Johannesburg Stock Exchange & Investment Decisions

Functions of the Johannesburg Security/Stock Exchange/JSE

• Connects investors with public companies.
• Experts value and assess shares.
• Regulates the share market.
• Protects investors.
• Encourages short-term investment.
• Provides a venture capital market.
• The orderly market for securities serves as a disciplined market for securities

Factors to Consider in Investment Decisions

• Return on Investment (ROI)
• Risk
• Investment term/period
• Inflation rate
• Taxation
• Liquidity

Explanation of Investment Decisions

Return on Investment

• Higher risk investments generally yield higher returns.
• There is usually a direct correlation between risk and return.

Risk

• Shares have low to medium risk over longer investment periods.
• Higher risk shares have the potential for greater returns.

Inflation Rate

• High inflation rates decrease purchasing power.
• Investment returns should exceed the inflation rate.

Liquidity

• Investments should be easily convertible to cash.
• Liquidity refers to the ease and speed of converting investments to cash.

Taxation

• Good investments yield favorable after-tax returns.
• Tax rates vary for different investments.

Investment Opportunities and Their Risks

Mutual Funds/Stokvels

• Informal savings schemes involve contributions from a small group of people.
• Encourages monthly savings for a specific purpose.
• Risks may include illegal pyramid schemes and loss of savings due to cash shortages.
• Savings accounts offer safe investment but with low interest rates and returns.

Managed Portfolio

• An investor instructs a financial institution/financial advisor to manages investments in one portfolio.
• Portfolios may be changed, with or without investor consent, if they underperform.
• Lower risk over longer terms/periods.
• Investments are diversified across various sectors/companies, managed by the portfolio manager.

32-Day Notice Accounts

• Money is invested at a fixed rate, with withdrawals allowed after 32 days' notice.
• Earns more interest than current or savings accounts but less than fixed deposits.
• Low risk, with investment and interest paid out on the maturity date.
• Interest rates may fluctuate, which can lead to an increased risk

Debentures

• Issued to raise capital from the public.
• Most debentures can be traded on the JSE.
• Low risk, as companies are liable to repay the debenture amount plus interest.

Business Ventures/Venture Capital

• Capital provided to start or expand a business in exchange for equity.
• Investors should be knowledgeable about the business, market, and economic conditions.
• High risk if research is inadequate.
• Inexperienced owners risk losses/business closure due to poor decisions.

Endowment/Life Insurance Policies/Retirement Annuities

• Monthly payments are made to an insurance company for a future payout.
• Provides for future expenses or peace of mind for dependents.
• Low risk, as the insured amount will be paid regardless of circumstances.
• Risk lies primarily in the insurance company's bankruptcy.

Forms of Investments

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

Impact of Four Forms of Investments

RSA Retail Savings Bonds/Government Retail Bonds

• Advantages include guaranteed returns with fixed interest rates, market-related interest rates, semi-annual interest payments, higher interest rates than fixed deposits, and no fees/commissions.
• Disadvantages retail bonds cannot be ceded to banks as security of loans, a minimum investment of R1 000 is required, retail bonds are not freely transferable, investors need valid SA identification and should be older than 18 years and penalties for early withdrawals within 12 months.

Unit Trusts

• Advantages include management by a fund manager, easy to cash in, small monthly investment amounts are possible, generally beats inflation over the medium/long term and is regarded as a safe investment due to management according to rules and regulations.
• Disadvantages share price may fluctuate, Unit Trusts investors are not allowed to borrow funds as it reduces their potential returns, not good for people who want to invest for a short period and not good for people who want to avoid risks at all costs.

Shares

• Advantages freely transferred/traded on the JSE, shareholders have voting rights at annual general meetings, protect against inflation, solid investment returns at retirement and ROI is linked to the performance of the company.
• Disadvantages shareholders may may receive less dividends/no dividends when company profits are low, companies have no legal obligation to pay dividends, high risk due to potential loss from company liquidation and dividend determined by directors/managment.

Fixed Deposits

• Advantages fixed interest rates regardless of economic conditions, short/medium/long term investment options, flexible investment periods, principal plus interest paid on maturity and financial discipline due to withdrawal restrictions.
• Disadvantages limited access to funds before maturity, low returns compared to other investments and may not outperform inflation over the long term.

Functions of the Johannesburg Stock Exchange (JSE) include connecting investors, valuing shares, regulating the market, and protecting investors. Key factors in investment decisions are ROI, risk, investment term, inflation, taxation and liquidity. Risk and return are directly correlated.