CHAPTER 2

Investment Alternatives

Objectives

After completing this topic, students should be able to:Identify the real assets and financial assetsClassify the assets riskDiscuss 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

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

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

Improved Property Land with structures built upon it

Types

Residential Property

Agricultural Property

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

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

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

Chattel

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 firm’s 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)

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

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

T-Bills

Unit Trust

An investment company that invests its shareholders’ money in a diversified portfolio of securities

managed by professional funds managers

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

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

3 PARTIES INVOLVED IN UNIT TRUST

Unit Trust Mgt Company

Trustee

Unit

Holde

r

Manages the

business of trust

fund

acts as the custodian of all assets of

the fund

People who invest in unit

trust

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

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

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

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 trading2) Futures market – no commodities but trading done

through future contracts at Bursa Malaysia

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

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

Futures

Savings

Form of fixed investment where the

principal amount is known with certainty. Eg: saving & fixed deposits a/c

Savings

ADVANTAGES

High Liquidity

Low risk and saved

Fixed amount of return is assured

Only small deposits Money can be withdrawn any place/any time

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

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

DISADVANTAGES•Once insurance is purchased, can’t be resold.•If would like to terminate, would probably lose a portion of the premium paid.