Factors that should be considered when making investment decisions

Factors that should be considered when making investment decisions

  • Return of investment (ROI)
  • Risk
  • Investment term/period
  • Inflation rate
  • Taxation
  • Liquidity
  • Personal budget
  • Investment planning factors
  • Volatility/Fluctuations on investment markets




Explanation of investment decisions

Return on investment

  • Refers to income from the investment, namely interest/dividends/increased capital growth on the original amount invested.
  • High risk investments yield higher returns.
  • Generally, there will be a direct link between risk and return.
  • The return should be expressed as net after-tax gains on the investment.
  • Returns can be in the form of capital gains where the asset appreciates in value over time.

Risk




  • Shares have low/medium risk over a longer investment period.
  • Shares with higher risks have a greater potential for higher returns.
  • Ordinary shares have the highest risk as the investor may lose the full/part of the investment when the company is dissolved
  • Preference shareholders’ risk is lower, as they have preferential claims on the assets of the liquidated company/may receive some compensation before ordinary shareholders.
  • Share prices are linked to factors that investors cannot control, e.g. economic conditions/ operational success of the company, etc.




  • Share prices are volatile/unstable/unpredictable/may increase/ decrease sharply within hours which contributes to the uncertainty of the value of an investment in shares on the short term.

Investment period

  • This refers to the duration of the investment which may influence the return on investment.
  • The longer the investment period the higher the returns.
  • The investment period will depend on an investor’s personal needs.
  • Short-term investments enable investors to access their money on a short period if needed.
  • The investment period can be short, medium and/or long term depending on the investors’ needs.

Inflation rate




  • 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.
  • Inflation has a positive effect on some investments such as property/shares where the income will increase as inflation increases.

Personal budgets

  • Investors can determine the amount of surplus money that can be invested.
  • Investors must budget for unforeseen costs.
  • Budget should provide for contingency plans/investments/savings.

Liquidity




  • An amount could be invested in a type of investment that can easily be converted to cash.
  • It is used to describe the ease and speed with which investors can convert an investment into cash.
  • Example: an investment in a savings account/unit trust 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.

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.

Divide investments between various investment options.

The method of calculating the interest/return on investment should be considered.

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