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Investment, securities, and insurance - Coggle Diagram
Investment, securities, and insurance
Investing refers to putting a sum of money at risk to potentially gain more wealth, or lose your investment.
Why invest?
Businesses:
-Speculative motive: for arising opportunities.
-Precautionary motive: for unforeseen expenses.
-Transaction motive: for daily expenses.
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Factors to consider:
Risk: the higher the risk, the higher the interest earned
Investment period: short-, medium-, or long-term
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Types of investment
Unit trusts are made up of a collection of investments that are managed by a fund manager, who invests it into securities that are combined into a portfolio that is then divided based on an investors investment.
Advantages:
-risk is divided.
-Unit trusts are easy to invest in.
-the investment is safely managed by an expert
Disadvantages:
-cannot be invested if investors do not want any risk.
-is reliant on a trustworthy company.
-Prices can fluctuate.
Government retail bonds/RSA Retail Bonds are provided by the government, as a low-risk investment option
Fixed-rate retail bonds are sold in periods of 2, 3, or 5-year terms. Interest is earned at market-related value.
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Inflation-linked retail bond is adjusted twice a year, according to the inflation rate, and consist of 3, 5, and 10-year terms. Interest is earned twice a year until maturity is reached.
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Shares of a company are bought by shareholders, meaning they have part "ownership" of the company.
Bonus shares are distributed based on the number of shares the shareholders hold. It is only received as a result of poor performance.
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Ordinary shares receive dividends if the business makes a profit, and only after preference shares.
Preference shares receive dividends even if no profit has been made, and are the first to be paid out if a business is declared bankrupt.
-Participating shares provide a minimum fixed dividend, and maybe a second dividend if profits are significant.
-Non-participating shares only provide a minimum fixed dividend.
-Redeemable shares are bought back by the company after a fixed period.
-Non-redeemable shares only earn dividends on shares.
-Cumulative shares are carried over to the next year, due to poor performance.
-Non-cumulative shares
-Convertible shares can be converted into ordinary shares after a fixed period.
-Non-convertible shares.
Analysis:
-Value increases as the company grows.
-Long-term investment.
-you can buy and sell shares.
-Prices are unpredictable.
-Ordinary shares carry the most risk.
-Shares are linked to uncontrollable factors.
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The JSE is an exchange market of stocks/securities:
-Indicator of economic conditions of SA.
-Links investors and public companies.
-Values and assesses shares.
-shares prices of shares to keep investors informed of market trends.
Debentures are low-risk investments that are provided by investors to large companies. The loan, as well as interest, is payable.
Notice deposits (short-term) are a low-risk-investment offered by commercial banks to investors, who notify the bank when they want to withdraw their investment.
Business ventures refer to businesses identifying a gap in the market, and creating a business or expanding a business, with the help of investors. The risk attached depends on the type of business started, and whether they did their research.
Stokvels are a low-risk investment option, where a group of trustworthy individuals contribute a fixed amount weekly or monthly. Every month, each individual then receives these funds.
Fixed property is an investment option that is non-liquid and low-risk in the long-run, where individuals purchase property and either rent it out or resell it at a higher price (capital gains).
Insurance refers to a contract taken out by the insured, who pays a monthly or yearly premium, for the insurer's services, that covers the monetary value of the item/s at risk. It is based on the principle of indemnification, as the insured must prove to lose financially if the loss or damage of the item occurs.
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Long-term insurance is taken out on a risk or situation that will happen at some point in your life.
Importance of insurance
Businesses:
-reduces cost of machinery or equipment.
-risk is transferred to the insurance company.
-Business is protected against dishonest employees.
-business is protected against debt and loss of goods or machinery.
-life insurance can be taken out on business partners.
Individuals:
-allows for retirements.
-offers financial protection.
-cover any debt in death.
-provides income for dependents.
-provides finances for funeral cover.
Disadvantages of insurance:
-insurance premiums can be high.
-items such as laptops are not covered.
-retirement policies may not be reliable.
-insurance policies have a lot of clauses.
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Compulsory insurance:
Businesses and employees pay into UIF in case of retrenchment.
-provides income to the unemployed and ill/disabled.
-provides income to women on maternity leave, if they are paid less than their average wage.
-provides income if you are adopting a child less than 2 years old.
-dependents can claim following the death of the employee.
COIDA is paid by the business every month and provides compensation to victims of workplace negligence.
-provides compensation to the employees who were injured during everyday work activities.
-provides compensation to the dependents of the employees.
-Protects the employer against financial obligations.
Road Accident Fund is paid through fuel levies and is only provided if you are a victim of a road accident and if you do not have medical aid.
-medical expenses and bodily harm or death are compensated.
-the victims dependents are compensated if income is lost.
-reduces financial pressure on businesses.
-dependents can claim if victims dies.
Non-compulsory insurance:
-fire insurance.
-storm damage insurance.
-fidelity insurance.
-cash-in-transit insurance.
-vehicle insurance.
-stock insurance.
-pet insurance
.-travel insurance.
-medical aid
Insurance principles
Utmost good faith refers to the insured being honest in the extent of the damage or loss, when making a claim to the insurer.
Security/certainty is taken out on long-term insurance and ensures that the insured will be paid out to the full or partial value of an event that will occur.
Indemnification refers to compensating the insured for damage or loss to an item that will put them in the same financial position that they were in before the incident.
Insurable interest refers to the insured proving that they stand to lose financially if the item is damage or lost.
Under-insurance occurs when an insured item has been calculated for less than its actual market value. Formula:
-insured amount/replacement value of the asset X damage/loss
Over-insurance occurs when an asset has been insured above its actual market value. Formula:
-insured amount/replacement value of the asset X damage/loss
Assurance refers to long-term insurance policies taken out on an event that will happen. It is based on the principle of security and offers the insured some peace of mind.
Types of assurance
Retirement annuities are controlled by you, where you pay monthly premiums in exchange for the insurance company investing for you.
-policyholders earn an income are retirement.
-the investment is protected.
-15% of earnings are tax free
Endowment policies offer life insurance that includes a death benefit, and a savings or investment option. The policyholder pays a premium, which is invested by the company for a number of specific years, before receiving its maturity value.
Life insurance is taken out on someone's life in the event of death. A predetermined lump sum is provided to the dependents.
-Term insurance is taken out in periodical years.