Investment: Securities (Grade 12 NSC Matric Business Studies): Revision Notes
Forms of Investment
Investment opportunities come in various forms, each designed to meet different financial goals and risk appetites. Understanding these different investment options is crucial for making informed financial decisions. The four main forms of investment available to South African investors are RSA Retail Savings Bonds, Unit trusts, Shares, and Fixed deposits.
When choosing an investment, you need to consider how each option will impact your financial situation. Each form of investment offers different advantages and disadvantages that can either help you achieve your financial goals or potentially expose you to various risks.
Before investing, always consider your financial goals, risk tolerance, and investment timeline. What works for one investor may not be suitable for another.
RSA Retail Savings Bonds (Government Retail Bonds)
RSA Retail Savings Bonds are investment products offered by the South African Government to encourage citizens to save money. These bonds represent a loan you make to the government, which pays you interest in return. There are two main types available: fixed rate bonds and inflation-linked retail savings bonds.
Key features:
- Interest payments are made twice yearly on 31 March and 30 September
- Interest is paid directly into your bank account
- Minimum investment requirement of R1,000
Advantages of RSA Retail Savings Bonds
These government bonds offer several benefits that make them attractive to conservative investors:
Why Government Bonds Are Considered Safe:
Government bonds are backed by the full faith and credit of the South African Government, making them one of the safest investment options available to citizens.
- Guaranteed returns: The interest rate remains fixed throughout the investment period, giving you certainty about your returns
- Low risk: Since the South African Government backs these bonds, they are considered very safe investments
- Regular income: You receive interest payments twice per year, providing a steady income stream
- Accessibility: Available to people from all income groups, making them inclusive investment options
- Flexibility: You can access your investment after the first year if needed
- No fees: There are no management fees or charges that reduce your returns
Disadvantages of RSA Retail Savings Bonds
Despite their safety, these bonds have some limitations:
Key Limitation to Remember:
The R1,000 minimum investment requirement may exclude smaller investors who want to start with lower amounts.
- Cannot be used as security: Banks won't accept these bonds as collateral for loans
- High minimum investment: The R1,000 minimum may be too high for some small investors
- Limited trading: You cannot easily buy and sell these bonds like shares
- Age restrictions: People under 18 cannot invest in these bonds
- Early withdrawal penalties: You may face penalties if you withdraw funds before 12 months
- Inflation risk: Returns may not keep pace with inflation over time
Unit Trusts
Unit trusts are collective investment schemes where money from many investors is pooled together and managed by professional fund managers. This pooled money is then invested in various assets such as shares, bonds, and short-term deposits.
How unit trusts work:
- Pool of Money: Individual investors, companies, and organisations contribute funds
- Fund Manager: A qualified investment professional manages the pooled funds
- Investment Assets: The manager invests in stocks, bonds, short-term deposits, and other securities
The Power of Pooling:
By pooling money from many investors, unit trusts can access investment opportunities that might be too expensive for individual investors. This allows even small investors to benefit from diversified portfolios.
Advantages of Unit Trusts
Unit trusts offer several benefits that make them popular among investors:
- Professional management: Experienced fund managers make investment decisions on your behalf
- Diversification: Your money is spread across different investments, reducing risk
- Flexible investment amounts: You can invest small or large amounts each month
- Easy access: Online platforms make it simple to invest and monitor your investments
- Liquidity: You can convert your investments to cash when needed
- Variety of options: Different funds offer various risk levels and investment strategies
- Lower risk: Spreading investments across many assets reduces potential losses
Disadvantages of Unit Trusts
However, unit trusts also have some drawbacks:
Market Risk Warning:
Even with professional management and diversification, unit trusts are still subject to market fluctuations. Your investment value can go up or down based on market performance.
- Market fluctuations: Share prices can go up and down, affecting your investment value
- Performance dependency: Growth depends on how well the companies in the fund perform
- Limited fund growth: Funds can only grow through member contributions, not borrowing
- Short-term limitations: Not ideal for investors wanting quick returns
- Market risk exposure: You're still exposed to general market risks despite diversification
Shares
Shares represent partial ownership in a company. When you buy shares, you become a shareholder and own a small portion of that business. Companies sell shares to raise money for their operations and growth.
Key features of shares:
- Traded on the Johannesburg Stock Exchange (JSE)
- Can be bought and sold through stockbrokers
- Give you voting rights in the company
- May provide dividend income
Understanding Share Ownership:
When you own shares, you're not just making an investment – you're becoming a part-owner of the company. This gives you certain rights and potential rewards, but also exposes you to the company's risks.
Types of Shares
Companies can issue different types of shares, each with unique characteristics:
| Type of Share | Description |
|---|---|
| Ordinary Shares | Only receive dividends when the company makes a profit. Shareholders get higher dividends when profits are higher and have voting rights at company meetings. |
| Preference Shares | Receive dividends regardless of company profitability. Fixed rate of return and preferential treatment during company liquidation. |
| Bonus Shares | Free shares given to existing shareholders as compensation for unpaid dividends. Shareholders receive more shares without paying for them. |
| Founders Shares | Special shares issued to company founders and promoters, receiving dividends after all other shareholders are paid. |
Advantages of Shares
Investing in shares offers several potential benefits:
- Dividend income: You may receive regular dividend payments based on company profits
- Capital growth: Share prices can increase over time, providing capital gains
- Voting rights: You can participate in company decisions at Annual General Meetings
- Liquidity: Shares can be easily bought and sold on the stock exchange
- Inflation protection: Shares often provide better protection against inflation than fixed deposits
- Long-term growth potential: Well-chosen shares can provide excellent returns over time
Disadvantages of Shares
Share investments also carry significant risks:
Risk Warning for Share Investments:
Share prices can be highly volatile and unpredictable. Never invest more than you can afford to lose, and always research companies thoroughly before investing.
- Dividend uncertainty: Dividends are not guaranteed and depend on company performance
- Capital loss risk: Share prices can fall, resulting in losses
- Company risk: If a company fails, shareholders may lose their entire investment
- Market volatility: Share prices fluctuate constantly based on market conditions
- Requires knowledge: Successful share investing requires research and understanding of companies
Fixed Deposits
Fixed deposits are conservative investment products offered by banks and financial institutions. You invest a specific amount for a predetermined period at a fixed interest rate.
Key features:
- Money cannot be accessed during the investment period
- Interest rate is fixed for the entire period
- Available in short-term, medium-term, and long-term options
- Higher returns than ordinary savings accounts
Perfect for Conservative Investors:
Fixed deposits are ideal for investors who prioritise capital protection over high returns and can commit their money for a specific period.
Advantages of Fixed Deposits
Fixed deposits offer several benefits for conservative investors:
- Guaranteed returns: You know exactly how much you'll earn before investing
- Capital protection: Your original investment is completely safe
- Various terms available: Choose from short-term to long-term investment periods
- Disciplined saving: Forces you to save by restricting access to funds
- Higher returns: Earn better interest rates than regular savings accounts
- Compound growth: Interest can be reinvested to earn additional returns
- No market risk: Not affected by stock market fluctuations
Disadvantages of Fixed Deposits
However, fixed deposits have several limitations:
The Inflation Risk:
While fixed deposits protect your capital, the fixed interest rate may not keep pace with inflation, potentially reducing your purchasing power over time.
- No access to funds: Money is locked away for the entire investment period
- Inflation risk: Returns may not keep up with rising prices
- Lower returns: Generally offer lower returns than other investment options
- Early withdrawal penalties: You may lose interest if you withdraw money early
- Opportunity cost: You might miss out on better investment opportunities
Types of Preference Shares
Preference shares come in various forms, each offering different benefits to investors:
Participating vs Non-participating Preference Shares
Participating preference shares:
- Guaranteed minimum fixed dividend from the company
- Share in any surplus profits the company makes
- Receive higher dividends when company profits increase
- Get paid before ordinary shareholders if the company closes down
Non-participating preference shares:
- Guaranteed minimum fixed dividend only
- Do not share in surplus profits
- Fixed returns regardless of company performance
- Still get paid before ordinary shareholders during liquidation
Choosing Between Participating and Non-Participating:
Participating preference shares offer more upside potential when companies perform well, while non-participating shares provide more predictable returns.
Other Types of Preference Shares
Cumulative preference shares: If dividends are not paid due to poor performance, these payments accumulate and must be paid later when the company recovers.
Non-cumulative preference shares: Missed dividend payments are not accumulated and are lost forever if not paid.
Redeemable preference shares: Can be sold back to the company at a fixed price if desired.
Non-redeemable preference shares: Can only be sold back if the company closes down for reasons other than bankruptcy.
Convertible preference shares: Can be converted into ordinary shares on a future date determined when originally issued.
Non-convertible preference shares: Cannot be converted into ordinary shares.
Rights of Shareholders
Rights of Ordinary Shareholders
Ordinary shareholders enjoy comprehensive rights including:
Shareholder Democracy:
Ordinary shareholders are the true owners of the company and have the most influence over major company decisions through their voting rights.
- Right to receive notice of and attend Annual General Meetings
- Right to participate and vote at company meetings
- Right to learn about company performance at AGMs
- Right to vote for company directors
- Right to receive copies of all financial reports
- Claims on company assets if the company fails (after creditors and preference shareholders)
Rights of Preference Shareholders
Preference shareholders have more limited but secure rights:
- Right to receive dividends regardless of profit levels
- Limited voting rights only on specific issues
- Priority claim on company assets during bankruptcy
- Right to receive financial reports
- Voting rights restricted to matters affecting preference shareholders
Key Investment Concepts
Understanding investment terminology is essential for making informed decisions:
Essential Investment Vocabulary:
These terms form the foundation of investment knowledge. Understanding them will help you make better investment decisions and communicate effectively with financial advisors.
Security: An asset that serves as a guarantee for the person providing funding, offering protection to financial institutions if borrowers cannot repay loans.
Debentures: Financial instruments that allow companies to borrow money directly from the public. Investors become creditors to the company and receive regular interest payments.
Dividends: Regular payments made by companies to shareholders from their profits. The word "dividend" comes from "divide," as company profits are divided among shareholders.
Capital Gain: The increase in value of an investment over time compared to the original purchase price. Capital gains may be subject to tax.
Hedging: An investment strategy designed to protect your finances from various risks and market fluctuations.
Disclosure: The requirement for companies to provide all necessary information to investors, ensuring transparency in investment decisions.
Key Points to Remember:
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Four main investment forms: RSA Retail Savings Bonds offer government-backed security, Unit trusts provide professional management and diversification, Shares offer ownership and growth potential, and Fixed deposits guarantee returns with capital protection.
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Risk and return relationship: Generally, higher potential returns come with higher risks. Government bonds are safest but offer lower returns, while shares offer higher growth potential but with greater risk.
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Diversification is key: Spreading investments across different types reduces overall risk and provides better long-term results.
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Understand your rights: Different investments give you different rights as an investor, from voting rights with shares to guaranteed payments with preference shares.
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Consider your investment timeline: Short-term goals suit fixed deposits, while long-term wealth building benefits from shares and unit trusts.