Summary
Summary Investment Opportunities & Insurance - Business Studies (Grade 12)
- Course
- Business Studies
- Institution
- Private
Investment Opportunities & Insurance - Business Studies This section includes: - Investments - Insurance
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Investment opportunitiesand insurance
INVESTMENT:
INTRODUCTION:
INVES TM EN T t ak e s plac e w h e n m one y i s s av e d i n orde r t o m ak e i t grow . Th e am ount i nv e s t e d i s know n
as t h e C AP ITAL C O NTRIB U TIO N.
Inv e s t i ng i s t h e c re at i on of w e alt h t h rough t he us e of c api t al.
D e c i di ng on t h e ri gh t as s e t s t o i nv es t i n, k now i ng you r ri s k prof i le and u nde rs t andi ng t h e v ari ous as s e t
c las s e s i s vi t al t o m ak e s uc c e s sf ul i nv e s t me nt de c i s i ons . E. g. P layi ng Roule t t e – h ow m uc h c an I af f ord
t o be t /los e
Any i nv e s t or s h oul d h av e a bas i c k now le dge of t h e F O U R M AJO R AS S ET C L AS S ES and t h e RIS K i nh e re nt
i n e ac h.
“ Th e bi gge r t h e ri sk you t ak e , t h e gre at e r t h e pos s i ble re w ard (grow t h i n c api t al)”
As an i nv e s t or y ou ne e d t o k now y our RIS K P RO F IL E, i .e . How m uc h ri s k you c an af f ord O R are w i lli ng
t o t ak e .
Inv e s t m e nt s m ay be c las s i f ie d as L O W RIS K, M OD ERATE RIS K and HIG H RIS K
Th e F O U R AS S ET C L AS S ES are : C AS H, P RO P ERTY , B O ND S and EQU I TIES .
INVESTMENT OPTIONS WILL BE EVALUATED ACCORDING TO: RISK, ROI,
TIMELINE:
R I S K = a h i gh ri s k i n v e s t m e n t i s e x pe c t e d t o de l i v e r a h i gh e r re t u r n o n i n v e s t m e n t ( R O I ) I F t h e
i n v e s t m e n t s uc c e e d s . A h i gh r i s k i n v e s t m e n t c o u l d a l s o r e s u l t i n a b i g l o s s i f t h e i n v e s t m e n t f a i l s .
D i v e r s i f i c at i o n c a n l ow e r t h e r i s k a s ri s k i s s p re a d o v e r a c om b i n a t i o n o f a s s e t o p t i o n s .
R E T U R N O N I N V E S T M E N T = a t o o l t o m e a s u r e t h e e f f i c i e nc y o f t h e i n v e s t m e n t of w h a t t h e i n v e s t o r
w i ll g e t b ac k o v e r a n d a b o v e t h e o ri g i n a l i n v e s t m e n t ( p r o f i t ).
T I M E L I N E = t h e l o n ge r t h e p e ri o d o f i nv e s t m e nt a v a i l a b le t o t h e i n v e s t o r , t h e g r e a t e r t h e ri s k s a r e
t h a t t h e i n v e s t o r c a n a f f o r d t o t a k e , b e c a u s e t h e l o n ge r t h e t i m e o f r e c o v e r y a v ai l a b l e i f t h e
i n v e s t m e n t f a i l s . E. g . A 2 0 ye a r o l d c a n t ak e m o r e r i s k w h e n i nv e s t i n g f o r r e t i r e m e n t (+ 4 5 y e a r s )
c o m p a r e d t o a 5 0 y e a r o l d s t a r t i n g a r e t i re m e n t i n v e s t m e n t (+ 1 5 y e a r s ).
THE MAJOR ASSET CLASSES AND RISK:
CASH – LOW RISK, LOW REWARD:
SASHTI NOTES 1
, • E . g . B a n k de p o s i t s , M o n e y M a rk e t A c c o u n t s – o f f e rs i nv e s t o r s t h e a s s u r a nc e o f a re g u l a r
i n t e re s t a n d t h e k n o w le d g e t h a t t h e i r c a p i t al w i l l n o t b e s u b j e c t t o h u ge e x t e r n a l
fluctuations.
• T h e r e i s n o g u a r a n t e e t h at t h e c a p i t a l s u m w i l l b e p r o t e c t e d a g a i n s t I N F L A T I O N . ( I nf l a t i o n =
5,26%)
• I n v e s t m e n t i n C A S H i s e s s e n t i a l l y a n i nc o m e ge n e r a t i n g i n v e s t m e n t a n d i f y o u w a n t t h e i n i t i a l
i n v e s t m e n t t o g r o w , t h e n t h e i nc o m e ge n e r a t e d m u s t b e r e i n v e s t e d .
P R O P E R T Y – M O D E R A T E T O H IG H R I S K :
• P r o p e r t y i s o f t e n t h e b i g ge s t a s s e t i n a p e r s on ’ s i n v e s t m e n t p o r t f o l i o e . g. O w ni n g a h o u s e .
• P r o p e r t y c a n k e e p u p w i t h I N F L A T IO N a n c a n b e a v e r y e f f e c t i v e w a y o f G E A R I N G ( t h e
r a t i o b e t w e e n b o r r o w e d t o o w n c a p i t al ) y o u r i n v e s t m e nt . U s i n g s o m e o n e e l s e ’ s m o ne y t o
i n c re a s e t h e r e t u r n o n y o u r i n v e s t m e n t – m ak i n g a p r o f i t o u t o f b o r r o w e d m o n e y . U s i n g t h e
b a n k s m o n e y t o b u y y o u r h o u s e a n d w h e n t h e h o u s e i n c re a s e s i n v a l u e o v e r t i m e , y o u
b e n e f i t . T h i s i s k n ow n a s a P O S I T I V E L E V E R AG E E F F E C T.
• D E B T i n t h e f o r m o f a M O R T G AG E B O N D c a n h e l p i nv e s t o rs a c q ui r e a n a s s e t , a n d a R E T U R N
o n t h e i n v e s t m e n t , t h at t h e y w o u l d n o t o t h e rw i s e b e a b l e t o af f o r d.
• R I S K d e p e n d s o n t h e l o c a t i o n o f t h e p r o p e rt y , t h e p o li t i c a l a n d e c o n o m i c e n v i r o n m e n t .
• A d r a w b a c k of t h i s i n v e s t m e n t c l a s s i s i t s l ac k o f L I Q U ID I T Y ( c a n n o t s e l l p r o p e r t y a s q u i c k l y
a s o t h e r as s e t c l a s s e s – t u r n i n g a s s e t t o c a s h )
BONDS – MODERATE RISK:
• B o n d s o r G i lt s = i n t e re s t - b e a ri n g s e c u ri t i e s i s s u e d b y g o v e r n m e nt o r c o m p a n i e s i n o r d e r t o
b o r r o w m o n e y f r o m i n v e s t o r s . “ IO U ” i n w h i c h t h e y p r o m i s e t o p a y t h e le n d e r I N T E R E S T
( k n o w n a s a c o u p o n ) a n d p a y b a c k t h e l e n de r ’ s C A P I T A L S U M o n a s p e c i f i c d a t e ( r e de m p t i o n
date).
• B o n d s a r e i s s u e d b y c o m p a ni e s a n d G i lt s b y t h e g o v e r n m e nt t o r a i s e m o n e y.
• R I S K - T h e c a pi t a l s u m i n v e s t e d c a n f l u c t u a t e , w h i l e t h e i n t e r e s t p a y m e n t c a n b e h i gh e r
than on cash.
EQUITIES – HIGH RISK:
• E q u i t i e s (S h a re s o r S t oc k s ) = t h e i n v e s t o r h a s o b t a i n e d p a r t - o w n e rs h i p i n t h e c o m p a n y a n d
b e c o m e a s h a re h o l de r .
• S h a r e s = S t oc k s ( a “ s t o c k ” i s a ge n e r a l t e r m t o d e s c ri b e t h e ow n e r s h i p c e rt i f i c a t e s o f a n y
c o m p a n y , w h e r e “ s h a r e s ” re f e r s t o a n o w n e rs h i p c e rt i f i c a t e i n a p a r t i c u l a r c o m p a n y –
“shares in what company?”
• S o m e c om p a n i e s a r e li s t e d o n a s t o c k e x c h a n g e w h i c h m e a n s t h a t s h a re s c a n be t r a d e d
f r e e l y o n t h a t s t o c k e x c h a n g e e . g . J S E L t d.
• H i g h ri s k , b u t b e s t c h a n c e o f b e at i n g I N F L A T I O N o v e r t h e l o n g t e r m . ( RO I )
• B L U E C H I P S H A R E S = m a j o r , s t a b le c om p a n i e s . T h e R I S K i n t h e s e s h a r e s a r e l o w e r t h a n
h a v i n g s h a re s i n o t h e r c om p a n i e s . Th e RO I i s al s o h i gh e r t h a n i n o t h e r c om p a n i e s .
• A s h a r e h o l d e r m a y s h a r e i n t h e p r o f i t of a c om p a n y b y r e c e i v i n g a D I V I D E N D .
• H i g h - ri s k P r o f i le s /P o r t f o li o s s h o u l d k e e p a s i gn i f i c a n t p o r t i o n o f t h e i r p o r t f o li o i n e q u i t i e s .
T h e l o n g e r b e f o r e re t i r e m e n t – t h e m o r e y o u s h o u l d i n v e s t i n e q ui t i e s ( y o u h av e m o r e t i m e t o
r e c o v e r f r om h i g h ri s k i nv e s t m e n t s a n d e q u i t i e s n o r m a l l y t a k e s l o n g e r t o g r ow )
• W h a t d e t e r m i n e s t h e s u p p l y a n d d e m a n d o f a pa r t i c u l a r s h a re / s h a r e p ri c e o n t h e J S E ?
o T h e le v e l o f c o n f i de n c e i n t h e s t a t e o f t h e e c on o m y – w h e n t h e e c o n o m y i s d oi n g w e l l ,
i n v e s t o r s w i l l f e e l c o n f i d e n t a b o u t i n v e s t i n g o n t h e JS E ( B u l l m a r k e t ) v s i nv e s t o r s
a n t i c i p a t i n g l o s s e s , t h e y w i l l s e l l t h e i r s h a r e s (B e a r m a rk e t ).
SASHTI NOTES 2
, o G o v e r nm e n t p o li c i e s o r n e w l e gi s l a t i o n – w i l l i m pa c t o n t h e c o nf i de n c e i n t h e e c o n o m y
a n t t h e re f o r t h e s h a r e p r i c e s . E . g. “ j u n k s t a t u s ” i n v e s t o r s w i l l s e l l t h e i r s h a r e s .
o I n d u s t r y p e r f o r m a n c e – s o m e i n d u s t ri e s m a y be m o r e a t t r a c t i v e t o i nv e s t o r s t h a n
o t h e r s . E. g . G o o d o r b a d p u b l i c i t y i n a n i n d u s t ry m a y c a u s e s h a r e p ri c e s t o f a l l o r
i n c re a s e .
o F i n a n c i a l pe r f o r m a nc e of t h e b u s i ne s s – t h e b e t t e r t h e f i n a nc i al p e rf o r m a n c e o f a
b u s i n e s s , t h e m o re l i k e l y t h e c om p a n y i s t o d e c l a r e g o o d d i v i de n d s a n d a s a r e s u l t t h e
s h a r e p ri c e s i s li k e l y t o i nc r e as e .
o M a n a g e m e n t a n d t h e p u b l i c ’ s c o n f i d e nc e i n t h e m a n a g e m e n t t e am – t h e h i gh e r t h e
c o n f i de n c e , t h e h i gh e r t h e de m a n d i n s h a re s , t h e h i gh e r t h e s h a r e p ri c e s w i ll
i n c re a s e . E. g . M e di a a r t i c le s o f t h e c u r re n t C E O , C F O e . g. E S KO M .
o S o c i a l i s s ue s s u r r o u n d i n g t h e c o m p a n y – m a y h a v e a p o s i t i v e o r n e g a t i v e i m p a c t o n
s h a r e p ri c e s . E. g . E nv i r o n m e n t a l l y f ri e n d l y m an u f a c t u r i n g p r oc e s s e s , C S R
involvement.
o L e g a l i s s ue s – p e n di n g l a w s ui t s o r a l le g a t i o n s o f p r i c e f i x i n g m a y n e g a t i v e l y i m p ac t
t h e s h a re p r i c e s .
o M e di a c o v e r a g e – i n c re a s e s t h e p u b l i c aw a r e n e s s o f t h e c o m p a n y / i n d u s t r y /c o u n t r y ,
c r e a t i n g p e rc e pt i o n s t h e re o f , t h a t m a y i m p a c t t h e s h a re p r i c e s .
o T i m e f r a m e – L o n g t e r m w h e n p u r c h a s i n g b l u e -c h i p s h a r e s w h e re t h e r e i s c a p i t a l
g r o w t h a n d w h e r e di v i d e n d s a r e u s e d t o p u r c h as e m o r e b l u e -c h i p s h a r e s .
P e o p l e t h at s pe c u l a t e b u y i n g s h a r e s i n c o m p an i e s t h a t w i l l h av e a q u i c k a n d s i g n i f i c a n t i n c re a s e i n
t h e s h a re p r i c e , w i l l t h e n s e ll t h e s h a r e s w h e n t h e re i s a n o p p o r t u n i t y t o m a k e a p r o f i t b a s e d o n a
h i gh e r s h a re p r i c e . T h e s pe c u l a t o r i s n o t r e a l ly c o n c e r ne d w i t h d i v i d e n d s . ( s h o r t e r t e rm i nv e s t m e nt
i n s h a re s )
R i s k : J S E L t d h av e s t r i c t r u l e s t o p r o t e c t i nv e s t o r s , b u t e q u i t i e s a r e s t i l l s e e n a s h i gh - r i s k
i n v e s t m e n t s . T h e r i s k i n B l ue - c h i p s h a re s a r e lo w e r.
R O I : I n c re a s e i n s h a r e p ri c e o r g o o d d i v i d e n d s g e n e r a t e d o r a c o m b i n a t i o n o f b o t h . W a n t t o
outperform inflation.
Time frame: Long term
DIVERSIFICATION:
D i v e r s i f i c at i o n m e a n s s p r e a di n g t h e i n v e s t m e n t r i s k be t w e e n t h e v a ri o u s a s s e t c l as s e s . “ N o t p u t t i n g
all your eggs in one basket”
M o s t i n v e s t m e n t p l a n s s h o u l d i nc l u d e a c o m bi n at i o n o f t h e f o u r a s s e t c l a s s e s be c a u s e o f t h e
b e n e f i t s of d i v e r s i f i c a t i o n. B a l a nc i n g t h e r i s k a n d r e w a r d s w i t h i n t h e p o r t f o li o .
RISK PROFILING:
P o t e n t i a l i nv e s t o r s s h o u l d c o m p le t e a n I N V E S TM E N T R I S K P R O F I L E t o d e t e rm i ne t h e t y p e of
i n v e s t m e n t o p t i o n s b e s t s ui t e d t o t h e i nv e s t o r a n d h i s /h e r pe r s o n a l c i rc u m s t a nc e s . ( H ow m u c h r i s k
can they tolerate? How much money are they prepared to lose? Why do they want to invest?
C r e a t e m o n t h l y i n c om e O R g r o w t h e i r c a p i t a l i nv e s t m e nt – i nv e s t m e nt o b j e c t i v e s ? T h e i r a ge – h o w
l o n g c a n t h e i nv e s t f o r ? H o w m u c h m o n e y d o t h e y h a v e t o i nv e s t – t h e i r f i n a n c i a l p o s i t i o n ? )
CRITERIA used to choose an investment option/combination:
1 . I n v e s t m e nt t im e f r a m e – t h e l o n g e r t h e i n v e s t m e nt t i m e h o r i z o n , t h e m o r e t h e c u s t o m e r
c a n a f f o r d t o h a v e h i gh e r ri s k i nv e s t m e nt s a s t h e re i s t i m e t o r e c ov e r f r o m l o s s e s o r p r i c e
f l u c t u a t i o n s i n t h e m a rk e t .
SASHTI NOTES 3
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