Presentation on theme: "OPTION 1 INVESTING Year 10 Commerce 2013. TO INVEST OR NOT TO INVEST…THAT IS THE QUESTION!!!"— Presentation transcript:
OPTION 1 INVESTING Year 10 Commerce 2013
TO INVEST OR NOT TO INVEST…THAT IS THE QUESTION!!!
CONTEXT In this unit of work we focus on the range of investment options and how to make wise investment decisions. In particular, we look at various investment options and the level of risk associated with each. We also examine the ways that investors can keep track of their investments so that they maximise their long- term gains.
LINGO LIST Capital gain Capital loss Collateral Equity Equity loan Ethical investing Gearing Income Interest Investment Investment portfolio Mortgage Negative gearing Unit trust
LINGO LIST - DEFINITIONS Capital gains – occurs when the sales price for an asset is greater than the initial cost. Capital loss – occurs when the sales price for an asset his less than the initial cost. Collateral – an asset promised to a lender in case the borrower is unable to meet the loan repayments.
LINGO LIST CONT. Equity – the value of an investment less the amount of money owing on the investment. Equity loan – a loan where the equity in an asset is used as collateral for the loan that is taken out to buy further assets. Ethical investing – investing in assets that are considered to be morally sound; for example, those that are not socially and environmentally harmful.
LINGO LIST CONT. Gearing – borrowing for the purpose of investment, such as purchasing a share portfolio or using a mortgage to purchase a house. Income – regular payments from an investment; for example, interest on cash or bond, dividends on shares or rent from properties. Investments – an asset purchased with the intention of producing a capital gain or income, or both, for the owner
LINGO LIST CONT. Mortgage – A debt that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front. Negative gearing – Borrowing money to buy an investment asset without receiving enough income from the investment to cover the interest expenses and other costs involved in maintaining it. The shortfall between income earned and interest due can be deducted from current income taxes. Unit trust – An investment where a number of individuals place their money with a professional manager who manages the total fund on their behalf.
INVESTMENT DECISIONS Investing is the outlay of resources in order to gain more resources. Resources may include anything of value, from money to shares in a company, or property, depending on: Where you would like to invest and What you would like to achieve by investing How long would you like to invest for
Some people use their investment as a form of saving so that they can eventually make a major purchase. In this case, they expect that it is earning more than if they had just put it aside. If you stored cash in a jar under your bed, the money would eventually lose its worth due to inflation, the decline in the value of money. If, however, you invested the money in a basic savings account, it would earn interest usually corresponding with the rise in inflation, meaning that it would at least be worth the same amount as when you deposited it OTHER REASONS INCLUDE
INCOME AND CAPITAL GAINS Income is money received from an investment while it is owned. A capital gain is made on an investment when it is sold for more money than it cost to buy. A capital loss occurs when an investment is sold for less money than it cost. For example, a house costing $400 000 is purchased as an investment. It produces an income, in the form of rent, of $1000 a month. If the property is sold for $500 000 some years later it has made a capital gain of $100 000. If it is sold for $350 000 it has made a capital loss of $50 000.
NEGATIVE GEARING When an investment property is negatively geared the investor may be able to reduce or minimise his or her taxable income. Negative gearing occurs when the deductions associated with an investment are greater than the income the investor receives in a 12-month period (the financial year). The loss that is made on the property investment can be offset against any income the investor has from employment or other investments. When the investors tax return is submitted, the investor may be entitled to a refund.
HOW IT WORKS IN PRACTICE You purchase an investment property for $200 000, which rents for $200 a week. You have borrowed 100 per cent of the purchase price using your equity in your existing property as collateral. Your cash flow position is shown in the table below, with expenses in brackets.
PROS AND CONS OF NEGATIVE GEARING
A RANGE OF WAYS TO FINANCE INVESTMENT
HOW DO YOU START? Unless an inheritance or some other windfall (for example, a gift or a lottery win) is received, investing is achieved through saving, borrowing or a mixture of both. A minimum amount of $500 is generally required to begin an investment portfolio.
SAVINGS The advantage of saving before you invest is that you do not have to pay Interest on a loan. However, it takes time to save sufficient funds to make the investment. This may mean you have extra costs, such as paying rent while saving for a house. Before starting to save, it is important to work out how much you are spending and whether there are ways to spend less and save more.
When borrowing money for an investment, you must: ensure that you can afford the repayments, shop around for some loans that suit your purposes carefully check and compare the features of these loans. For example, personal loans may be secured or unsecured Secured – the bank or financial institution retains an interest in the item purchased, such as a boat or car. Unsecured – the bank or financial institution give the loan without security ( the onus is on you to make the repayments and pay back the loan) BORROWINGS
EQUITY LOANS Home-owners can use the equity in the home they own or are paying off to purchase an investment property. For example: You bought a home in 2009 for $300 000. To finance your purchase you borrowed $200 000. You used your savings ($100 000) to pay the balance. At this point your equity in the home is $100 000. Four years later, thanks to the property boom, your home is worth $500 000. Your equity is now $300 000 plus any amount you have been able to pay off your mortgage.
Ethical investors take a holistic view ( this means linking strategy to things like charitable purposes, appetite for risk, as well as moving from a peer group approach and adopting more individual strategies to examine how the money will be used ) When making investment decisions, some people decide that they wish to invest only in certain companies or organisations whose products, policies and practices are in line with their own beliefs and values. It is becoming more common as people become more aware of the issues and practices of businesses that can damage our society and the environment.
OTHER THOUGHTS TO CONSIDER An ethical investor who cares for the environment might therefore refuse to invest in a mining company, for example, or an investor involved in human rights might decline to invest in company known to treat their workers badly. This form of investment is highly subjective, based on the investor's personal politics. Consideration of ethical issues when investing may lead to reduced returns
OTHER THOUGHTS TO CONSIDER Certain investments could be promoted as ethical as a marketing ploy and may not, in fact, be ethical. Use of the terms ethical and socially responsible could make it appear that investments that do not use these terms are unethical or socially irresponsible. Slight contradictions can occur within an investment portfolio. For example, a socially responsible fund may choose not to invest in tobacco companies but may invest in retailers who sell cigarettes.
Complete the following Ethical Investment Questionnaire to give you an indication of the type of investor you might be http://www.ifa.cc/pdfs/EthicalInvestmentQuestionnai re.pdf