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Fin329 Chapter 3 - Investment Alternatives

Real assets include tangible assets like land, buildings, jewelry and art. They are not as liquid as financial assets but can increase in value. Real estate specifically includes residential, agricultural, commercial, industrial and recreational property. Financial assets are claims that can be traded, like stocks, bonds, mutual funds and derivatives. Stocks provide ownership while bonds provide fixed income. Mutual funds offer diversification managed by professionals. Derivatives derive value from underlying assets and can be used to hedge risk but also carry risk.

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219 views30 pages

Fin329 Chapter 3 - Investment Alternatives

Real assets include tangible assets like land, buildings, jewelry and art. They are not as liquid as financial assets but can increase in value. Real estate specifically includes residential, agricultural, commercial, industrial and recreational property. Financial assets are claims that can be traded, like stocks, bonds, mutual funds and derivatives. Stocks provide ownership while bonds provide fixed income. Mutual funds offer diversification managed by professionals. Derivatives derive value from underlying assets and can be used to hedge risk but also carry risk.

Uploaded by

Muhd Hisyamuddin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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CHAPTER 2

Investment Alternatives

Objectives

After completing this topic, students should be


able to:
Identify

the real assets and financial assets


Classify the assets risk
Discuss the advantages and disadvantages of real
assets and financial assets

1. Real Assets

REAL ASSET (NON FINANCIAL ASSET)


Or

tangible assets
they are not as liquid as financial assets
eg: land, building (personal properties,
commercial properties), jewellery, antiques, art
works, old coins, old stamps

Real Estate
Involved land and structures built on the
land entities such as residential homes,
raw land & income property
eg. Warehouses, offices, apartment
building & condominiums

ADVANTAGES
Financing to buy R/E is flexible
Tend to increase in value, thus good hedge against inflation
There is always demand for real property
Safe and returns are secured

Real Estate

DISADVANTAGES
Require large amount of capital
Commitment for long period
Difficult to sell quickly as is too high to be afforded by
an average person
Risk of leasing or renting out to tenants

Improved Property

Land with structures built upon it

Residential Property
Agricultural Property
Types
Commercial Property
Industrial Property
Recreational Property

Residential Properties

Residential properties personal living


which covers various types of houses
Eg : single storey house, double-storey
terrace, bungalows, semi-detached
houses, flats, apartments and
condominium.
Residential rental properties investors
who purchase residential properties for
the purpose of providing living space to
others by renting them out.

Agricultural Land

Used for agricultural


purposes
Eg: crop planting
(rubber, paddy, cocoa,
bananas, oil palm
plantations), dairy
farming, animal
farming, orchards.

Commercial Properties

Commercial properties are


made up of shop houses,
banks and other financial
services, office block,
hotels and shopping
complexes

Recreational Properties

Mainly used for


leisure activities or
vacations
Eg: lakeside resorts,
golf courses, seaside
resort property
amusement areas and
parks.

Industrial Properties

Used for the manufacturing


and warehousing of industrial
and consumer products
Eg: factories, utility companies
(i.e water-works, electricity
stations), warehouses,
industrial parks and estates

Chattel
Non-financing assets traded in informal
markets
Buying and selling through dealers
Values determined by supply & demand
eg: antiques, art objects, coins, Chinese
ceramics classic cars

ADVANTAGES
high in value
can be sold during financial difficulties
A display of wealth most items are protected by insurance

Chattel

DISADVANTAGES
Involves large amount of money
Low liquidity
High risk of loss or forgery
Traded through an informal market, not by government

2. Financial Assets
claims that the organization sell to
raise funds for their financial needs
highly liquid and can be traded easily
& efficiently
eg: common stock, bonds, preferred
stock, certificate of deposit, T-bills,
unit trust, derivative securities

Common Stock

Referred to as equity securities because investor


have an ownership (equity) position in a firm for
every share/stock own by them
Investor can participate in the firms earnings
and dividends, an equal vote in mgt.
The more shares investors own, the higher
investors ownership position in the firm

Bonds
Fixed income securities whereby issuer
(borrower) agreed to make income payments
that fixed by contract
Maturity date the date in which the debt will
cease to exist & borrower have completely paid
off (par value)
Issuer government or private corporation

Preferred Stock
Issued by corp; hybrid securities because
the characteristics of bond and common
stock
Entitled dividend payment = c/stock
Dividend is fixed = bond
Par value = RM100

Treasury Bills

Money market instrument issued by BNM to


raise short term funds to finance government
expenses
eg: Malaysian Treasury Bills (MTBs)
Issued in minimum denominations RM10,000
and thereafter multiplies of RM10,000
Maturity period less than a year ( 91 days to
270 days)

ADVANTAGES
Low risk/risk free as it is normally issued by government
Secured of income in the form of interest payment

T-Bills

DISADVANTAGES
Investor must provide a significant amount of money to buy
T-Bill as they are sold in minimum denomination of RM10,000

Unit Trust
An investment company that invests its
shareholders money in a diversified
portfolio of securities
managed by professional funds managers

ADVANTAGES
The capital is small
Well managed by professional
Portfolio are well diversified, thus reducing risk
High liquidity, can easily bought & sold
Return is in the form of dividend and capital gain

Unit Trust

DISADVANTAGES
return is low, since it is highly diversified
Investor do not have a say on the management of funds
Market price of shares, still subjected to the market price
fluctuation

3 PARTIES INVOLVED IN UNIT TRUST

Manages
the
business
of trust
fund

Unit Trust
Mgt
Company

Trustee

Unit
Holde
r
People who
invest in unit
trust

acts as the
custodian of
all assets of
the fund

Derivatives-Options

The value of a derivative instrument depends of


the value of some other basic underlying
instruments such as commodity price, exchange
rates interest rates or share prices.
An options contract gives the holder the right to buy
or sell a certain amount of underlying financial
asset at a specified price for a specified time period
2 types of options
Call options
Put options

ADVANTAGES
The buyers maximum loss is known in advance
Options reduce the risk i.e an investor can sell the stock short
and buy the call

Options

DISADVANTAGES
Investors must have the expertise and knowledge to
understand the mechanism of trading/investing in options

Derivatives-Futures

Include farm products, cocoa, coffee, sugar,


potatoes, orange juice, and other raw materials
such as silver, copper and tin
Prices are determined by changes in supplies
government action
2 types of market:
1) Spot market commodities are present for trading
2) Futures market no commodities but trading done
through future contracts at Bursa Malaysia

ADVANTAGES
Transaction done thru margin trading, so high return
Providing liquidity, since daily trading
Theres always demand since product consist of raw materials
for manufacturing goods

Futures

DISADVANTAGES
Risk is high since supply affected by nature is beyond
human control
Involves high capital
Must have expertise and knowledge on principles of
commodities trading
Potential loss is great as there is a potential for a lot of
price volatility

Savings
Form of fixed investment where the
principal amount is known with certainty.
Eg: saving & fixed deposits a/c

ADVANTAGES
High Liquidity
Low risk and saved
Fixed amount of return is assured
Only small deposits
Money can be withdrawn any place/any time

Savings

DISADVANTAGES
Low return
High discipline as money can be withdrawn any time
Purchasing power risk because the interest is fixed
F/D- return will only be received after a certain period of time

Insurance
Protection against losses that could result
from death, illness or disability, damage to
property or a negligent act
Can be acquired through life, health,
property and liability insurance

ADVANTAGES
In case of the above, the insured person or family
members (death case is assured of compensation
for future needs
Monthly premium is tax deductible

Insurance

DISADVANTAGES
Once insurance is purchased, cant be resold.
If would like to terminate, would probably lose a portion
of the premium paid.

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