Forms of Investments
There are four forms of investments that we need to understand
o Investors are constantly seeking new forms of investment that will
increase the return on their investments and lower the risks.
o The choice of a particular type of investment has a direct impact on
the financial reward that may accrue to the investor.
o The impact could be either positive (advantages) and/or negative
(disadvantages).
The 4 forms of investments are as outlined below
Forms of investments
RSA Retail savings
Unit trusts Shares Fixed deposits
bonds
1. The RSA Retail Savings Bonds/Government Retail Bonds
o The South African Government offers its citizen the opportunity to invest
in saving bonds as a strategy to encourage savings in the country.
o There are two types of retail savings bonds namely
fixed rate
Inflation linked retail savings bonds.
o Interest is earned half-yearly on 31 March and 30 September and paid
out into the bond holder’s/investor’s bank account.
Positives/Advantages
o The interest rate is fixed for the duration of the investment, thereby
providing the investor certainty of a return on his/her investment.
o More investors could invest in this type of investment because they are
offered interest rates that are determined by the markets.
o The investor receives interest payments twice a year from the
government.
o The investor has free access to his investment and may withdraw cash
after the first year of the investment.
o The investment is a low-risk investment because it’s an investment
instrument issued by the South African government.
o The investment is available to people from all income groups.
Negatives/Disadvantages
o This investment type cannot be offered as a form of security in return
for loans from financial institutions.
o This investment requires a minimum investment amount of R1 000,
which could too much for some small investors to spend.
o Investors do not have the option of freely exchange retail bonds
amongst themselves.
o People younger than 18 do not have the option of investing in this form
of investment.
o An investor is liable to pay a penalty should he/she wish to withdraw
funds from this investment before a period of 12 months has expired.
2. Unit Trusts
o It is a collection of investment options/methods made up of shares in
different companies.
o The investments of a number of investors are pooled together in a unit
trust fund, managed by a fund/portfolio manager/expert.
o Can be bought directly from the accredited service providers.
Positives/Advantages
o Unit trusts are pooled funds of investors that are managed by a fund
manager on behalf of the investors who buy shares on the JSE.
o The fund manager chooses from a variety of share options that offer
low to high risks investments.
o The investments are managed according to predetermined rules and
procedures, which makes this type of investment a safe option.
o The amounts that may be invested each month varies from small
amounts to big amounts.
o Investment options like online investments make it easy for investors to
work with this type of investments.
o Investors have free access to the funds and may convert them to cash
in the event of an emergency.
o Lowers the potential risk and allows more people to invest in the fund.
Negatives/Disadvantages
o Share prices, as a rule, are subject to fluctuations, which may increase
the risk of this type of investment.
o Growth of unit trust investments is dependent on the established and
well recognised companies in which shares were bought, continue to
grow/expand.
o The funds of the unit trust are limited to the contributions of members
and may not be increased by other borrowings.
o This investment option is not recommended to investors who want to
invest for a limited period.
o This investment option is not suitable for investors who want to evade
risks.
3. Shares
o Companies sell/issue portions of its ownership to shareholders in the
form of shares to obtain capital/funds to operate its core business.
o Shares give the holder one vote per share and the right to receive a
dividend.
o Shares of listed companies are traded on the JSE.
o Shares can be bought/sold through stock/share brokers to whom a
brokerage/fee will be paid by the investor.
Positives/Advantages
o A shareholder will be entitled to dividend payments, based on a high
number of shares purchased.
o The shares may be freely sold and purchased on the JSE.
o The investors have voting rights at the Annual General Meetings of the
public company.
o The investor’s return on investment is based on the financial
performance of the company.
o Investors invest in shares as hedging against increases in the general
price levels of goods and services.
o The growth in the value of shares may provide the investors with a
good return of investments over a longer period.
Negatives/Disadvantages
o Dividends payable to shareholders are reliant on the company
declaring a dividend based on the profit it made (if any).
o Investors must rely on the goodwill of the company to declare a
dividend.
o Shareholders could lose their investment should the company be
declared insolvent, making the risk high.
o The value of the dividends declared by the company is determined by
the directors of the company.
4. Impact of Fixed Deposits
o It is a very conservative method of investment at a fixed rate for a fixed
period/at a financial institution/bank.
o Money cannot be withdrawn/added during the period of the deposit.
Investors have to be certain that they will not access/need the money
for the period of the deposit.
Positives/Advantages
o The investor is certain of the return on investment because the interest
rate is fixed for a predetermined period.
o The period of investment available to the investor ranges from short-
term, medium-term, or long-term periods.
o The investor doesn’t have access to his/her funds for the duration of the
investment period, thus instilling a sense of financial discipline.
o The duration of the investment period is determined solely by the
investor.
o The return on investment of this type of investment is higher.
o Investors earn a better return on investment than on an ordinary
savings account.
o The investor will be paid the original amount of the investment plus all
interest earned during the investment period.
Negatives/Disadvantages
o The investor doesn’t have access to any funds invested until the end of
the investment period.
o The return in investments may be lower than the general rate of
inflation.
o This type of investment generally provides the investors with lower
returns than other types of investments.
o Penalties may be charged for early withdrawal.
Types of Shares
o Various types of shares may be offered to investors by a company.
o The shareholders of these shares have different obligations and rights in
terms of the shares held.
o Certain shares must be purchased, while other shares are offered to
the investors without the company receiving payment for it.
o Certain shareholders are guaranteed a dividend, while other
shareholders must wait for the company to declare a dividend.
Type of share Description
1 Ordinary shares • Ordinary shares only receive dividends when profit is made.
• Normally the higher the net profit, the higher the dividend.
• Shareholders are the last to be paid, if the company is declared bankrupt
liquidated.
• Dividends vary from year to year according to profits made and are
determined by the company/board of directors.
• Shareholders have a right to vote at the Annual General Meeting/AGM.
2 Preference shares • Some of these types of shares receive dividends regardless of whether a profit
is made.
• A fixed rate of return is paid on this type of shares.
• Shareholders have a preferred claim on company assets in the event of
bankruptcy/ liquidation.
• These shares enjoy preferential rights to dividends/repayment over
ordinary shares.
• Dividends are payable according to the type of preference share.
• Voting rights are restricted to particular circumstances/resolutions.
3 Bonus shares • Payment in the form of shares to shareholders.
• Issued as compensation for unpaid dividends.
• Shareholders will own more shares and collect more dividends in the future.
• Shareholders receive these shares without being required to pay for them.
4 Founders shares • Issued to the founders and incorporators/ promoters of the company.
• They receive dividends after all other shareholders were paid.
