Fin329 Chapter 3 - Investment Alternatives
-
Upload
muhd-hisyamuddin -
Category
Documents
-
view
232 -
download
0
description
Transcript of Fin329 Chapter 3 - Investment Alternatives
CHAPTER 2
Investment Alternatives
Objectives
After completing this topic, students should be able to:Identify the real assets and financial assetsClassify the assets riskDiscuss the advantages and disadvantages of real
assets and financial assets
1. Real Assets
REAL ASSET (NON FINANCIAL ASSET)Or tangible assets they are not as liquid as financial assets eg: land, building (personal properties,
commercial properties), jewellery, antiques, art works, old coins, old stamps
Real Estate
Involved land and structures built on the land entities such as residential homes, raw land & income property
eg. Warehouses, offices, apartment building & condominiums
DISADVANTAGES• Require large amount of capital• Commitment for long period• Difficult to sell quickly as is too high to be afforded by an average person• Risk of leasing or renting out to tenants
ADVANTAGES• Financing to buy R/E is flexible• Tend to increase in value, thus good hedge against inflation• There is always demand for real property• Safe and returns are secured
Real Estate
Improved Property Land with structures built upon it
Types
Residential Property
Agricultural Property
Commercial Property
Industrial Property
Recreational Property
Residential Properties
Residential properties – personal living which covers various types of houses
Eg : single storey house, double-storey terrace, bungalows, semi-detached houses, flats, apartments and condominium.
Residential rental properties – investors who purchase residential properties for the purpose of providing living space to others by renting them out.
Agricultural Land
Used for agricultural purposes
Eg: crop planting (rubber, paddy, cocoa, bananas, oil palm plantations), dairy farming, animal farming, orchards.
Commercial Properties
Commercial properties are made up of shop houses, banks and other financial services, office block, hotels and shopping complexes
Recreational Properties
Mainly used for leisure activities or vacations
Eg: lakeside resorts, golf courses, seaside resort property amusement areas and parks.
Industrial Properties
Used for the manufacturing and warehousing of industrial and consumer products
Eg: factories, utility companies (i.e water-works, electricity stations), warehouses, industrial parks and estates
Chattel
Non-financing assets traded in informal markets
Buying and selling through dealers Values determined by supply & demand eg: antiques, art objects, coins, Chinese
ceramics classic cars
DISADVANTAGES• Involves large amount of money• Low liquidity• High risk of loss or forgery• Traded through an informal market, not by government
ADVANTAGES• high in value• can be sold during financial difficulties• A display of wealth most items are protected by insurance
Chattel
2. Financial Assets
claims that the organization sell to raise funds for their financial needs
highly liquid and can be traded easily & efficiently
eg: common stock, bonds, preferred stock, certificate of deposit, T-bills, unit trust, derivative securities
Common Stock
Referred to as equity securities because investor have an ownership (equity) position in a firm for every share/stock own by them
Investor can participate in the firm’s earnings and dividends, an equal vote in mgt.
The more shares investors own, the higher investors ownership position in the firm
Bonds
Fixed income securities whereby issuer (borrower) agreed to make income payments that fixed by contract
Maturity date – the date in which the debt will cease to exist & borrower have completely paid
off (par value) Issuer – government or private corporation
Preferred Stock
Issued by corp; hybrid securities because the characteristics of bond and common stock
Entitled dividend payment = c/stock Dividend is fixed = bond Par value = RM100
Treasury Bills
Money market instrument issued by BNM to raise short term funds to finance government expenses
eg: Malaysian Treasury Bills (MTBs) Issued in minimum denominations RM10,000
and thereafter multiplies of RM10,000 Maturity period less than a year ( 91 days to
270 days)
DISADVANTAGES• Investor must provide a significant amount of money to buy T-Bill as they are sold in minimum denomination of RM10,000
ADVANTAGES• Low risk/risk free as it is normally issued by government• Secured of income in the form of interest payment
T-Bills
Unit Trust
An investment company that invests its shareholders’ money in a diversified portfolio of securities
managed by professional funds managers
DISADVANTAGES• return is low, since it is highly diversified• Investor do not have a say on the management of funds• Market price of shares, still subjected to the market price fluctuation
ADVANTAGES• The capital is small• Well managed by professional• Portfolio are well diversified, thus reducing risk• High liquidity, can easily bought & sold• Return is in the form of dividend and capital gain
Unit Trust
3 PARTIES INVOLVED IN UNIT TRUST
Unit Trust Mgt Company
Trustee
Unit
Holde
r
Manages the
business of trust
fund
acts as the custodian of all assets of
the fund
People who invest in unit
trust
Derivatives-Options
The value of a derivative instrument depends of the value of some other basic underlying instruments such as commodity price, exchange rates interest rates or share prices.
An options contract gives the holder the right to buy or sell a certain amount of underlying financial asset at a specified price for a specified time period
2 types of options Call options Put options
DISADVANTAGES• Investors must have the expertise and knowledge to understand the mechanism of trading/investing in options
ADVANTAGES• The buyer’s maximum loss is known in advance• Options reduce the risk i.e an investor can sell the stock short and buy the call
Options
Derivatives-Futures
Include farm products, cocoa, coffee, sugar, potatoes, orange juice, and other raw materials such as silver, copper and tin
Prices are determined by changes in supplies government action
2 types of market:1) Spot market – commodities are present for trading2) Futures market – no commodities but trading done
through future contracts at Bursa Malaysia
DISADVANTAGES• Risk is high since supply affected by nature is beyond human control• Involves high capital• Must have expertise and knowledge on principles of commodities trading• Potential loss is great as there is a potential for a lot of price volatility
ADVANTAGES• Transaction done thru margin trading, so high return• Providing liquidity, since daily trading• There’s always demand since product consist of raw materials for manufacturing goods
Futures
Savings
Form of fixed investment where the
principal amount is known with certainty. Eg: saving & fixed deposits a/c
Savings
ADVANTAGES
High Liquidity
Low risk and saved
Fixed amount of return is assured
Only small deposits Money can be withdrawn any place/any time
DISADVANTAGES• Low return• High discipline as money can be withdrawn any time• Purchasing power risk because the interest is fixed• F/D- return will only be received after a certain period of time
Insurance
Protection against losses that could result from death, illness or disability, damage to property or a negligent act
Can be acquired through life, health, property and liability insurance
Insurance
ADVANTAGES• In case of the above, the insured person or family members (death case is assured of compensation for future needs• Monthly premium is tax deductible
DISADVANTAGES•Once insurance is purchased, can’t be resold.•If would like to terminate, would probably lose a portion of the premium paid.