INVESTMENTS: SECURITIES

TYPES OF INVESTMENTS

KEY WORDS• INVESTMENT acquisition of

capital assets, (buildings, machinery, stocks, bonds and shares)

• SHARES part ownership of a company

• BROKER licensed member of the stock exchange who trade securities

• BROKERAGE fees charged by a stockbroker for his professional service• BROKER’S NOTE serves as proof

that shares have been purchased.• SHARE CERTIFICATE shows the

number of shares which a shareholder owns

KEY WORDS DIVIDEND a portion of the company’s profit

given as reward to a shareholder for the investment

VOTING given the right to

participate in important decisions,

like choosing directors.

BLUE CHIP SHARES shares in a company that is performing well in terms of

profitability and stability

PORTFOLIO a collection of

investments belonging to an investor

INTEREST RATE percentage that will

be earned on an investment or paid

on borrowed money

?How can a business invest internally in their business to become more successful?

INTERNAL BUSINESS INVESTMENTS

• Investing in vision and mission by building confidence in it’s g&s• Investing in latest technology (physical capital)

• Investing in expert and productive personnel (human capital)• Investing in comprehensive marketing to maintain market share

EXTERNAL BUSINESS INVESTMENTS

• Range of opportunities for profitable financial returns

• Investing in property or other assets

• Get holding and controlling interest in

other businesses

THE JOHANNESBURG SECURITIES EXCHANGE

(JSE)Formal market where the public companies that have been listed

trade their shares.

Provide to SA’s economy by providing a market for securities

and creating new investment

opportunities

Main function to direct capital into productive

economic activity through shares.

Prices of shares are determined by supply and

demand

FUNCTIONS OF THE JSEProvide

opportunities for financial

institutions to invest their money

Provide a market for share

transactions

Follow strict rules to prevent

fraud

Publishes share prices daily –

public stay informed

Small investors can invest by buying shares in big

companies

WHY INVEST IN SHARES• Buy shares to receive dividends

• Buy shares at lower price and sell at higher prices to make profit

HOW TO INVEST IN SHARESTrading takes

place through a stockbroker.

These stockbrokers advise on stock

investment issues like when and which shares

to buy.

These transactions are done via

computer programmes on the

Internet.

Stockbrokers charge their customers brokerage and

taxes.

Once a share is bought you will

receive a broker’s note and then a

share certificate to say that you own the

shares.

TYPES OF SHARES

ORDINARY SHARES Standard shares with no special

rights or restrictions. High gains (dividends) but high

risk Dividends are not guaranteed –

if profits are small no dividends will be paid

Last to be paid if company closes down

BONUS SHARESShares are held back and issued as dividends at a later stage or they put them towards special

funds.PREFERENCE SHARES Receive a fixed rate of dividend Paid before other shareholders are paid Even if profits are large, still only get dividends at fixed rate Ordinary preference shares only receive dividends if

there are profits to divide Cumulative preference shares dividends accumulate for

the future if they are not paid out in the current year. Non-cumulative preference shares do not accumulate

any dividends for the future Participating preference shares receive regular dividends

and also share in surplus profits Non-participating preference shares do not carry the

right to participate in excess pofits.

ADVANTAGES OF INVESTING IN SHARES• Shows higher returns

than bank deposits and property

• Provide solid returns at retirement age

• Values of shares increase as companies expand

• You get profits from companies in the form of dividends

RISKS OF INVESTING IN SHARES

Share prices can rise or fall within

seconds and investors might not

have time to sell their shares before

they become worthless

Share performance and price are linked

to many forces which are out of the

control of the investor

UNIT TRUSTSThe portfolio is

divided into equal ‘units’ – the

investor receives a certain amount of

units for the money they have invested.

The trust does not give share to investors,

but combines them in a portfolio.

Management company buys blue chip shares at JSE with money from thousands of investors.

ADVANTAGES OF UNIT TRUSTS• Anyone can purchase units• There is professional

investors that ensure

maximum capital and

income growth

• Medium to long-term investments –

provide for future needs

• Direct access to money invested –

give written instruction to sell

your units within 3-5 working days

RISKS OF INVESTING IN UNIT TRUSTS

Same risks as shares, but

companies have better track

records

If blue chip companies do not continue to grow, the unit trust will also be affected and will not give

expected returns.

GOVERNMENT RETAIL BONDS – RSA RETAIL

SAVINGS BONDS• Invest R1000 to R1 million for a period of 2, 3 or 5 years on a fixed

interest.• Interest is paid out every 6 months (March 31 and September 30)

directly into buyer’s bank account.• The only way to lose on this investment is in the case of political or

economical chaos (war)

BENEFITS OF RSA RETAIL SAVINGS BONDS• Safety paperless, everything is done electronically• Guaranteed returns you will get fixed interest for the whole investment period.• No risk cannot be used as security for loans or sold in the market• Convenience easy to invest – electronically or at the post office• Accessibility can make early withdrawals after 12 months, but will pay

penalties if there is less than R1000 left in the Bond• No charges

RETURNS ON INVESTMENT

UNIT 3 – Page 237

RETURN ON INVESTMENTRETURNS Returns on investment is the

earnings on the capital invested.

DIVIDENDS Shareholders receive dividends

from the shares they bought. Directors decide to distribute some

profits to shareholders. Profitability of company will

determine the dividend. Type of share will determine the

certainty of receiving dividends.INTEREST Reward the investor receives for

giving up the use of their money for a certain period of time.

Long-term investments – higher rate of interest.

Must consider the risk on investments

INTEREST RATES AND

CALCULATIONS

UNIT 4 – Page 238

KEY WORDSSIMPLE INTEREST interest calculated

on the original amount only.

COMPOUND INTEREST interest calculated using the original amount

and all of the accumulated payments added into the formula.

PRINCIPAL the original

amount invested

SIMPLE INTEREST• The PRINCIPAL remains the same over the entire period of

investment.• Interest earned is kept separate unless it is reinvested. • Formula:

P x R x nP = principalR = rate of interestn = time in years or months

EXAMPLE OF SIMPLE INTERESTArthie invested an amount of R3 000 at the bank for a period of three years. The interest rate quoted was 4% simple interest. Calculate the interest earned.

Calculation:A= P(1+ixn)A = R3000(1+4x3)The interest is R360The value of the investment is R3000 + R360 = R3 360

COMPOUND INTEREST• The PRINCIPAL grows with the

addition of interest to it.• Interest is calculated on the new

(higher) principal and again added to it.

EXAMPLE OF COMPOUND INTEREST

• Arthie invested an amount of R3 000 at the bank for a period of three years. The interest rate quoted was 4% simple interest. Calculate the interest earned.

• Total amount received back = R3374.60

Principal Year InterestR3000 R3 000 x 4/100 R120R3120 R3120 x 4/100 R124.80R3244.80 R3244.80 x 4/100 R129.80

EXAMPLE 2 OF COMPOUND INTEREST

• Formula:

P x P = principali = rate of interestn = time in years or months

Arthie invested an amount of R3 000 at the bank for a period of three years. The interest rate quoted was 4% simple interest. Calculate

the interest earned.

3000 x = 3000 x = 3000 x = 3000 x (1,124864)= R3374,59