 year.
High risk.
Income: Buy asset w. aim to generate income [property – rental, shares –
dividend, fixed deposit – interest].
Capital growth: Buy house R500 000 and sell after 10 years for R5.5m [R5m capital
growth].
Purpose is to protect purchasing power of capital.
Take-overs and Buy a second neighboring farm to farm more effectively.
mergers:
Control over raw Set of interdependent organizations in the process of making a
material / product / service available for use / consumption.
distribution channel:
TERMINOLOGY
FINANCIAL INSTRUMENTS AND FINANCIAL SECURITIES
Financial instruments
Collective term: all assets / units of capital that are tradable.
Emphasis on tradability of the value paper [ability to transfer ownership].
Financial securities
Financial instrument that represents:
- Investment as an owner in corporation [stock], or
- Creditor relationship w. corporation / governmental body [bond], or
- Rights to ownership [option].
Emphasis is on the guarantee function of the value paper.
SHARES
Small units of ownership that the capital of a company consists of.
Originated due to:
- Seeking large amounts of money.
- Seeking limited liability.
Share certificate:
- Document [/paper] issued to shareholder as proof of share ownership.
, - Disappeared due to dematerialization.
- Shares are purchased electronically, and shares are held in electronic record.
BONDS AND GILTS
Bonds
Tradeable debt instruments.
Can be issued by:
- Corporations [debentures].
- Governments / quasi-governmental institutions [gilts].
Characteristics:
- Loans that must be repaid on future date [maturity date].
- Fixed interest must be paid periodically to owner.
- Market price dependent on fluctuations in interest rates.
Gilts
Debt instruments issued by state / semi-state institutions.
Example:
- RSA and Eskom gilts.
SECURITIES EXCHANGE
Company that creates opportunity for potential buyers and sellers of a security to come
together for trading.
New listings; trading.
Johannesburg Stock Exchange [JSE].
STRATE AND DEMATERIALIZATION
Trading of securities on JSE facilitated by stockbroker.
When “deal is struck” ownership must be transferred between buyer and seller.
Strate (Pty) Ltd performs this function:
- “Shareholders Transactions Totally Electronic” = STRATE.
- South Africa’s Central Securities Depository [CSD].
- Electronic settlement system.
- Works together w. Central Securities Depository Participants [CSDP’s].
Dematerialization:
- 2001.
- Process whereby paper share certificates are converted to electronic format.
MONEY MARKET AND CAPITAL MARKET
Money market
Total market of all short-term funds traded.
Example:
- Short-term loans, money market funds.
Surplus / shortfall influences money market interest rates.
Capital market
Market of all long-term funds traded.
Example:
- Fixed deposits, mortgages, debentures.
Influences long-term interest rates.
PRIMARY AND SECONDARY MARKETS
Primary market
Market where listed companies and governments sell securities for the first time.
Initial issue vale = nominal value / par value.
South Africa:
- Companies Act prescribes that shares issued after 1 May 2011 have no par value.
- Average issue price.
,Additional capital required: additional shares through a rights issue.
Prospectus: information on new issue of shares and invitation to subscribe.
Secondary market
Once new shares have been issued and bought by investors, these investors can keep them
or trade them.
Trading takes place in the secondary market.
Market price: determined by supply and demand.
SHARE PRICE
Price at which shares are traded in the secondary market [market price].
- Bid to buy [buyer’s price] [bid]: highest price buyers will pay.
- Offer to sell [seller’s price] [offer]: lowest price sellers will sell at.
- Market price [last]: last traded price [price at which last transaction took place].
These prices can help identify price trends.
- 620 [bid]; 630 [offer]; 610[last].
- Price trend: upwards.
- Next transaction: probably higher than 610c.
BLUE CHIPS
Ordinary shares of companies w. an elite investment status.
Good reputation over long-term by maintaining:
- Stable and sound profit and dividend history.
- Healthy growth prospects.
PORTFOLIO AND DIVERSIFICATION
Portfolio
Composition of a person’s investments.
Can consist of shares, bonds, properties, options, etc.
Diversification
Do not place all your eggs in one basket.
Invest in different companies / sectors.
Include instruments w. different risk profiles in portfolios.
RISK
Possibility that actual returns realized on investments may be lower than expected return.
INSTITUTIONAL INVESTORS AND UNIT TRUSTS
Institutional investors
Enterprises investing w. large amounts of capital.
Example: insurance companies, pension funds and mutual funds.
Unit trusts
Pooling of money:
- Collect small amounts of savings from individuals and companies and invest large
amounts in a diversified portfolio.
Advantage:
- Managed by trained investment professionals.
LISTING
Right a company obtains to trade its shares on a stock exchange after certain prerequisites
are met.
IPO [Initial Public Offering].
Pre-listing statement:
- Document issued after company complied w. all requirements for listing on JSE.
- Source of information about proposed listing.
, - Not an invitation to buy additional shares.
ARBITRAGE
Product traded on two / more markets: risk free profit made from short-term price
differences.
Buy product on the cheaper market and sell it on the more expensive market.
Steps:
1. Determine whether a mispricing exists.
2. Determine how to exploit the mispricing.
3. Determine profit to be made.
BULL AND BEAR MARKETS
Bull market
Period of continuous price increases over the long-term.
Strong buying pressure [demand].
Prices of most shares will increase.
Bear market
Period of mainly price decreases over the long-term.
BULLS, BEARS AND STAGS
Bull
Buys shares at low price, keep for long-term, sell after a few years, makes a profit.
Bull speculator
Motive is to achieve short-term capital gain.
Sells shares to obtain funds to pay for purchase of shares.
Bear speculator
Sells shares not in his possession, hoping prices will continue to drop [short sales].
Example:
- Peter sells 1 000 shares [that he does not own] to John for R5 per share. Share price
drops and after a few days Peter buys 1 000 shares from Garth for R4 per share. Peter
delivers the shares to John.
- Summary: Peter pays R4 000 [1 000 @R4 ps].
Peter sells R5 000 [1 000 @R5 ps].
Profit: R1 000
Bear market
Market where the expected prices of products [stocks, cryptocurrency, property, etc.] within
that market are expected to go down or at least show signs of declining in value.
A bear speculator wants this as they can make a profit from shorting one of these products
because they can sell shares they do not own and repay their own debt at a lower price
thus making a profit.
Stag
Stag is a speculator that makes quick profit from:
- New listing.
- Rights issue.
CORPORATE ACTIONS
Decisions made by management that have effect on securities issued.
Mandatory corporate actions
Participation of shareholders is mandatory.
E.g. dividends, capitalism [bonus] issues, subdivisions [stock splits] and mergers.
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