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- Business Management 142
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- Stellenbosch University (SUN)
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BUSINESS MANAGEMENT NOTES 144CHAPTER 1: INVESTMENT CONCEPTS
BUSINESS: A DEFINITION
BUSINESS: The organised effort of individuals to produce and sell, for a profit, the goods and
services that satisfy society’s needs.
INTRODUCTION
Gambling is when a person makes a decision or executes an activity without any knowledge of
what the outcome will be. A person pushing down a lever of a gambling machine knows that the
possibility of a large return exists, but has no idea of when it might happen.
Speculation is when a person ventures his/her money (and often also other people’s money) on an
activity (for example the purchase of a cottage at the sea or of shares) with the expectancy of a large
return after a very short time period. There is a degree of knowledgeableness applicable.
Speculation holds the promise of great returns, but it is very risky.
Investments consist of the purchasing of assets with the purpose of retaining it for a considerable
period of time so that it can increase in value and/or provide reasonable return for the investor.
The investor will purchase the cottage expecting that the value will double over the next few years.
At the same time he can also earn an income from letting the property.
A distinction can be made between speculation and investment in the basis of two aspects:
• The term
• The motive
Nominal return = Actual return
Real return = Actual return – Inflation rate
,INVESTMENT OBJECTIVES
The most important reasons for investing are:
• Speculation
Although speculation is not viewed as a pure investment decision, it is one of the main
reasons why assets are acquired. The investor purchases the asset with the purpose of
selling it within a short period of time at a considerable profit. The risk during speculation is
high as the value of the asset can decrease over the short term. If the speculator purchases
the asset with borrowed money, his loss and financial dilemma will be so much bigger. The
asset could provide a substantial return. Buying asset (property, stocks, options, cattle) with
a goal to sell it for a substantial profit within 1 year. High risk
• Income
Property is purchased for the rent that it will provide shares for the dividends and fixed
deposits for the interest. Buy asset with aim to generate income (property – rental; shares –
dividend; fixed deposit – interest)
• Capital growth
Capital growth implies that the original investment eventually increases. It is on this capital
growth that South Africans must pay capital gains tax. The reason why investors seek
capital growth is to protect the purchasing power of their money. They therefore try to
obtain a capital growth that will at least be equal to the present inflation rate. Buy house
R500 000 and sell after 10 years for R5.5m (R5m capital growth). Purpose = protect
purchasing power of capital.
• Take-overs and mergers
A merger: Operates at a lower cost per unit when operating together.
Take-over: One company buying shares of another company with the purpose of eventually
taking over. Buy a 2nd neighbouring farm – farm more effectively
• Control over a raw material/distribution channel
A farmer buys a farm primarily to obtain access to a river flowing through the farm. Set of
interdependent organizations involved in the process of making a product/service available
for use /consumption
,IMPORTANT CONCEPTS/TERMINOLOGY
FINANCIAL INSTRUMENTS AND FINANCIAL SECURITIES
• Financial instruments
• Collective term: all assets or units of capital that are tradable
• Emphasis is 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 with corporation or 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 or quasi-government 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 - are debt instruments issued by state or semi-state institutions
E.g. RSA's 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)
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