BUSINESS MANAGEMENT 142
CHAPTER 1: INVESTMENT CONCEPTS
1.1 Introduction
• Two ways to create wealth
• Speculation
Þ Venture your money on an activity with an expectancy of a large return after
a short time period (<1 year)
Þ Degree of expertise, but risky
• Investments
Þ Purchase an asset with the purpose of
Þ Retaining it for a considerable period of time (>1 year)
Þ Either to increase the value or provide a reasonable return
• Gambling is NOT an investment but a decision to execute an activity without any
knowledge of what the outcome may be
Investment Speculation
Term Long term (5+ years) Short term (1-2 years at most)
Motive Requires reasonable return Requires considerable return
1.2 Investment Concepts
1. Speculation
• Buying an asset (property, stocks, options, cattle) with the goal to sell it for a
substantial profit within 1 year
• High risk
2. Income
• Buy an asset with the aim to generate income
• Property – rental, shares – dividend, fixed deposit – interest
3. Capital growth
• Buy house for R500 000 and sell it after 10 years for R5.5 million (R% million
capital growth)
• Pay “Capital Gains Tax” on the capital growth amount
• Purpose = to protect the purchasing power of their money
• Try to obtain a capital growth that at least = current inflation rate
4. Takeover and merger
• Buy a second neighbouring farm – farm more effectively
• Takealot (Kalahari), Telkom (Neotel), MTN (Telcom)
,5. Control over raw material/Distribution channel
• Set of interdependent organizations involved in the process of making a
product/service available for use/consumption
• Farmer buys neighbouring farm to gain access to the river
• Shoe manufacturer buys a number of retail shoe stores to sell his
manufactured shoes exclusively to these stores
1.3.1 Financial Instruments and Financial Securities
Financial Instruments
• Monetary contract between parties and a collective term for all assets, or units of
capital, that are tradable
Þ Emphasis = tradability of the value paper that serves as security
Þ Value paper can either be a virtual or real document
Þ E.g. ability to transfer ownership of an asset from 1 person to another – sell
shares
Financial Securities
• Financial instrument that can represent the following:
§ Investment as an owner (share)
§ Creditor’s relationship with company or governmental body
(debenture/bonds)
§ The rights to ownership as represented by an option
Þ Emphasis = guarantee function of financial/other assets
Þ E.g. to serve as guarantee/security when you apply for a loan/overdraft
facilities – parent signs as security for student who takes out a loan in case of
default payments
• Equity-based financial securities include shares
• Debt-based financial securities include bonds
1.3.1.1 Shares
• Small units of ownership that the capital of a company consists of
• Companies issue shares
Þ Purpose = to raise money from investors to expand, merge, acquire
land/buildings/PPE, settle debt, purchase equipment
Þ Shares issued to the public
Þ Limited liability
• Investors buy shares
Þ Stake in the company’s equity
Þ Share in its profits in the form of dividends
Þ Aptitude to vote at general meetings of shareholders
,• Share Certificate (past)
• Proof of Ownership (paper document) – now non-existent due to
dematerialisation
• Today shares are purchased electronically and held in electronic accounts
1.3.1.2 Bonds and Gilts
Bonds:
• Tradable debt instruments issued by corporations
• Referred to as Debentures
Gilts:
• Tradable debt instruments issued by state or semi-state institutions (Kwasi-state
institutions)
• RSA’s Gilts (state) and Eskom Gilts (semi-state)
Characteristics of both:
• Loans that must be repaid on future date (maturity date)
• Fixed interest must be paid periodically to owner
• Market price tends to vary around issue price (par value) as market interest
rates rise/fall
Þ Offer little opportunity to make capital gains, but are still included in portfolio
because it provides the investor with constant, fixed income
1.3.2 Securities Exchange
• Company that creates the opportunity for potential buyers and sellers of a
security to come together for trading
• Johannesburg Stock Exchange (JSE), worldwide (NYSE, LSE)
1.3.3 STRATE and Dematerialisation
Strate (Share Transactions Totally Electronic)
• Trading of securities on the JSE is facilitated by stockbroker
Þ Stockbroker = regulated professional who buys/sells stocks for clients
through the JSE or over the counter in return for commission
• When a “deal is struck”, ownership must be transferred between buyer and
seller and payment must be made
• Strate performs this function with the help of specific organizations that have
been authorized to act as Central Securities Depository Participants (CSDP)
• CSD (South Africa’s Central Securities Depository) keeps records of ownership of
shares in electronic format
, Dematerialisation
• Occurred in 2001
• Process whereby paper share certificates were converted to electronic format
1.3.4 Money Market and Capital Market
Money Market (MM)
• Total market (mechanism) of all short-term funds traded (securities < 1 year
maturity)
• Short-term Savings accounts – day deposits, cheque (earn interest)
• Short-term loans – overdrafts, instalment credit (pay interest)
• Surplus/shortfall of ST funds can influence MM interest rate
Capital Market (CP)
• Market (mechanism) where long-term funds are traded (securities > 1 year
maturity)
• Long-term investments – fixed deposits, participation bonds (earn interest)
• Long-term loans – mortgages, debentures (pay interest)
• Surplus/shortfall of LT funds can influence CM interest rate
1.3.5 Capital Market = Primary and Secondary Markets
Primary Market
• Key function
Þ Facilitates capital growth by enabling individuals to convert their savings into
investments
Þ Facilitates companies to issue NEW SHARES to raise money directly from
households for business expansion or to meet financial obligations
• Non-par value shares = listed companies/governments issue and sell shares for
the very 1st time
• Average issue price = value per share
• Rights issue
Þ When additional capital is required at a later stage (e.g. to pay off debt,
purchase equipment/merge with another company) more shares will be
issued
Þ Issue price = price for new shares (usually lower than the market price)
• Prospectus
Þ To issue new shares
Þ Contains info on shares for new/current shareholders and parties interested
in purchasing new shares
CHAPTER 1: INVESTMENT CONCEPTS
1.1 Introduction
• Two ways to create wealth
• Speculation
Þ Venture your money on an activity with an expectancy of a large return after
a short time period (<1 year)
Þ Degree of expertise, but risky
• Investments
Þ Purchase an asset with the purpose of
Þ Retaining it for a considerable period of time (>1 year)
Þ Either to increase the value or provide a reasonable return
• Gambling is NOT an investment but a decision to execute an activity without any
knowledge of what the outcome may be
Investment Speculation
Term Long term (5+ years) Short term (1-2 years at most)
Motive Requires reasonable return Requires considerable return
1.2 Investment Concepts
1. Speculation
• Buying an asset (property, stocks, options, cattle) with the goal to sell it for a
substantial profit within 1 year
• High risk
2. Income
• Buy an asset with the aim to generate income
• Property – rental, shares – dividend, fixed deposit – interest
3. Capital growth
• Buy house for R500 000 and sell it after 10 years for R5.5 million (R% million
capital growth)
• Pay “Capital Gains Tax” on the capital growth amount
• Purpose = to protect the purchasing power of their money
• Try to obtain a capital growth that at least = current inflation rate
4. Takeover and merger
• Buy a second neighbouring farm – farm more effectively
• Takealot (Kalahari), Telkom (Neotel), MTN (Telcom)
,5. Control over raw material/Distribution channel
• Set of interdependent organizations involved in the process of making a
product/service available for use/consumption
• Farmer buys neighbouring farm to gain access to the river
• Shoe manufacturer buys a number of retail shoe stores to sell his
manufactured shoes exclusively to these stores
1.3.1 Financial Instruments and Financial Securities
Financial Instruments
• Monetary contract between parties and a collective term for all assets, or units of
capital, that are tradable
Þ Emphasis = tradability of the value paper that serves as security
Þ Value paper can either be a virtual or real document
Þ E.g. ability to transfer ownership of an asset from 1 person to another – sell
shares
Financial Securities
• Financial instrument that can represent the following:
§ Investment as an owner (share)
§ Creditor’s relationship with company or governmental body
(debenture/bonds)
§ The rights to ownership as represented by an option
Þ Emphasis = guarantee function of financial/other assets
Þ E.g. to serve as guarantee/security when you apply for a loan/overdraft
facilities – parent signs as security for student who takes out a loan in case of
default payments
• Equity-based financial securities include shares
• Debt-based financial securities include bonds
1.3.1.1 Shares
• Small units of ownership that the capital of a company consists of
• Companies issue shares
Þ Purpose = to raise money from investors to expand, merge, acquire
land/buildings/PPE, settle debt, purchase equipment
Þ Shares issued to the public
Þ Limited liability
• Investors buy shares
Þ Stake in the company’s equity
Þ Share in its profits in the form of dividends
Þ Aptitude to vote at general meetings of shareholders
,• Share Certificate (past)
• Proof of Ownership (paper document) – now non-existent due to
dematerialisation
• Today shares are purchased electronically and held in electronic accounts
1.3.1.2 Bonds and Gilts
Bonds:
• Tradable debt instruments issued by corporations
• Referred to as Debentures
Gilts:
• Tradable debt instruments issued by state or semi-state institutions (Kwasi-state
institutions)
• RSA’s Gilts (state) and Eskom Gilts (semi-state)
Characteristics of both:
• Loans that must be repaid on future date (maturity date)
• Fixed interest must be paid periodically to owner
• Market price tends to vary around issue price (par value) as market interest
rates rise/fall
Þ Offer little opportunity to make capital gains, but are still included in portfolio
because it provides the investor with constant, fixed income
1.3.2 Securities Exchange
• Company that creates the opportunity for potential buyers and sellers of a
security to come together for trading
• Johannesburg Stock Exchange (JSE), worldwide (NYSE, LSE)
1.3.3 STRATE and Dematerialisation
Strate (Share Transactions Totally Electronic)
• Trading of securities on the JSE is facilitated by stockbroker
Þ Stockbroker = regulated professional who buys/sells stocks for clients
through the JSE or over the counter in return for commission
• When a “deal is struck”, ownership must be transferred between buyer and
seller and payment must be made
• Strate performs this function with the help of specific organizations that have
been authorized to act as Central Securities Depository Participants (CSDP)
• CSD (South Africa’s Central Securities Depository) keeps records of ownership of
shares in electronic format
, Dematerialisation
• Occurred in 2001
• Process whereby paper share certificates were converted to electronic format
1.3.4 Money Market and Capital Market
Money Market (MM)
• Total market (mechanism) of all short-term funds traded (securities < 1 year
maturity)
• Short-term Savings accounts – day deposits, cheque (earn interest)
• Short-term loans – overdrafts, instalment credit (pay interest)
• Surplus/shortfall of ST funds can influence MM interest rate
Capital Market (CP)
• Market (mechanism) where long-term funds are traded (securities > 1 year
maturity)
• Long-term investments – fixed deposits, participation bonds (earn interest)
• Long-term loans – mortgages, debentures (pay interest)
• Surplus/shortfall of LT funds can influence CM interest rate
1.3.5 Capital Market = Primary and Secondary Markets
Primary Market
• Key function
Þ Facilitates capital growth by enabling individuals to convert their savings into
investments
Þ Facilitates companies to issue NEW SHARES to raise money directly from
households for business expansion or to meet financial obligations
• Non-par value shares = listed companies/governments issue and sell shares for
the very 1st time
• Average issue price = value per share
• Rights issue
Þ When additional capital is required at a later stage (e.g. to pay off debt,
purchase equipment/merge with another company) more shares will be
issued
Þ Issue price = price for new shares (usually lower than the market price)
• Prospectus
Þ To issue new shares
Þ Contains info on shares for new/current shareholders and parties interested
in purchasing new shares
