Investment Concepts

• Simple interest is interest paid only on the original amount invested.
• Dividends represent the earnings shareholders receive for their investment in a company's shares.
• Capital gain is the profit an investor makes from selling an asset at a higher price than its purchase price.
• A debenture is an agreement where a lender provides money to a company under specific conditions for a set time.
• Compound interest includes interest earned on both the initial investment and the accumulated interest from prior periods.
• Return on investment (ROI) is the income generated from an investment, including interest, dividends, and capital gains, relative to the original investment amount.
• Risk is the potential for losing the invested amount due to unforeseen circumstances.
• Investment period/term refers to the length of time for which an investment is made, which can influence the return.
• Inflation rate is the percentage increase in the prices of goods and services over time.
• A fixed rate means the rate of return on an investment remains constant throughout the investment period.
• Accumulated interest is the total interest earned over the entire investment period.
• The capital market/securities market facilitates the trading of securities/shares, enabling companies and governments to raise long-term capital.
• A shareholder is an individual or entity that owns a portion of a company through shares.

Functions of the Johannesburg Security/Stock Exchange/JSE

• The JSE connects investors with public companies.
• Experts assess and determine the value of shares.
• The JSE regulates trading activity.
• It offers safeguards for investors.
• The JSE encourages short-term investment.
• Venture capital market access is provided via the open market.
• The JSE provides an organized and disciplined market for securities trading.

Factors to Consider When Making Investment Decisions

• Return on Investment (ROI)
• Risk
• Investment Term/Period
• Inflation Rate
• Taxation
• Liquidity

Return on Investment (ROI)

• Higher risk investments typically offer the potential for higher returns.
• There is generally a direct relationship between the level of risk and the expected return.

Risk

• Shares generally present a low to medium level of risk when held over a longer investment period.
• Shares that carry higher risks also have the potential for greater returns.

Inflation Rate

• High inflation erodes purchasing power, reducing the value of money.
• Investment returns should exceed the inflation rate to maintain or increase purchasing power.

Liquidity

• Investments should be convertible to cash easily.
• Liquidity is the ease and speed at which an investors can convert their assets into cash.

Taxation

• A favorable investment strategy considers after-tax returns.
• Tax rates vary based on the type of investment.

Mutual Funds/Stokvels

• Mutual funds and Stokvels are informal savings schemes where a small group of people contribute regularly.
• These encourage regular saving for a specific purpose.
• Risk: Stokvels may be fraudulent pyramid schemes, leading to loss of savings due to insufficient funds.
• Savings accounts are low risk but offer lower interest rates and returns.

Managed Portfolio

• A managed portfolio involves an investor entrusting a financial institution/advisor to oversee their investments/assets.
• Changes may be made to the portfolio without direct investor consent if performance is not as expected.
• Risk: Risk is lower over longer periods.
• Investments across various sectors/companies reduce risk.

32-Day Notice Accounts

• In a 32-day notice account, funds are invested at a fixed rate, and withdrawals are permitted with 32 days' notice.
• These offer more interest than current, checking, or savings accounts but less than fixed deposits.
• Risk: Low risk, as the principal and interest are paid upon maturity.
• Fluctuating market conditions can cause interest rates to vary, increasing risk.

Debentures

• Debentures are issued to raise capital from the public.
• Most debentures are tradable on the JSE.
• Risk: Debentures are low risk due to the obligation to repay the principal plus interest.

Business Ventures/Venture Capital

• Venture capital involves investors providing capital to start/expand a business in exchange for equity.
• Research on the business, market, and economic conditions is crucial.
• Risk: High risk if insufficient research is conducted.
• Inexperienced owners and poor business decisions can lead to significant losses.

Endowment/Life Insurance Policies/Retirement Annuities

• These involve regular payments to an insurance company in anticipation of a future payout.
• They provide both future financial security and peace of mind.
• Risk: Low risk, with payouts guaranteed regardless of circumstances.
• The primary risk is the insurance company's bankruptcy.

Forms of Investments

• Government/RSA retail savings bonds
• Unit trusts
• Shares
• Fixed deposits

RSA Retail Savings Bonds/Government Retail Bonds

• Advantages: Guaranteed returns via a fixed interest rate for the investment period.
• Market-related interest rates are attractive.
• Interest payments can be received bi-annually.
• Interest rates are typically higher than those of fixed deposits.
• No fees or commissions are payable.
• Disadvantages: Retail bonds cannot be used as loan collateral with banks.
• A minimum investment of R1,000 may be a barrier for some.
• Retail bonds are not easily transferable.
• Investors must be over 18 and have a valid South African ID.
• Early withdrawal penalties apply within the first 12 months.

Unit Trusts

• Advantages: Professional management by a fund manager who invests in shares on the JSE.
• Easy to liquidate when cash is needed.
• Small monthly investments are possible.
• Generally, beats inflation in the medium to long term.
• Safe investments due to regulatory oversight.
• Disadvantages: Share prices can fluctuate.
• Borrowing funds is restricted as it reduces potential returns.
• Not suitable for short-term investment goals.
• Not suitable for risk-averse investors.
• Returns are affected if blue-chip companies underperform.

Shares

• Advantages: Freely transferable/tradable on the JSE.
• Shareholders have voting rights at AGMs.
• Shares provide protection against inflation.
• Solid returns at retirement age can be achieved.
• ROI is tied to company performance.
• Disadvantages: Dividends may be reduced/eliminated in periods of low company profit.
• Companies are not legally required to pay dividends.
• High risk, with potential loss of investment if the company is liquidated.
• Dividend amounts are determined by company management/directors.

Fixed Deposits

• Advantages: Fixed interest regardless of economic changes.
• Investment terms are available over the short, medium or long term.
• Investors can choose the term that suits them.
• Principal plus interest is paid out on the maturity date.
• Encourages financial discipline due to restrictions on early withdrawal
• Disadvantages: Funds cannot be withdrawn before maturity.
• Returns are low compared to other investments.
• May not outperform inflation over the long term.

Understanding investment concepts such as simple and compound interest, dividends, and capital gains is crucial for financial planning. Considering factors like ROI, risk, investment period, and inflation rate helps in making informed decisions. A debenture represents a lending agreement with specific conditions and duration.