Investment: Securities: Mind The Gap CAPS Grade 12 Business Studies Chapte R 12: Investmen T: Securities 67

Chapter 12
Investment:
Securities
INTRODUCTION
Investors have a range of investment opportunities to choose from. They

measure these investment opportunities against criteria for a good
investment. Investors set financial goals and consider different factors when
making investment decisions.
An investor should consider the advantages and disadvantages of each

form of investment to ensure making an informed
decision.
© Department of Basic Education 2014

Mind the Gap CAPS Grade 12 Business Studies CHAPTER 12: INVESTMENT: SECURITIES 67
Chapter 12
Overview
TOPIC CONTENT CONTENT DETAILS FOR TEACHING,
LEARNING AND ASSESSMENT PURPOSES
Investments:  Functions of the Johannesburg  Outline/Describe/Explain/Discuss
Securities Securities Exchange the functions of the JSE.
 Description of types of investment  Explain a range of available
opportunities business investment opportunities
 Analysis of the risk factor of the e.g.:
above mentioned investment o Government/RSA retail savings
opportunities. bonds
 Types of shares o Unit trusts
 Impact of the following forms of o Shares
investment o Fixed deposit
 Meaning of debentures, dividends, o Managed portfolio
capital gain, simple interest, o Debentures
compound interest. o Fixed property
 Factors that must be considered o Mutual funds/stokvels
when making investment decisions. o Business ventures/venture
 Distinction between compound capital
interest and simple interest. o Endowment/Life insurance
 Calculation of compound and simple policies/Retirement Annuities.
interest. o 32-day notice accounts/Call
Deposits
 Analyse the risk factor of each type
of investment opportunity.
 Name/Describe/Explain/Discuss the
types of shares.
 Explain the difference/Differentiate
between ordinary and preferences
shares.
 Outline/Describe/Explain the rights
of preferences shareholders
 Explain/Describe the types of
preference shares.
 Describe and evaluate
(positives/negatives) of the following
forms of investment:
o Government/RSA retail
savings bonds
o Unit trusts
o Shares
o Fixed deposit

Chapter 12
TOPIC CONTENT CONTENT DETAILS FOR TEACHING,
LEARNING AND ASSESSMENT PURPOSES
Investments:  Define/Explain the meaning of
Securities debentures, dividends, capital gain,
simple interest, compound interest.
 Outline/Explain/Discuss the factors
that must be considered when making
investment decisions.
 Explain the differences
between/Distinguish between
compound interest and simple interest.
 Calculate compound and simple
interest from given scenarios.
 Recommend types/forms of
investment based on the calculations.

Chapter 12
12.1 Key concepts
These definitions will help you understand the meaning of key

Business Studies concepts that are used in this chapter.
Use mobile notes to
help you learn these key Definition
concepts. Find out more about
Term
mobile notes on page xiv
in the introduction. Investment Investing/Saving money in order to
yield better returns.
Is a formal market, trading in shares,

JSE/Johannesburg
comprising of all the public companies
Security Exchange
that have been listed.
Share It gives investors the opportunity to

obtain a part ownership of a company.
Capital Market / It is the market for securities/shares
securities market where companies and the government
can raise long-term funds.
Short term investment An investment for a period shorter
than one year.
Long term investment An investment for a period for longer
than one year.
Fixed rate The rate of return stays the same for
the period of time.
Accumulated Interest earned over the
investment period.
Simple interest Calculated on the original/principal
amount invested.
Compound interest Calculated each period on the
original/principal amount including all
interest accumulated during past
periods.
Risk Refers to the chance that the invested
amount may reduce in value/lost in total
over a period of time, due to unforeseen
circumstances.

Chapter 12
12.2 Functions of the Johannesburg Securities Exchange

 Gives opportunities to financial institutions to invest their funds in
shares.
 Serves as a barometer/indicator of economic conditions in South
Study Africa.
this  Keeps investors informed on share prices by publishing it daily.
question  Acts as a link between investors and public companies.
well.  Small investors are invited to take part in the economy of the country
through the buying/selling of shares.
 Raises primary capital.
 Provides protection for investors.
 Encourages short-term investment.
12.3 Investment opportunities

Description
Types of investment Description

opportunities
Government/RSA retail  The SA Government offers SA citizens the
savings bonds opportunity to invest in saving bonds, to
encourage saving.
Unit trusts  A collection of investment options/methods
made up of shares in different companies.
 The investments of a number of investors are
pooled together in a unit trust fund, managed by
a fund/portfolio manager/expert.
Shares  A portion of ownership sold to shareholders in
the form of shares.
Fixed deposit  A conservative method of investment at a fixed
rate for a fixed period/at a financial
institution/bank.
Managed portfolio  An investor instructs a financial
institution/bank/financial advisor to manage
his/her various investments/assets in one
portfolio.
Debentures  It is issued to raise borrowed capital from the
public and most types of debentures can be
traded on the JSE.
 The lender/debenture holder agrees to lend
money to the company on certain conditions for
a certain period.
Fixed property  Buying a house/piece of land is usually suitable
as a long term investment only.
 Return on property is earned in the form of
rental/sales/capital gains at a higher price than
what it was bought for (including the transfer
costs and taxes).
Mutual funds/stokvels  An informal savings scheme to which a
relatively small group of people contribute.
 A stokvel is usually managed by a trustworthy
chairman/treasurer, who will be responsible for
keeping records and managing the bank
account.
Business ventures/venture  Venture capital is given by an
capital investor/businesses to start up/expand a
business in return to have a share in the
new/expanded business.
Chapter 12
Endowment/Life insurance  A monthly payment to an insurance company
policies with the expectancy of receiving a pre-
determined amount on a date in the future.
Retirement Annuities  A monthly payment to an insurance company in
return for a certain amount of money at
retirement age.
32-day notice accounts/Call  Money is invested at a fixed rate, although
Deposits withdrawals may be made provided the bank is
given 32 days' notice of the withdrawal.
Activity 1
1.1 Identify the types of investment opportunity that is available for

Sam in each statement below:
1.1.1 Masakhane savings scheme has invited Sam to join

the scheme.
1.1.2 Interest is earned twice in this investment option.
1.1.3 Money can be withdrawn anytime in this investment
option.
1.1.4 The bank must first be notified within a specific period
of time before money is withdrawn.
1.1.5 A fixed amount of money is invested and can only be
withdrawn after a predetermined period.
(10)
Answer to activity 1
1.1.1 Mutual funds/stokvels√√
1.1.2 Government/RSA retail savings bonds√√
1.1.3 Unit trusts√√
1.1.4 32-day notice accounts/Call Deposits√√
1.1.5 Fixed deposit√√
(5 x 2) (10)

Chapter 12
Analysis of the risk factor of the investment opportunities
Types of Risk factor

investment
opportunities
Government/RSA  Risk is very low, as an investment is made in
retail savings bonds the government who cannot disappear/go
bankrupt.
 It is a safe investment, as it cannot be sold on
the open market/not exposed to market risks.
Unit trusts  Investment may be made in high and low risk
shares, which spread the risk throughout the
fund and lowers the risk for all the investors/fund
members.
Shares  Shares have low/medium risk over a long
term/investment period depending on the chosen
type of shares. e.g.
o Ordinary shares have the highest risk as
the investor may lose the full or part of the
investment when the company is
dissolved/bankrupt/liquidated.
o Preference shareholders' risk is lower, as
they have preferential claims on the assets
of the liquidated company/may receive
some compensation before ordinary
shareholders.
Fixed deposit  Very low as the investor will receive what was
promised.
 The interest rate is usually fixed, the return will
not be affected by market fluctuations.
Managed portfolio  Risk is lower over a longer term/period.
 Investments are made in various
sectors/companies, therefore the risk is spread
and better managed by the portfolio manager.
Debentures  Debentures have a low risk as they must be
paid back.
Fixed property  Low risk over a long term.
 Risk may be determined by economic conditions
and may influence the value of property.
Mutual  Money in a savings account is a safe
funds/stokvels investment, but with low interest rates.
Business  High risk for the investor(s) if the history of the
ventures/venture company is not well researched.
capital
Endowment/Life  Low risk, as the insured amount will be paid out
insurance regardless of circumstances.
policies/Retirement
Annuities
32-day notice  Low risk, as investment plus interest will be paid
accounts/Call out on the maturity date of the investment.
Deposits  Interest is calculated on the daily balance,
accelerating the value/return on the
investment/lowering the risk.

Chapter 12
Types of shares
Types of shares Description

Ordinary shares  Standard shares with no special rights or
restrictions.
 Shareholders may receive higher dividends
when the company has made large profits.
Preference shares  These shares enjoy preferred claim on company
assets in event of bankruptcy/liquidation.
 A fixed rate of return is paid on this type of
share.
Founder shares  Shares that belongs to shareholders who started
the company.
Bonus shares  Shares that are issued to existing shareholders
as compensation for loss of dividends.
Differences between ordinary and preference shares
Ordinary shares Preferences shares

 Ordinary shares only receive  Some of these types of shares
dividends when profit is made. receive dividends regardless of
profit made.
 Normally the higher the profit the  A fixed rate of return is paid on
higher the dividends these type of shares.
 Shareholders are the last to be  Shareholders have a preferred
paid, if the company is declared claim on company assets in the
bankrupt. event of bankruptcy.
Rights of preferences shareholders

 Receive dividends regardless of how much profits are made.
 Receive a fixed rate of return/dividend.
 They are paid first/enjoy preferential rights to dividends.
 They have a preferred claim on company assets in the event of
bankruptcy/ liquidation of the company.
 Receive interim and annual reports.
 They only have voting rights at the Annual General Meeting
under particular circumstances/for certain resolutions.

Chapter 12
Activity 2
Explain THREE types of preference shares. (9)
Participating preference shares√√
 Shareholders are guaranteed minimum fixed dividends.√
 They are entitled to shares in any surplus company profits.√
 They have preferential rights over ordinary shares on repayment
when the company closes down.√
Sub max (3)
Cumulative preference shares√√
 Shareholders are entitled to receive minimum fixed dividends√
 They receive dividends not previously paid out when profits were
too low.√
Sub max (3)
Non-cumulative preference shares√√
 Shareholders are not compensated for past dividends that were
not paid out when profits were low.√
Sub max (3)
Redeemable preference shares√√
 Shares can be redeemed/bought back at the option of the issuing
company, either at fixed price on a specified date/over a certain
period of time.√
Sub max (3)
Convertible preference shares√√
 Shares are converted into predetermined number of ordinary
shares on the date specified when the preference shares were
issued.√
Sub max (3)
Max (9)
NOTE: Only the first THREE responses will be marked.

When the numbers of facts are specified, then markers
will only mark the number of facts required.

Chapter 12
12.4 Impact of the forms of investment opportunities

When asked to evaluate the
impact of the types of investments, you
should write either the positives/advantages
or negatives/disadvantages.
Government/RSA retail savings bonds

Positives/Advantages Negatives/Disadvantages
 Guaranteed returns, as interest rate is  Retail bonds cannot be ceded to banks as
fixed for the whole investment period. security for obtaining loans.
 Investment may be easily accessible, as  A minimum of R1 000 must be invested,
cash may be withdrawn after the first which may be difficult for some small
twelve months, subject to penalties. investors to accumulate.
 No charges/costs/commissions payable  Retail bonds are not freely transferable
on this type of investment. amongst investors.
 Investors need to have valid SA
identification/should be older than 18
years.
Unit trusts
 Managed by a knowledgeable fund  If blue chip companies’ growth path
manager to buy shares on the stock declined the growth of the unit trusts will
exchange. also be affected.
 Safe investments, as it is managed  Unit trust holders are not allowed to
according to rules and regulations. borrow against their investment.
 A small amount can be invested per  Not appropriate for short term
month. investments.
 Easy to invest in, as investors simply fill in  Not advisable if investors want to avoid
several forms or invest online. risks at all costs.
 Easy to cash in when an investor needs
money.

Chapter 12
Shares
 Holding a higher number of shares may  Holders may receive less dividends/no
result in higher proportional dividend pay- dividends when company profits are low.
outs.  Companies have no legal obligation to
 Can be freely transferred/traded on the pay dividends to shareholders.
JSE.  Risk may be high, as investment may be
 Shareholders' liability to the debt of the lost when companies are liquidated.
company is limited to what was  Dividends declared may be determined
invested/Shareholders have limited by the management/directors of the
liability for company debts. company/business.
 Holders have voting rights at the annual
general meeting (AGM).
Fixed deposit
 Interest is earned at a fixed rate  The investor cannot withdraw their funds
regardless of changes in the economic before the maturity date.
climate.  May not outperform the effect of inflation
 The investor can choose the investment over long term.
period.  Low return compared to other
 It has a low risk as investors are investments.
guaranteed a final payment.
12.5 Investment concepts

Description of investment concepts
Debentures
 It is issued to raise borrowed capital from the public and most types of debentures can be traded on
the JSE.
Dividends
 The return on an investment in shares.
Capital gain
 The return on property/fixed assets/investments.
Simple interest
 The interest is calculated on the original/principal amount invested.
Compound interest
 The interest is calculated for each period on the original/principal amount including all interest
accumulated during past periods.

Chapter 12
Activity 3
1.1 Identify an investment concept represented by EACH statement

below:
1.1.1 A type of loan issued by a company to borrow money,

usually at a fixed rate of interest.
1.1.2 The return on investments that shareholders receive.
1.1.3 Interest is earned on the original amount and not on the accrued
amount.
1.1.4 An increase in the value of the money investment
1.1.5 Interest is earned on the original amount invested and interest
earned in previous periods. (10)
1.1.1 Debenture√√
1.1.2 Dividends√√
1.1.3. Simple interest√√
1.1.4 Capital gain√√
1.1.5 Compound interest√√
(5 x 2) (10)
12.6 Investment decisions

Factors to consider when making investment decisions
Return on investment
Ensure  Refers to income from the investment, namely interest, dividends or capital appreciation
that you (growth/increase) on the original amount invested.
can name  Generally, there is a direct link between risk and return.
& explain
Risk
each  Refers to the chance that the invested amount may reduce in value/lost in total over a
factor. period of time, due to unforeseen circumstances.
 The higher the potential return, the higher the risk of a potential loss.
 Example: investing in shares has a higher risk than investing in a fixed deposit.
Liquidity
 An amount of capital could be invested in a type of investment that can easily be
converted to cash.
 The term liquidity is used to describe the ease and speed with which investors can
convert an investment into cash.
 Example: an investment in a savings account will be easier to convert into cash than an
investment in a fixed deposit which is usually deposited for a fixed period of time.
Taxation
 A good investment will yield good after-tax returns.
 Income tax implications must be considered in order to ensure a high net after tax
return.
 Tax rates are not necessarily the same for different investments.
Inflation rate
 Inflation refers to a decrease in the value of money due to rising prices.
 People are affected by a high inflation rate because their money/purchasing power
decreases.
 The return on investment should be higher than the inflation rate.
Chapter 12
Investment period
 This refers to the duration of the investment which may influence the return on
investment.
 It can be short, medium and/or long term.
 The investment period will depend on a customer's personal needs.
Investment planning factors

 Investors should always consider the safest possible investment opportunities.
 Some investments offer a low income on invested capital, but it could be a safer
investment than one that promises a higher income.
 Examine opportunities with a history of good return.
Budgets
 Investors can determine the amount of surplus money that can be invested.
 Investors must budget for unforeseen costs.
Volatility/Fluctuations on investment markets

 Fluctuation in national and international economic trends should be considered.
 The level of volatility will determine the amount of returns.
12.7 Simple interest and compound interest

Differences/Distinction between simple interest and compound interest
SIMPLE INTEREST COMPOUND INTEREST

 Calculated on the original/principal amount  Calculated each period on the
invested. original/principal amount including all interest
accumulated during past periods.
 Accumulated interest from prior periods is  Accumulated interest from prior periods is
not used in calculations for the following used in calculations for the following period.
period.
 Interest charged remain fixed for the full  Based on the concept of adding
period of investment. accumulated interest to the original/ principal
amount and interest is earned on interest.
Calculation of simple interest
Simple interest is calculated on the original/principal amount invested.
FORMULA: Interest = P x R x T
Simple interest = Principal (amount invested) x percentage interest rate x time in years/months
I = P x R x T
Activity 4
Remember to Jack invested R100 000 in a fixed deposit for three years.
always show all The bank offers him 11% simple interest.
your
calculations in Calculate the interest that Jack would receive after
the three years.
tests and (3)
exams.

Chapter 12
I = P x R x T
= 100 000 x 11% x 3
= 100 000 x 11/100 x 3
= 100 000 x 0.11 x 3
Interest = R 33 000 √√√
Activity 5
Zizi invests R 3000 in a savings account at a bank where he

will receive 10% simple interest p.a., paid out every 6 months.
Calculate the interest amount Zizi will receive after 2 years.

(3)
FORMULA: Interest = P x R x T √
Option 1: R3 000√ x 10% x 2 years√ = R600√
OR
Option 2: R3 000√ x 10% x 6/12 √ = R150

R150 x 4 = R600√
OR
Option 3: R3 000√ x 10% x 6/12 x 4√ = R600√

Max (3)

Chapter 12
Calculation of compound interest
Compound interest is calculated each period on the

original/principal amount including/plus all interest accumulated
during past periods.
Interest = P (1+i)ᶰ - P
P = Principal amount (initial investment)

i = percentage interest rate
n = number of years
Activity 6
Jill wants to invest R 25 000 in a fixed deposit for three years.

The bank offers her 10% compound interest.
1. Calculate the interest that Jill would receive after three years.
(8)
1. Option 1
Year 1: R25 000√ x 10% = R 2 500 √
Year 2: R27 500√ x 10% = R 2 750√
Year 3: R30 250√ x 10% = R 3 025√
Total interest = R 8 275√√
OR
Option 2
P (1+i)ᶰ - P√
25 000√(1+0,1)³√√ OR 25 000√(1,1)³√√ OR 25 000√(1,331)√√ - 25 000√√
= R 8 275√√
Max (8)


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Chapter 12

Investors have a range of investment opportunities to choose from. They

An investor should consider the advantages and disadvantages of each

© Department of Basic Education 2014

© Department of Basic Education 2014

© Department of Basic Education 2014

These definitions will help you understand the meaning of key

Is a formal market, trading in shares,

Share It gives investors the opportunity to

© Department of Basic Education 2014

12.2 Functions of the Johannesburg Securities Exchange

12.3 Investment opportunities

Types of investment Description

1.1 Identify the types of investment opportunity that is available for

1.1.1 Masakhane savings scheme has invited Sam to join

© Department of Basic Education 2014

Analysis of the risk factor of the investment opportunities

Types of Risk factor

© Department of Basic Education 2014

Types of shares Description

Differences between ordinary and preference shares

Ordinary shares Preferences shares

Rights of preferences shareholders

© Department of Basic Education 2014

Explain THREE types of preference shares. (9)

NOTE: Only the first THREE responses will be marked.

© Department of Basic Education 2014

12.4 Impact of the forms of investment opportunities

Government/RSA retail savings bonds

© Department of Basic Education 2014

12.5 Investment concepts

© Department of Basic Education 2014

1.1 Identify an investment concept represented by EACH statement

1.1.1 A type of loan issued by a company to borrow money,

12.6 Investment decisions

Investment planning factors

Volatility/Fluctuations on investment markets

12.7 Simple interest and compound interest

SIMPLE INTEREST COMPOUND INTEREST

Calculation of simple interest

Simple interest is calculated on the original/principal amount invested.

© Department of Basic Education 2014

= 100 000 x 11/100 x 3

= 100 000 x 0.11 x 3

Interest = R 33 000 √√√

Zizi invests R 3000 in a savings account at a bank where he

Calculate the interest amount Zizi will receive after 2 years.

Option 1: R3 000√ x 10% x 2 years√ = R600√

Option 2: R3 000√ x 10% x 6/12 √ = R150

Option 3: R3 000√ x 10% x 6/12 x 4√ = R600√

© Department of Basic Education 2014

Calculation of compound interest

Compound interest is calculated each period on the

P = Principal amount (initial investment)

Jill wants to invest R 25 000 in a fixed deposit for three years.

Year 1: R25 000√ x 10% = R 2 500 √

Year 2: R27 500√ x 10% = R 2 750√

Year 3: R30 250√ x 10% = R 3 025√

Total interest = R 8 275√√