Commerce investment notes

Investment is when money is spent to gain a profitable return. Individuals, businesses and
governments carry out investment for a variety of reasons.

Businesses invest in new machinery, factories, other firms or their own workforces (to increase
their working skills). Companies do this to increase profit levels.

Governments invest by spending on infrastructure that is vital to the economy such as:
● Transport facilities ie roads, railways, airports, ports
● Telecommunication systems
● Education ie schools, TAFEs, universities
● Hospitals
● Dams
● Access to energy supplies – electricity and gas

Individuals invest their savings in order to achieve some future goal. These goals may be:
● Short term (0 to 3 years)
● Medium term (3 to 5 years)
● Long term (over 5 years)

Goals that might lead individuals to look for investment opportunities include:
● the desire for extra income
● future security
● pay for a major purchase e.g. holiday or child’s education
● ensure a comfortable retirement

A trade-off is a situation where you have to give up something to get/gain something

else. All investors are faced with trade-offs whenever they make an investment.
They have to balance risk, return and liquidity.
Insider trading is the trading of a public company's stock or other securities (such as bonds or
stock options) based on material, nonpublic information about the company. In various
countries, some kinds of trading based on insider information is illegal.

Pty Ltd- Private company

Ltd- Public company

Some key terms:

Negative gearing:
Negative gearing is a form of financial leverage whereby an investor borrows money to acquire
an income-producing investment and the gross income generated by the investment (at least in
the short term) is less than the cost of owning and managing the investment, including
depreciation and interest charged on the loan (but excluding capital repayments).

Liquidity:
The degree to which an asset or security can be bought or sold in the market without affecting
the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be
easily bought or sold are known as liquid assets.
Liquidity is the ability to convert an asset to cash quickly. It is also known as "marketability." It is
safer to invest in liquid assets than illiquid ones because it is easier for an investor to get his/her
money out of the investment.
Liquidity is the term used to describe how easy it is to convert assets to cash. The most liquid
asset, and what everything else is compared to, is cash. This is because it can always be used
easily and immediately.

Certificates of deposit are slightly less liquid, because there is usually a penalty for converting
them to cash before their maturity date. Savings bonds are also quite liquid, since they can be
sold at a bank fairly easily. Finally, shares of stock, bonds, options and commodities are
considered fairly liquid, because they can usually be sold readily and you can receive the cash
within a few days. Each of the above can be considered as cash or cash equivalents because
they can be converted to cash with little effort, although sometimes with a slight penalty.

Moving down the scale, we run into assets that take a bit more effort or time before they can be
realized as cash. One example would be preferred or restricted shares, which usually have
covenants dictating how and when they might be sold. Other examples are items like coins,
stamps, art and other collectibles. If you were to sell to another collector, you might get full value
but it could take a while, even with the internet easing the way. If you go to a dealer instead, you
could get cash more quickly, but you may receive less of it.
The least liquid asset is usually considered to be real estate because that can take weeks or
months to sell.

Inflation:
Inflation is defined as a sustained increase in the general level of prices for goods and services.
It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a
smaller percentage of a good or service.

The value of a dollar does not stay constant when there is inflation. The value of a dollar is
observed in terms of purchasing power, which is the real, tangible goods that money can buy.
When inflation goes up, there is a decline in the purchasing power of money. For example, if the
inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year. After
inflation, your dollar can't buy the same goods it could beforehand.
Inflation poses a “stealth” threat to investors because it chips away at real savings and
investment returns. Most investors aim to increase their long-term purchasing power. Inflation
puts this goal at risk because investment returns must first keep up with the rate of inflation in
order to increase real purchasing power. For example, an investment that returns 2% before
inflation in an environment of 3% inflation will actually produce a negative return (−1%) when
adjusted for inflation.

If investors do not protect their portfolios, inflation can be harmful to fixed income returns, in
particular. Many investors buy fixed income securities because they want a stable income
stream, which comes in the form of interest, or coupon, payments. However, because the rate of
interest, or coupon, on most fixed income securities remains the same until maturity, the
purchasing power of the interest payments declines as inflation rises.

In much the same way, rising inflation erodes the value of the principal on fixed income
securities. Suppose an investor buys a five-year bond with a principal value of $100. If the rate
of inflation is 3% annually, the value of the principal adjusted for inflation will sink to about $86
over the five-year term of the bond.

Because of inflation’s impact, the interest rate on a fixed income security can be expressed in
two ways.
The nominal, or stated, interest rate is the rate of interest on a bond without any adjustment for
inflation.
The real interest rate on an asset is the nominal rate minus the rate of inflation.
Inflation can adversely affect fixed income investments in another way. When inflation rises,
interest rates also tend to rise either due to market expectations of higher inflation or because
the Federal Reserve has raised interest rates in an attempt to fight inflation. (See below for
more information on how the Federal Reserve combats inflation.) When interest rates rise, bond
prices fall. Thus, inflation may lead to a fall in bond prices, potentially reducing total returns on
bonds.
Unlike bonds, some assets rise in price as inflation rises. Price rises can sometimes offset the
negative impact of inflation:
Common stocks have often been a good investment relative to inflation over the very long term,
because companies can raise prices for their products when their costs increase in an
inflationary environment. Higher prices may translate into higher earnings. However, over
shorter time periods, stocks have often shown a negative correlation to inflation and can be
especially hurt by unexpected inflation. When inflation rises suddenly or unexpectedly, it can
heighten uncertainty about the economy, leading to lower earnings forecasts for companies and
lower equity prices.
Prices for commodities generally rise with inflation. Commodity futures, which reflect expected
prices in the future, might therefore react positively to an upward change in expected inflation.

Capital gain:
A profit from the sale of property or an investment.

Asset:
An item of property owned by a person or company, regarded as having value and available to
meet debts, commitments, or legacies.

Share:
Shares are units of ownership interest in a corporation or financial asset that provide for an
equal distribution in any profits.

Diversified portfolio:
All investors will like to get the maximum possible return with little or no risk but no single type of
investment will provide this. The challenge is to create an investment portfolio that has some
risky but high return investments and some secure but low return investments. This way an
investor has the best of both worlds-the advantages of earning high returns and the security of
some low risk investments.
Also, a diversified portfolio makes it easy to take advantage of changes in the returns in different
types of investments. An investor who invests all their funds into an investment property will do
very well while property price rises, but what will happen if real estate values stop rising? An
investment in the stock market can promise strong returns, but an investor will make a loss if all
their funds are in the ASX when there is a bear market.
Spreading money in different types of investments protects investors- a fall in one area may be
balanced by an improvement in another.

Blue chip investments:

Safe shares or investments that will guarantee you a small profit.

Fixed Expenses/Variables: Variable costs vary based on the amount of output, while fixed costs
are the same regardless of production output. Examples of variable costs include labor and the
cost of raw materials, while fixed costs may include lease and rental payments, insurance, and
interest payments.

Debenture: A document that tells you how much has been borrowed, the interest and terms of
investment