Certificate for Introduction to Securities & Investment (Cert.ISI) Unit 1 Lesson 3:  Financial assets and markets  Cash deposits and interest 3cis.

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Presentation transcript:

Certificate for Introduction to Securities & Investment (Cert.ISI) Unit 1 Lesson 3:  Financial assets and markets  Cash deposits and interest 3cis

Cash The most basic financial asset is cash

Where to keep your cash?

After the failure of Northern Rock, the UK government guarantees all cash deposits up to £50,000 per saver Banks are usually safer places to keep your money… …provided the Bank doesn’t go bust

UK’s main types of savings institutions High street banks Building societies Cash can be deposited by a wide variety of savers:  Retail investors  Companies  Governments, including local governments  Other financial institutions

Does the money just stay in the bank’s vault? Money as debt 1/5 web-link Cash does not just sit there piling up in the bank’s vault…  The bank lends out your money to its customers who wish to borrow  It makes a charge for using that money: the charge is called “interest”  The bank pays you a fee for allowing it to use your money for lending  This fee is also called “interest”  Interest is the cost of borrowing money

Interest on deposits The interest paid on deposits will vary with the amount of money deposited:  It is more economical for a bank to process one large deposit than lots of small deposits Banks compete intensely with one another for all new deposits  More deposits mean more money for the banks to lend out to borrowers

Capital The amount deposited in a savings account is known as the “capital” sum  Capital is just another word for assets Investors seek to achieve two goals with their investments 1. Investors usually wish to see the value of their capital rise 2. Investors usually wish to earn income from their capital But in Financial Services, capital usually means money... Capital can be plant…. …or factory equipment …or even a good work-force.

Capital growth and income If you invest your capital in a buy-to-let flat, you are hoping for two things: What constitutes capital growth and what constitutes income?  For the value of that flat to rise  i.e. for your capital to grow  To earn rent from letting out the flat to tenants  the rent is income earned by your capital (i.e. your flat) What every buy-to-let investor hopes for… …and with steady rental income too.

Disadvantage of cash deposits as an investment Your capital will not grow – when you withdraw your deposit, you receive back your original sum  You will only earn interest income If instead of buying a flat you had placed your £250,000 of capital on deposit with a building society at 3.25% for three years:  You would earn income of £25,175  But only if you didn’t withdraw any of the interest over that period  If you withdrew your income each year to meet living expenses, you would earn £24,375

Advantages of cash deposits as an investment Your money is comparatively safe  Until the failure of Northern Rock in 2008, no British bank had failed for over 100 years You can withdraw your capital relatively quickly  It can be difficult to sell property in a falling market Now depositors based in the UK are covered by the Financial Services Compensation Scheme (FSCS)  FSCS provides protection for the first £50,000 of deposits per person with an authorised institution Property investment has been a roller- coaster ride… Cash deposits provide much more reliable returns than property

Other disadvantages of cash deposits Inflation reduces returns on your capital  If you pay tax on your interest earnings as well, your real return might be negative If you put your money on deposit outside the UK, you face currency risk  And you might not enjoy the same degree of regulatory protection as you do in the UK Interest rates change, and so the returns on cash deposits will vary  In 2008, UK interest rates fell very sharply