Investing

Question 1

Define Capital gain

Answer 1

Occurs when the sale price for an asset is greater than the initial cost.

Question 2

Define Capital loss

Answer 2

Occurs when the sale price for an asset is less than the initial cost.

Question 3

Define Collateral

Answer 3

An asset promised to a lender in case the borrower is unable to meet the loan repayments.

Question 4

Define Equity

Answer 4

The value of an investment less the amount of money owing on the investment.

Question 5

Define Ethical investing

Answer 5

Investing in assets that are considered to be morally sound

Question 6

Define Gearing

Answer 6

Borrowing for the purpose of investment, e.g mortgage to purchase a house.

Question 7

Define Income

Answer 7

Regular payments from an investment

Question 8

Define Equity loan

Answer 8

A loan where the equity in an asset is used as collateral for the loan that is taken out to buy further assets.

Question 9

Define Unit trust

Answer 9

An investment where a number of individuals place their money with a professional manager who manages the total fund on their behalf.

Question 10

Define Diversification

Answer 10

Spreading investments over a range of asset sectors with the aim of reducing risk.

Question 11

Define Dividend

Answer 11

An investor’s share of a company’s profit.

Question 12

Define Return

Answer 12

The amount of money received from an investment each year

Question 13

Define Risk

Answer 13

The level of uncertainty associated with a particular investment. Higher the risk, higher the return theoretically

Question 14

Define Term Deposit

Answer 14

Money invested for a fixed period of time, interest is paid at regular intervals.

Question 15

Define All Ordinaries Index

Answer 15

Measurement of the average movements in the share price of a selection of major Australian companies.

Question 16

Define Comparison Rate

Answer 16

A true rate of interest. It includes both the interest rate and any fees and charges.

Question 17

Define Saving is what

Answer 17

storing something for later use

Question 18

Define Investing is what

Answer 18

using resources in the anticipation of creating even more resources.

Question 19

Gearing is when:

Answer 19

loans are given for investing. If income gained from the investment is less than the repayments this is negative gearing.

Question 20

What does negative gearing do

Answer 20

• Often used as a way of reducing an investors taxable income while building up repayments.
• Occurs when the deductions associated with an investment are greater than the income within a financial year.
• Loss that is made on the property can offset against any income the investor has from employment or other investments

Question 21

Advantages and Disadvantages of negative gearing

Answer 21

Advantages
•You can purchase an asset that may increase in value over time.
•You can reduce the amount of tax you are required to pay.
•Investment in property helps to increase the stock of housing for those who rent accommodation.
Disadvantages
•The asset may not increase in value or could actually fall in value.
•The property you purchase may prove difficult to rent while you keep making loan repayments.
•Interest rate increases.
•Loss you need to reduce tax has to be funded out of your other sources of income.

Question 22

What is home equity

Answer 22

• Homeowners can use the equity in the home they own
• Equity Loan. Bought home in 2000 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. Therefore, your equity is now $300,000.
• Banks will lend you money using the $300,000 equity in your home as collateral.

Question 23

What is ethical investing

Answer 23

• Negative screening is choosing not to invest in particular companies because you consider them unethical. Include tobacco or guns/alcohol.
• Positive screening is investing in companies that are socially responsible. This can include waste recycling, social support.
• Issues with ethical investing include the fact that by doing this you could make reduced returns, certain investments
• Financial Services Reform Act ’01 (Cwlth) requires Product Disclosure statements for financial products involved in investing to show environmental, social or ethical considerations taken into account.

Question 24

What are the 4 investment option, and the risk ratings

Answer 24

Cash-low
Sharemarket-high
Property-medium high
Fixed Interest-low

Question 25

What does diversification do

Answer 25

• Improves consistency of returns in the long term.

- Risk in shares can be reduced in time.

Question 26

Why do you modify investment patterns

Answer 26

For maximum long term gains

Question 27

Issues effecting investing environment

Answer 27

• Financial markets are affected by investor’s confidence. Terrorism has mad investors more cautious
• Australians are keen to buy their own house and have considerable debt.
• Problems arise when interest rates go up, can’t afford to repay.
• Readjusting Super allocations?