Chapter 1-Investement Concepts
Investment objectives
Gambling- no knowledge of outcome of decision
Speculation- buying an asset with a goal to sell it for a substantial profit within one year,
short term (1-2 years), high risk and requires a considerable return
Investments- reasonable return, less risky and long term (5 years or more)
Income-buy an asset with the aim to generate an income (rent, dividend, interest)
Capital growth-the purpose is to protect the purchasing power of capital
Take overs and mergers- when someone buys a second neighbouring farm and farms more
effectively
Control over raw material or distribution channel- set of interdependent organisations
involved in the process of making a product or service available for use or production
Investment Concepts/Terminology
Financial instruments Blue chips Corporate actions :
and securities: shares, Capitalisation (Bonus share) issue
bonds and gilts
Securities exchange Portfolio, diversification & risk Corporate actions :
Subdivisions (stock splits) & share
consolidations
Strate, Institutional investors & unit Corporate actions :
Dematerialisation trusts Rights issue, Cum rights, Ex rights,
Underwriting
Share buy-backs
Capital vs. Money Listing & arbitrage Corporate actions :
market Pre-listing statements Share buy-backs
Primary vs Secondary Bull vs bear markets Fundamental vs. Technical analysis
market Bulls, bears and stags
Prospectus
Share price / market Corporate actions: Dividends; Savings, financial investment, economic
price Interim-, investment
final-, annual dividend, Cum/Ex
dividend
,Financial instruments- collective term for all assets or units of capital that are tradable.
Emphasis is placed on the tradability of the value paper which indicates its ability to transfer
ownership
Financial securities- financial instruments that represents investment as an owner in
corporation (stock) or creditor relationship with corporation or government body (bond) or
rights to ownership (option). Emphasis is placed on the guarantee of the value paper
Shares- small unit of ownership that the capital of a company consists of. Shares originated
from the requirement of large amounts of capital and limited liability
Share certificate- document issued to shareholder as proof of share ownership but was later
replaced by an electronic system (dematerialisation of 2001)
Bonds-tradeable debt instruments that can be issued by corporations (debentures),
governments or quasi-government institutions (gilts). Bonds are loans that must be repaid on
a future date (maturity date), fixed interest must be paid periodically to owner, market price is
dependent on fluctuations in the interest rates
Gilts- debt instruments issued by state or semi state institutions
Securities exchange- company that creates opportunity for potential buyers and sellers of a
security to come together for trading (JSE)
STRATE (Pty) Ltd.- electronic settlement system that transfers ownership between buyer
and seller (Share Transactions Totally Electronic)
Dematerialisation- process whereby paper share certificates are converted to electronic
format
Money Market- total market of all short term funds traded and surplus and shortfalls
influences money market interest rates. Ex. Short term loans, money market funds
Capital Market-market of all long term funds traded and influences long term interest rates.
Ex. fixed deposits, mortgages, debentures
Primary Market-market where listed companies and governments sell securities for the first
time. The initial value = par value = nominal value. Since 1 May 2011 there is no par value
but an average issue price. Additional capital required refers to the additional shares issued
through a rights issue. Prospectus is information on new issue of shares and an invitation to
subscribe
Secondary Market- Once new shares have been issued and bought by investors, these
investors can keep or trade them and the trading takes place on the secondary market. The
market price of these shares are determined by the supply and demand
These prices can help identify price trends:
Share price-price at which shares are traded in the secondary market (market price)
Bid to buy (buyer’s price)- highest price buyers will pay
Offer to sell (seller’s price)- lowest price sellers are willing to sell at
Market price (last)- last traded price, price at which last transaction took place
Blue chips- ordinary shares of companies with an elite investment status. They have a good
reputation over the long term by maintaining stable and sound profit and dividend history and
healthy growth prospects
,Portfolio- composition of a person’s investments and can consist of shares, bonds, properties,
options
Diversification- invest in different companies or sectors and it includes instruments with
different risk profiles in portfolio
Risk- possibility that actual returns realised on investment may be lower than expected return
Institutionalised investors- enterprises investing in large amounts of capital e.g. insurance
companies, pension funds, mutual funds
Unit trusts-comprises of pooling money by collecting small amounts of savings from
individuals and companies and then invest large amounts in a diversified portfolio
Listing- right a company obtains to trade its shares on a stock exchange after certain
prerequisites are met.
IPO- Initial Public Offering
Pre-listing statement- document issued after a company complied with all requirements for
listing on the JSE. It’s a source of information about a proposed listing and is not an
invitation to buy additional shares
Arbitrage
-product traded on two or more markets
-risk free investment made from short term price differences
-buy a product on the cheaper market and sell it on the more expensive market
-1. determine whether a misplacing exists
-2. determine how to exploit the mispricing
-3. determine profit to be made
Bull market- period of continuous price increases over the long term, prices of most shares
will increase, strong buying pressure (demand)
Bull- someone who buys shares at a low price, keeps it for the long term and sells it after a
few years and makes a profit out of the process
Bull speculator- person with the motive to achieve short term capital gains, sells shares to
obtain funds to pay for purchase of shares
Bear market- period of mainly price decreases over the long term
Bear speculator- person that sells shares that are not in his possession and hopes that prices
will continue to decrease (short sales)
Stag- speculator that makes quick profit from new listings and rights issue
Corporate Actions
Corporate actions- decisions made by management that have an effect on securities issued
Mandatory corporate actions- participation of shareholders is mandatory e.g. dividends,
capitalisation(bonus) issues, subdivisions (stock splits) and merges
Voluntary (elective) corporate actions- shareholders elect to participate e.g. rights issues,
share buy backs
Dividends
-portion of profit after payment of tax, subdivided amongst shareholders (retained earnings)
-preference and ordinary dividend
, -interim (6 months) + final dividend = total dividend of the year
Announcement/declaration- at least 13 business days before the record date
Cum dividend- buy share cum-dividend: including rights to dividend
Ex-dividend- one business day after end of cum-dividend until payment date, can buy shares
but is not entitled to dividends
Record date- company closes share register, always on a Friday for mandatory corporate
actions
Payment date- dividends electronically paid into account
Capitalisation issue (bonus issue)
-shareholders receive free shares in company at current market price
-purpose: provide shareholders with opportunity to share in the prosperity of the company,
especially if there is insufficient cash to pay dividends
-company finances issue from distributable reserves
-shareholder can keep or sell the shares
Capitalisation issue (bonus share issue)
-announcement date
-last day of trading to qualify for free shares (cum trading)
-receive shares on record date
-existing shares are subdivided into 2 or more shares
-shareholders receive more shares, but with a lowers average issue value (no inflow of
capital)
-purpose: make shares more affordable (lower market price of shares)
-prevent hostile takeovers
-opposite of share consolidation
Share consolidation
-when market price is very low it gives impression of weak company
-too many small shareholders which increases admin costs
-consolidate shares into 1 share
-number of issued shares decreases and average issue price per share increases
Rights issue
-voluntary corporate action
-existing shareholders receive first right to purchase further shares in the company
-3 options: exercise the rights, sell the rights, nothing
-purpose: to acquire additional capital
-issue at price lower than the market price
-increases shareholders’ equity
-underwriting: large financial institutions undertakes to buy all shares that are not sold
during the rights issue
Cum Rights- always start on the Announcement date and end on last day of cum-trading
Ex-Rights- always start the next business day after Cum Rights and ends on closing date
“No Dematerialisation”- always start the same day as Ex Rights and ends on Record Date (3
business days)
Share buy backs
-purpose: accounting advantage
-transaction can lead to increase in EPS of remaining shares (nr of issued shares decrease)
Investment objectives
Gambling- no knowledge of outcome of decision
Speculation- buying an asset with a goal to sell it for a substantial profit within one year,
short term (1-2 years), high risk and requires a considerable return
Investments- reasonable return, less risky and long term (5 years or more)
Income-buy an asset with the aim to generate an income (rent, dividend, interest)
Capital growth-the purpose is to protect the purchasing power of capital
Take overs and mergers- when someone buys a second neighbouring farm and farms more
effectively
Control over raw material or distribution channel- set of interdependent organisations
involved in the process of making a product or service available for use or production
Investment Concepts/Terminology
Financial instruments Blue chips Corporate actions :
and securities: shares, Capitalisation (Bonus share) issue
bonds and gilts
Securities exchange Portfolio, diversification & risk Corporate actions :
Subdivisions (stock splits) & share
consolidations
Strate, Institutional investors & unit Corporate actions :
Dematerialisation trusts Rights issue, Cum rights, Ex rights,
Underwriting
Share buy-backs
Capital vs. Money Listing & arbitrage Corporate actions :
market Pre-listing statements Share buy-backs
Primary vs Secondary Bull vs bear markets Fundamental vs. Technical analysis
market Bulls, bears and stags
Prospectus
Share price / market Corporate actions: Dividends; Savings, financial investment, economic
price Interim-, investment
final-, annual dividend, Cum/Ex
dividend
,Financial instruments- collective term for all assets or units of capital that are tradable.
Emphasis is placed on the tradability of the value paper which indicates its ability to transfer
ownership
Financial securities- financial instruments that represents investment as an owner in
corporation (stock) or creditor relationship with corporation or government body (bond) or
rights to ownership (option). Emphasis is placed on the guarantee of the value paper
Shares- small unit of ownership that the capital of a company consists of. Shares originated
from the requirement of large amounts of capital and limited liability
Share certificate- document issued to shareholder as proof of share ownership but was later
replaced by an electronic system (dematerialisation of 2001)
Bonds-tradeable debt instruments that can be issued by corporations (debentures),
governments or quasi-government institutions (gilts). Bonds are loans that must be repaid on
a future date (maturity date), fixed interest must be paid periodically to owner, market price is
dependent on fluctuations in the interest rates
Gilts- debt instruments issued by state or semi state institutions
Securities exchange- company that creates opportunity for potential buyers and sellers of a
security to come together for trading (JSE)
STRATE (Pty) Ltd.- electronic settlement system that transfers ownership between buyer
and seller (Share Transactions Totally Electronic)
Dematerialisation- process whereby paper share certificates are converted to electronic
format
Money Market- total market of all short term funds traded and surplus and shortfalls
influences money market interest rates. Ex. Short term loans, money market funds
Capital Market-market of all long term funds traded and influences long term interest rates.
Ex. fixed deposits, mortgages, debentures
Primary Market-market where listed companies and governments sell securities for the first
time. The initial value = par value = nominal value. Since 1 May 2011 there is no par value
but an average issue price. Additional capital required refers to the additional shares issued
through a rights issue. Prospectus is information on new issue of shares and an invitation to
subscribe
Secondary Market- Once new shares have been issued and bought by investors, these
investors can keep or trade them and the trading takes place on the secondary market. The
market price of these shares are determined by the supply and demand
These prices can help identify price trends:
Share price-price at which shares are traded in the secondary market (market price)
Bid to buy (buyer’s price)- highest price buyers will pay
Offer to sell (seller’s price)- lowest price sellers are willing to sell at
Market price (last)- last traded price, price at which last transaction took place
Blue chips- ordinary shares of companies with an elite investment status. They have a good
reputation over the long term by maintaining stable and sound profit and dividend history and
healthy growth prospects
,Portfolio- composition of a person’s investments and can consist of shares, bonds, properties,
options
Diversification- invest in different companies or sectors and it includes instruments with
different risk profiles in portfolio
Risk- possibility that actual returns realised on investment may be lower than expected return
Institutionalised investors- enterprises investing in large amounts of capital e.g. insurance
companies, pension funds, mutual funds
Unit trusts-comprises of pooling money by collecting small amounts of savings from
individuals and companies and then invest large amounts in a diversified portfolio
Listing- right a company obtains to trade its shares on a stock exchange after certain
prerequisites are met.
IPO- Initial Public Offering
Pre-listing statement- document issued after a company complied with all requirements for
listing on the JSE. It’s a source of information about a proposed listing and is not an
invitation to buy additional shares
Arbitrage
-product traded on two or more markets
-risk free investment made from short term price differences
-buy a product on the cheaper market and sell it on the more expensive market
-1. determine whether a misplacing exists
-2. determine how to exploit the mispricing
-3. determine profit to be made
Bull market- period of continuous price increases over the long term, prices of most shares
will increase, strong buying pressure (demand)
Bull- someone who buys shares at a low price, keeps it for the long term and sells it after a
few years and makes a profit out of the process
Bull speculator- person with the motive to achieve short term capital gains, sells shares to
obtain funds to pay for purchase of shares
Bear market- period of mainly price decreases over the long term
Bear speculator- person that sells shares that are not in his possession and hopes that prices
will continue to decrease (short sales)
Stag- speculator that makes quick profit from new listings and rights issue
Corporate Actions
Corporate actions- decisions made by management that have an effect on securities issued
Mandatory corporate actions- participation of shareholders is mandatory e.g. dividends,
capitalisation(bonus) issues, subdivisions (stock splits) and merges
Voluntary (elective) corporate actions- shareholders elect to participate e.g. rights issues,
share buy backs
Dividends
-portion of profit after payment of tax, subdivided amongst shareholders (retained earnings)
-preference and ordinary dividend
, -interim (6 months) + final dividend = total dividend of the year
Announcement/declaration- at least 13 business days before the record date
Cum dividend- buy share cum-dividend: including rights to dividend
Ex-dividend- one business day after end of cum-dividend until payment date, can buy shares
but is not entitled to dividends
Record date- company closes share register, always on a Friday for mandatory corporate
actions
Payment date- dividends electronically paid into account
Capitalisation issue (bonus issue)
-shareholders receive free shares in company at current market price
-purpose: provide shareholders with opportunity to share in the prosperity of the company,
especially if there is insufficient cash to pay dividends
-company finances issue from distributable reserves
-shareholder can keep or sell the shares
Capitalisation issue (bonus share issue)
-announcement date
-last day of trading to qualify for free shares (cum trading)
-receive shares on record date
-existing shares are subdivided into 2 or more shares
-shareholders receive more shares, but with a lowers average issue value (no inflow of
capital)
-purpose: make shares more affordable (lower market price of shares)
-prevent hostile takeovers
-opposite of share consolidation
Share consolidation
-when market price is very low it gives impression of weak company
-too many small shareholders which increases admin costs
-consolidate shares into 1 share
-number of issued shares decreases and average issue price per share increases
Rights issue
-voluntary corporate action
-existing shareholders receive first right to purchase further shares in the company
-3 options: exercise the rights, sell the rights, nothing
-purpose: to acquire additional capital
-issue at price lower than the market price
-increases shareholders’ equity
-underwriting: large financial institutions undertakes to buy all shares that are not sold
during the rights issue
Cum Rights- always start on the Announcement date and end on last day of cum-trading
Ex-Rights- always start the next business day after Cum Rights and ends on closing date
“No Dematerialisation”- always start the same day as Ex Rights and ends on Record Date (3
business days)
Share buy backs
-purpose: accounting advantage
-transaction can lead to increase in EPS of remaining shares (nr of issued shares decrease)
