CHAPTER 8 – INVESTMENT
Overwhelming to decide on investment option. Following criteria used to evaluate each of
the investment options:
- Risk
- Return on investment (ROI)
- Time frames
A. RISK
- Higher risk investment expected to deliver higher return on investment IF the
investment succeeds. May also result in great loss if it fails.
- Further idea related to risk = diversification = not all eggs kept in one basket.
- Not ONE of the investment options is used to hold all reserves, but rather that a
COMBINATION of options is used to spread risk over different assets.
- At the time, investor has the choice to choose degree of risk relative to the most
suitable investment option.
B. RETURN ON INVESTMENT (ROI)
The tool used to measure the efficiency of an investment. It is an indicator of what the investor
will get back over and above original investment made.
C. TIMELINES (PERIOD OF INVESTMENT)
- Longer period available to investor = greater risks investor can afford to take.
- If someone who is 20 wants to make provision for retirement, they have another 45 years to
discover losses. However someone who is 50 wanting to make provision has less time before
retirement age = cannot afford to take many risks regarding investments
- Different investment strategies include:
GROWTH INVESTMENT STRATEGY: BALANCED INVESTMENT STRATEGY:
High risk Investor prepared to accept medium risk
Long-term capital growth instead of monthly Aim = capital growth, with monthly income as
income well
Shares on JSE may be considered, with Blue-chip Combination of equities & interest-bearing
investments reducing risk investment considered
DEFENSIVE INVESTMENT STRATEGY: CONSERVATIVE INVESTMENT STRATEGY:
Low risk Investor wants no risk
Emphasis on monthly income, investor wants Focus on monthly income, while maintaining
some capital growth too capital amount of investment
Investments in property/money in the bank, Most investment in property/cash instruments to
smaller investment in equities. generate monthly income
Equities also known as shares in a company – listed or unlisted.
Look at listed companies when considering equities & shares
o Because info on shares’ performance readily available.
o Unlisted companies don’t make financial performance info readily available to
anyone but shareholders, banks, creditors & SARS.
o Without financial info = impossible to evaluate whether investment has
delivered acceptable ROI.
Each owner of shares each own portion of business.
TWO OPTIONS/METHODS TO BECOME SHAREHOLDER IN JSE LISTED COMPANY:
- Shares bought from company when shares are issued the first time, therefore, person who
bought shares contributes capital to business.
- Shares bought on JSE from previous shareholder. Money paid for share is not going to the
business, but to the person who sold shares. Shares bought and sold on JSE have no impact on
capital available to business.
Risk:
- Stock exchanges have strict rules for companies to list on it – to protect investors & decrease
risk of people investing in listing person. Equities are still seen as moderate to high risk.
- Blue-chip shares = shares in high-end companies on stock exchange, the risk of acquiring
shares is smaller than other companies. ROI is usually higher.
- Investors usually take smaller risks than people speculating with share
RETURN ON INVESTMENT (ROI)
Two factors that contribute to ROI:
o Increase in share price.
o Dividends.
Shareholders that buy shares, have certain expectations:
- Share price will increase over time = capital growth.
- Good dividends will be generated
- Dividends = profits of the company that are divided among shareholders, are not taxed in the
hands of shareholders in SA.
- Combination of both above occurs = helps outperform inflation
Market forces/demand & supply determine the price of the share on the stock market. Determined
by how many supplied and demanded.
- Because info on shares’ performance readily available.
- Unlisted companies don’t make financial performance info readily available to anyone but
shareholders, banks, creditors & SARS.
- Without financial info = impossible to evaluate whether investment has
delivered acceptable ROI.
Each owner of shares each own portion of business.
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