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Susan HayesCulleton

Money Matters is a new and ready-to-go learning package offering an opportunity for Transition Year students to learn fundamental life skills relating to financial literacy. Money Matters will help students to learn about saving, investing, enterprise and general money management. Written by Susan HayesCulleton, who also co-wrote the bestselling Positive Economics for Leaving Certificate Economics, Money Matters is proudly sponsored by CFA Society Ireland and includes the following: Free teacher textbook

Teacher e-book

Digital resources

TEXTBOOK Structured according to three strands – enterprise, personal finance and investing – so that the module can be shaped by the teacher and the students’ interests Designed to suit all types of learners, from visual to logical to active

Introduces exciting, complex subjects such as the stock market in an accessible way Linked to concepts in the Economics, Business and Accounting Leaving Cert curricula Contains a question on journaling and reflective thought at the end of each chapter Offers five types of activities to develop key skills: numeracy, oracy, research, visual and writing Accompanied by extra activities and online tools for further investigation and suggests many free technology tools for homework or in-class projects Includes insights into careers and the skills sought out in today’s workplace

DIGITAL RESOURCES

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9 781845 369439

MATTERS

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Money Matters Cover.indd 1-3

IS B N 978-1-84536-943-9

MONEY

The Educational Company of Ireland

Teacher’s resources and e-book available on

Teachers can access the Money Matters interactive e-book at www.edcolearning.ie, plus a bank of free digital resources, including: Chapter summary documents, which include the end-of-chapter exercises Step-by-step activities Glossary document

Nestles concepts in real-life case studies for better understanding and application to the real world

CFA Society Ireland is a member organisation of CFA Institute, whose mission is to lead the investment profession globally by promoting the highest standards of ethics, education and professional excellence for the ultimate benefit of society. This book is sponsored by CFA Society Ireland.

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Packed with exercises for active learning in the classroom

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MONEY MATTERS TRANSITION YEAR FINANCE

Susan HayesCulleton

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First published 2021 The Educational Company of Ireland Ballymount Road Walkinstown Dublin 12 www.edco.ie A member of the Smurfit Kappa Group plc © Susan HayesCulleton 2021 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior permission of the publishers or a licence permitting restricted copying in Ireland issued by the Irish Copyright Licensing Agency, 63 Patrick Street, Dún Laoghaire, Co. Dublin. ISBN 978-1-84536-943-9 Project editor: Kristin Jensen Design and layout: EMC Design Cover design: EMC Design Proofreader: Jane Rogers Illustrations: EMC Design Photos: Central Statistics Office, CFA Society Ireland, Enterprise Ireland, Getty Images, iStock, Shutterstock, Student Enterprise Programme, United Nations Sustainable Development Goals (www.un.org/sustainabledevelopment; the content of this publication has not been approved by the United Nations and does not reflect the views of the United Nations or its officials or Member States). While every care has been taken to trace and acknowledge copyright, the publishers tender their apologies for any accidental infringement where copyright has proved untraceable. They would be pleased to come to a suitable arrangement with the rightful owner in each case. Web references in this book are intended as a guide for teachers. At the time of going to press, all web addresses were active and contained information relevant to the topics in this book. However, The Educational Company of Ireland and the author do not accept responsibility for the views or information contained on these websites. Content and addresses may change beyond our control and pupils should be supervised when investigating websites.

Acknowledgements It has been an enormous pleasure to write this book, shape the stories within the chapters and brainstorm the activities to turn the theory into practice. It can make such a difference to an individual’s life if they feel comfortable managing their own money and getting the supports they need to make the most of it. Personally, I’m fortunate to have the opportunity to work with thousands of teenagers each year and I’m always so impressed at their ability to absorb new tools and techniques with an open mind. This project was made possible due to the support of CFA Society Ireland. The team was passionate about the concept and had the perseverance, enthusiasm and vision to see the idea progress from a conversation over breakfast one morning into a book that now is in every school in the country. I want to give huge thanks to Noel Friel, who gave time, rigour and energy to every stage of the book’s development, as well as to Eoin Diffley, who gave a detailed perspective, warm support and his ESG specialist knowledge to the initiative. Claire Paul brought immense professionalism, critical thinking and valuable insights to the project, while Francis Carter offered his occupational knowledge, lots of ideas and his openness to help along the way. I would also like to thank CFA Institute for their support and recognition of what we sought to achieve. It truly represents the gold standard of the industry and preserves the ethical, educationally strong fundamentals of its ideals while moving forward with relevance, modernity and positive influence on the issues that matter. It lives and breathes its mission statement: ‘To lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society.’ Thank you to each CFA Society Ireland member who offered their personal story at the end of each chapter. Tomorrow’s economists, analysts, investors, researchers and managers are inspired by those who lead the way today. I very much appreciate that you’ve chosen to share lessons from your journey with the readers of this book so they may see the excitement and opportunity of their own career adventure in the years ahead. I wish to express sincere appreciation to the Edco team. Thank you to Julie, Frank, Kristin, Gearóid, Catriona and the sales representatives who will bring this book into the hands of the teachers and students who can benefit from it most. Thank you sincerely to David Bane, who reviewed the book in its earliest form and offered highly actionable feedback with kindness. Finally, thank you to my husband, Ardle Culleton, for listening to me talk about the characters in the book, offering suggestions and guidance along the way and always, always accepting me the way I am. Thank you to my mam, dad and my brother, Conor, for giving me the childhood and friendship during adulthood that enables me to cultivate my interests and work on the causes that matter to me. Thank you to my colleagues at the Hayes Culleton Group who work with Ardle and I every day to make a difference to the world.

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Contents Foreword

Introduction

1 Enterprise

Personal Finance

Investing

Chapter 1:

What does money mean to me?

Chapter 2:

How can I make money now?

Chapter 3:

How much money can I afford to spend?

Chapter 4:

Where can I save my money?

Chapter 5:

How do I spend money in other countries?

Chapter 6:

How do I get access to short-term cash?

Chapter 7:

How can I retire comfortably?

Chapter 8:

How can I get a loan to buy a house?

Chapter 9:

How can I buy a house without buying a house?

Chapter 10:

How do I go shopping in the stock market shop?

Chapter 11:

How much money could I make if I save or invest?

Chapter 12:

Where does a business get finance and why do people give it to them?

100

Chapter 13:

How do I get a regular income from the stock market?

109

Chapter 14:

How do I know if a business really makes money?

118

Chapter 15:

How do I know which investment performed the best?

129

Chapter 16:

How do I find a fund that is suitable for me?

140

Chapter 17:

How can I help climate change and social issues as an investor?

154

Chapter 18:

What is my investing personality?

169

Glossary

× ×

180

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Chapter

What does money mean to me?

Learning objective

• Understand the fundamental concepts around money, including why it exists, how it moves around the economy and the asset classes that it can be invested in.

Learning outcomes

• Understand why money exists. • List the functions of money. • Explore the link between education and poverty. • Identify how people interact with money throughout their lives. • Outline how money moves around the economy. • Explain how inflation happens. • Distinguish between the asset classes and the reasons why one would put money into each one.

Literacy links

• Money, deprivation, entrepreneur, profit, inflation, demand, return

Numeracy links

• Reading a table of data

Cross-curricular links

• Business Studies: Enterprise, finance • Economics: Demand, monetary system, poverty, multiplier, cost-push inflation, demand-pull inflation • Accounting: Sales, costs and profit

Money Matters BOOK.indb 2

Let’s set the scene Money is everywhere. Everybody has some. It’s in every house, every car, every building, yet many people feel they can’t get enough of it. However, that’s why work happens. If we simply printed enough money for everybody so that they had enough, then why would people go to work? Some would still go because they love what they do and that’s great. In fact, that’s the best way to think about your job. However, many people wouldn’t work. Therefore, unless people wanted more money, we wouldn’t have an economy or many of the goods and services that you enjoy.

What is money? Money: A medium of exchange in the form of coins and banknotes; a store of wealth/savings.

Money can be used to do a lot of good things. It gives people the opportunity to educate their children. It gives governments the means to create a functioning healthcare system to take care of people’s wellness. It gives families a way to buy food and to rent or buy a home. It gives charities the ability to help those in need who can’t afford to do so themselves. Money can be put to life-changing use. Sandra has €50. She can choose to buy clothes, go to the cinema, buy food or save it. It’s a store of wealth. Sandra can hold on to the value of that money by keeping the €50 or she can spend her money by using that €50 to purchase something. Sandra can keep the money as cash, put it in a current account in the bank (which means that she can take her money out at any time for ‘current’ expenses) or put it in other types of accounts with financial companies.

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A transfer of value Patrick decides that he wants to start earning money. He asks his mum if he can borrow the lawnmower and use it to cut the neighbours’ lawns. He charges his neighbour €15 to bring the machinery, cut the grass and tidy away the cuttings. As the neighbours pay him, it’s a transfer of value. The €15 was in the neighbour’s wallet and they could have used that money to go out for lunch, buy some groceries or pay a bill. Instead they chose to give that money to Patrick in exchange for cutting the grass, so he now has the choice about how he wants to spend the money.

Adelaide checks her bank account online and she sees that she has €250 in it. She can count this money and knows that she can withdraw it at any time. She also knows that she can buy goods and services up to the value of €250 with this money. It’s very clear. Now imagine that she had three lollipops, four sheep, a roll of measuring tape, a pair of shoes and a picture frame in her bank account. How could you count the value of what she has? How could you count what she could buy? You couldn’t! Therefore, since money is clearly worth a certain amount and the costs are clearly outlined in the same terms, money is a unit of account.

Deprivation Deprivation: Deprivation happens when a person or family doesn’t have enough money to buy the goods and services that other people in the same society currently have access to.

Chapter 1

What does money mean to me?

A unit of account

In Ireland, the Central Statistics Office (CSO) defines enforced deprivation as not being able to afford to buy two or more of these 11 basic deprivation indicators: Two pairs of strong shoes A warm waterproof overcoat New (not second-hand) clothes A meal with meat, chicken, fish (or vegetarian equivalent) every second day Activity 1.1 A roast joint or its equivalent once a week Visit the CSO website to Home heating during the last year find the percentage of Fuel to keep the home adequately warm people at risk of poverty Presents for family or friends at least once a year and in consisent poverty as well as the deprivation Replacements for worn-out furniture rate and how they have Drinks or a meal for family or friends once a month changed in recent years. A morning, afternoon or evening of entertainment once a fortnight.

Activity 1.2 Examine the table on the next page and answer the following questions. 1 Of those people at risk of poverty in Ireland, what percentage of them had at most a higher secondary education in 2016 and in 2017? 2 Of those people in deprivation in Ireland, what percentage of them had at most a third-level degree or above in 2016 and in 2017? 3 What does this suggest about the link between education and poverty? Transition Year Finance

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Profile of population at risk of poverty1, experiencing deprivation2 and in consistent poverty by demographic characteristics and year % of individuals 2016 2017 Population At risk of Deprivation In consistent Population At risk of Deprivation In consistent poverty poverty rate2 poverty poverty rate2 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

State Sex Male 49.5 48.5 Female 50.5 51.5 Age group 0–17 24.8 30.8 18–64 61.9 61.1 65+ 13.3 8.0 Principal economic status At work 43.0 14.2 Unemployed 4.8 13.0 Student 7.5 14.8 Home duties 9.2 14.6 Retired 9.8 6.7 Not at work due to illness or 2.9 9.9 disability Children under 16 years of age 22.2 25.3 Other 0.6 1.5 Highest education level attained Primary or below 10.3 14.6 Lower secondary 13.6 19.2 Higher secondary 17.4 19.2 Post-Leaving Cert 10.1 9.8 Third-level non-degree 10.6 6.8 Third-level degree or above 14.0 4.0 Children under 16 years of age 22.8 25.3 1.0 1.1 Other3 Household composition 1 adult aged 65+ 3.9 3.2 1 adult aged < 65 4.8 10.0 2 adults, at least 1 aged 65+ 8.7 5.6 2 adults, both aged < 65 11.3 8.0 3 or more adults 16.8 10.0 1 adult with children aged 4.6 12.2 under 18 2 adults with 1–3 children aged 32.9 26.0 under 18 Other households with children 17.0 24.9 aged under 18 Number of persons at work 0 20.8 61.5 1 28.7 30.6 2 38.3 6.4 3+ 12.1 1.5 Urban/rural location Urban areas 67.8 66.4 Rural areas 32.2 33.6 Region Northern and Western 17.7 23.5 Southern 33.3 34.9 Eastern and Midland 49.0 41.6 1 Including all social transfers, 60% median income threshold. 2 Experienced two or more types of enforced deprivation. 3 Including missing highest education level.

47.7 52.3

46.2 53.8

49.5 50.5

47.3 52.7

47.7 52.3

46.0 54.0

31.2 60.5 8.3

35.1 61.9 3.0

24.7 61.6 13.6

30.3 62.2 7.5

31.7 61.3 7.0

33.7 62.8 3.5

24.1 10.9 10.2 12.0 5.6 9.2

10.1 15.5 15.1 13.7 2.1 13.0

43.7 4.1 7.5 7.9 10.9 3.3

14.3 13.5 18.3 13.1 5.9 9.0

26.2 11.0 10.5 10.1 4.5 9.8

8.7 18.0 16.6 12.5 2.3 14.3

26.5 1.4

28.7 1.9

22.2 0.5

23.9 2.0

26.8 1.1

26.1 1.5

14.4 16.9 19.5 10.7 6.7 4.0 26.5 1.4

13.9 18.1 19.8 11.4 4.2 2.7 28.7 1.1

10.3 13.5 17.3 9.7 10.7 15.2 22.5 0.8

13.3 19.8 18.3 10.8 6.9 5.9 24 1.1

14.4 16.8 17.2 11.2 7.4 5.6 26.8 0.6

14.5 21.3 13.9 13.2 6.4 3.9 26.1 0.6

3.9 6.4 4.2 8.0 10.6 11.5

1.9 9.6 1.6 6.7 6.6 14.3

4.1 5.0 8.9 11.4 16.2 4.9

2.8 10.3 5.4 8.2 12.7 14.7

3.5 8.0 3.5 7.9 10.8 13.7

1.6 14.0 2.9 8.2 7.9 17.8

29.7

27.8

32.7

20.4

28.5

19.9

25.6

31.6

16.9

25.6

24.0

27.7

44.0 33.3 16.3 6.4

70.4 24.5 3.0 2.1

20.0 28.9 38.8 12.3

60.1 30.7 8.0 1.3

42.6 30.0 22.1 5.2

74.3 21.3 4.5 0.0

72.6 27.4

72.5 27.5

68.6 31.4

65.7 34.3

73.5 26.5

75.2 24.8

15.7 33.9 50.4

20.2 32.4 47.4

17.7 33.3 49.0

24.2 35.5 40.3

16.0 32.9 51.0

16.6 35.0 48.4

Source: Central Statistics Office 4

Money Matters

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Activity 1.3

Chapter 1

People interact with money in different ways over their lives. For example, a person may: Need to spend money on things that are crucial for their wellbeing and safety, e.g. food and accommodation Want to spend money on things they enjoy, e.g. holidays Need to earn money in order to pay for essentials, e.g. medicine Want to earn more money by getting paid more for doing a more skilled job or taking on more responsibility Want to put money away for retirement so that they can have a comfortable life after being employed Want to save so that they can earn interest on money that they don’t need right away and put it away safely for the future Want to invest money so that they can make more money in the future Want to donate money to charities or other not-for-profit organisations to support causes that are important to them Need to pay tax to the government on their income and on certain things that they buy in the shops.

What does money mean to me?

How do we interact with money?

Write down a list of examples where you’ve seen money change hands (either via cash, card or electronically) in recent days.

How does money move through our economy? Entrepreneur: A person who takes the risk to set up a business or businesses in the hope of making a profit. Profit: The money left over after taking costs away from income.

Caoimhe is an entrepreneur. She opens a café selling tea, coffee, home-made scones and sandwiches. She hires two staff to help her prepare the food and serve customers. Caoimhe adds up the cost of her ingredients, rent for the space and the wages for her staff. These are her costs. She needs to make enough sales to cover these costs and make some profit for herself. If she doesn’t make any profit, then she wouldn’t be motivated to put all the work into starting and building the business. Caoimhe buys her ingredients from suppliers. She employs people from the area to work in the café. She rents the space from a local person who owns it. She pays tax to the government on her staff’s wages, her own income and the profits of the business. In turn, her suppliers can hire more people. Her own staff spend money on food, entertainment and items for their houses. The person who owns the building spends money on making sure that it’s painted and looking well.

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On and on and on it goes. As people create businesses that sell products and/or services at a profit, as consumers spend money on goods and services and as governments tax and spend, money moves around the economy.

Activity 1.4 In your copybook, write down 20 different businesses in your area in the following format: Business name

Industry

One way the business spends money in the local area

Caoimhe’s Café

Food and drink

Hires staff

Brendan’s Bakery

Food and drink

Sponsors the GAA club

Why do things get more expensive? Your parents might tell you that the houses that they grew up in cost a lot less than the house you are growing up in today. In fact, you may remember yourself that a bag of crisps cost less when you were younger than it does today. Why does inflation happen? In other words, why do things usually get more expensive? Why can’t prices just stay the same? Inflation: A general increase in prices.

Inflation happens for two key reasons: Costs go up. People want more and are willing to pay more.

Costs go up Caoimhe gets an email from her suppliers to say that their costs have gone up, so they are increasing the cost of her coffee beans, flour and sugar by 3%. On the same day, one of her staff members asks if she could work more hours in the next couple of months, as she wants to save for a house and needs all the money she can get. Caoimhe agrees to give her 10 more hours per week. In both cases, Caoimhe’s costs have increased. Therefore, for her to make sure that it’s worthwhile to stay in business, she needs to increase the prices that she charges to customers. Therefore, her customers experience inflation.

People want more and are willing to pay more Caoimhe decides to try selling buckwheat pancakes. She knows that they’ve been popular recently. She makes a batch, buys in various toppings and puts some posts up on her social media feeds to say that these healthy new pancakes are available. She has queues out the door! People are lining up to get some as they love the flavours, find that the pancakes fill them up for the day and it saves them from having to make breakfast at home. However, Caoimhe can’t keep up with the demand. She can’t believe the number of people who want to buy them. The kitchen is too small and her staff are stressed. She doubles her price and now only those who really want the pancakes come in to get them. She now has fewer customers but more money and she can manage again. In this case, people wanted more and were willing to pay more. Demand: The desire of customers Caoimhe put up her price and this caused inflation. for a product or service.

Money Matters

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What does money mean to me?

Deflation Deflation, i.e. a general decline in prices, can also happen. While this might sound good to an individual who can buy things more cheaply, it doesn’t help the economy. For example, if a couple wants to buy a house and see that it has fallen in value by €20,000, they might wait and see if the price falls further. This prevents the house from being sold, so the seller might start to panic and drop the price even further to encourage somebody to buy it. The couple then see that the price does fall further and they wait even longer to buy. Imagine the effect of this happening with thousands of houses – think of what would happen to all the people employed to build houses. Deflation can really slow down an economy.

Asset classes

Chapter 1

As Caoimhe looks at her business bank account one day, she realises that she has €5,000 in profit after paying suppliers, staff (including herself), taxes and rent as well as investing in her new pancake product. She can keep this money now and wonders what to do with it. She doesn’t need it right now, so she could invest the money to make more in the future. In other words, by investing she would make a commitment to give her money to a financial company of some sort to hopefully earn more money in return. Return: In its simplest terms, a return (also known as a financial return) is the money made or lost on an investment over some period of time.

As an investor, she has four key choices about where to put her money: cash, debt, equity or property.

Cash (i.e. making a deposit in a bank) Caoimhe could put her money on deposit in a bank over a period of time. She would then earn interest on that money. A current account is where you store money but can get it out at any time. A deposit account is where you lock your money away for some months or years in order to get a higher interest rate.

Debt (i.e. lending money to a company or government) Caoimhe could lend her money to the government, which would pay her back in the future the money it borrowed now. She would also receive some money from the government every year; this is called coupon interest. The government would use Caoimhe’s money to build roads, hospitals and schools. Alternatively, Caoimhe could lend her money to a company and they, too, would promise to repay her in the future with coupon interest every year. Caoimhe takes the risk that the government or company may be unable to pay some or all of its debt back to her. However, she gets paid a return to take that risk.

Equity (i.e. buying shares in a company) Caoimhe might buy a piece of a company. Let’s say that she knows some technology companies that seem to be getting bigger and bigger. If she were to buy a part of one of those companies, she would also get a part of its profits. Some companies pay money regularly to the people who own those shares. These payments are called dividends. However, if Caoimhe buys a part of these companies and they stop making money, she could lose some or all of her money too. Caoimhe has the potential to make a return in exchange for taking that risk. Transition Year Finance

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Property (i.e. buying part of a property) If Caoimhe and some of her family members could put together enough money to buy a house, they could offer it to people who want to rent a room or the whole house. Caoimhe’s family would then collect the rent and divide it up between the family members. However, somebody would have to take responsibility for taking care of the property, i.e. fixing a broken dishwasher, etc.

Activity 1.5 In your copybook, draw three emojis beside each of the asset classes to offer a visual explanation of each one. (a) Cash (c) Equity (b) Debt (d) Property

Career spotlight Joe Kavanagh, CFA, Head of Performance Measurement and Risk Analysis How did you start off in the investment industry? I completed my undergraduate studies in Dublin Institute of Technology before entering the investment management world when I was offered a job in the investment management part of a bank. My understanding of money totally changed when I realised how big funds must manage assets so that investors can have a better standard of living in the future.

When did you get involved with CFA Society Ireland? I was the key point person with CFA Institute (based in America) on the establishment of the Irish society back in 2002 (which was the same year that the euro was introduced into Ireland). I have been involved with the Society ever since then and served as President from 2004 to 2009.

What was your experience of taking the CFA® exams? The exam programme provided me with a much greater depth of knowledge about the investment decision-making process, which I’ve put to good use in my role within the firm. There is a lot involved in deciding where to put clients’ money. You must understand what they want, what investing opportunities are available and how to link the two together. I’d certainly recommend the exam programme to any recent graduate or experienced person who wishes to extend their knowledge of investments.

Do you use what you learned during your studies in your job today? My job gives me plenty of opportunities to use this knowledge in how I deal with other investment professionals in the firm, but also outside the firm with potential new customers and the companies that advise them.

Money Matters

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End-of-chapter exercises

Chaptersummary summary Chapter

1 Make a word search or a crossword (complete with clues) using the following words: • Demand • Money • Deprivation • Poverty • Entrepreneur • Profit • Inflation

4 List all the ways that Caoimhe either bought something, sold something or considered investing in something throughout the chapter. 5 Define inflation and give one example of how it occurs. 6 In your copybook, fill in the remaining rows of the following table. What is the name of this asset class?

What is a brief explanation of the asset class?

How does the asset class pay the investor?

Who is likely to take the money from the investor?

Cash

Put money on deposit

Interest

A bank

Chapter 1

3 Research the latest levels of poverty and deprivation in Ireland and answer the following questions. (a) Of those people at risk of poverty in Ireland, what percentage of them had higher secondary education? (b) Of those people in deprivation in Ireland, what percentage of them had at most a higher secondary education? (c) What does this suggest about the link between education and poverty?

What does money mean to me?

2 Describe two functions of money.

JOURNAL QUESTION

What does money mean to you?

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Chapter

How can I make money now?

Learning objective

• Understand why customers spend money, how to meet the needs or wants of customers and how to start a business.

Learning outcomes

• Differentiate between active and passive methods of making money. • Research the Global Entrepreneurship Monitor Report for Ireland for statistics. • Describe a target market. • Outline the needs and wants of a target market. • Develop a marketing plan. • Put together a list of expenses and add up all the costs associated with a money-making activity. • Critique a money-making idea. • Brainstorm a revenue-generating idea.

Literacy links

• Target market, marketing, cost-based pricing

Numeracy links • Cost-based pricing

Cross-curricular links

• Business Studies: Enterprise, planning, generating ideas • Maths: Sales, costs and profit • Economics: Enterprise factor of production, demand and supply, competition • Accounting: Sales, costs and profit

Money Matters BOOK.indb 10

Let’s set the scene Claudine is a Transition Year student and she wants to earn some money. She is going on a couple of school trips soon and would like to have the money to fund them.

Activity 2.1 Put together a collage of images associated with making money. PicCollage is a great online tool for this.

Ways of making money There are two categories of ways to make money. One is active and the other is passive. Generating money actively means that you must do something that you would get paid for. Examples of generating money actively are getting a job, selling a product or service, or setting up a business that you would work in directly. Generating money passively means that you don’t have to work for a payment – even if you’re asleep, on holiday or sick, you will still earn money. Examples of generating money passively are earning interest on bank deposits and other asset classes mentioned in Chapter 1. However, Claudine is only 16 years old. She doesn’t have a lot of money yet, so she must use active ways for now. She wonders if there are many other people who are interested in setting up a business at her age.

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Activity 2.2

Research levels of entrepreneurship in Ireland. First, search online for eight statistics. You could look up the Global Entrepreneurship Monitor (GEM) Report for Ireland or others for those facts. For example: • 2,250 businesses were set up in Ireland in 2018. • 33% of the people who set up businesses in 2018 live in Dublin. • 80% of the people who set up businesses in 2018 did so because they saw an opportunity rather than because they had to (through necessity). Now conduct some market research in your class to compare your classmates’ thoughts on setting up a business to the national statistics. Ask your classmates eight questions, for example: • Would you like to set up a business at any stage in the future? • Where would you like to live if you were to set up a business? Using the Canva website or a blank sheet of paper and some markers, create an infographic with the eight statistics comparing your class’s views to those of the entire country.

Chapter 2

Activity 2.3

How can I make money now?

Put together a case study of a teenager who set up a successful business. Address the following points in the case study: • What was their product or service? • How did they get started? • Where in the world do they live? • What are their plans for the future? • Include a picture of the teenager themselves or their product or service in the case study.

How to start a business Claudine now wonders where she might start in setting up a business. There are five key things that she needs to do.

1. Find a target market Claudine needs to figure out what group of people she would like to sell something to. For example, she might want to sell cakes to the people in her school, offer to walk her neighbours’ dogs or be an extra in a movie. In those cases, she would be selling to her schoolmates, her neighbours and a movie producer, respectively.

Target market: A particular group of consumers that a product or service is aimed at.

Activity 2.4 Identify who might be a target market for each of the following goods or services. (It’s likely that there is more than one target market, so compare your answers with other people in your class to see how many the entire group can come up with.) (a) Alarm system (e) Christmas tree (b) Haircut (f) Driving instructor (c) Accounting services (g) Headache tablets (d) Textbooks

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2. Find a way to meet a need or want of that target market Claudine must consider what a target market needs or wants. For example, a person who is stressed out from working very hard may want the relaxation of a facial massage, a shopper in a supermarket may want garlic to add it to a recipe that she wants to try or a student may be finding his Maths homework difficult every day and asks his parents to look for somebody who could give him some extra help.

Activity 2.5 Working in groups of three, copy this fishbone graphic organiser to come up with three different ways that a business could help people who are willing to pay for solving these problems.

Hungry and doesn’t have time to cook

Is running late for a train

Stressed from studying for big exams

Worried about getting sick from infection

Wants to learn about history

Wants to prepare for a job interview

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Marketing: The action or business of promoting and selling products and services.

Activity 2.6 Identify who you might reach (i.e. the target market) by using the following marketing activities. (a) Advertising in a local newspaper (e) A stand at a local supermarket (b) Putting up posters in school (f) An online advertising campaign on a news website (c) A YouTube video (g) Flyers distributed at a local sports game (d) A social media post

4. Find a price that the target market would pay Claudine will have to work out a price that makes it worth her while to offer the solution to her target market, but also where it’s worthwhile for the customer to pay the money to solve the problem. While there are several ways that she could work this out, she comes across a method called cost-based pricing.

Cost-based pricing: Add up all the costs of everything you would need to price a product, then add on some profit afterwards.

Chapter 2

Claudine also needs to let people know that her solution is available to solve their problem. For example, she might post on social media if her target market is on those platforms. She might put up a poster in local shops if her target market is the people who live in the area. Or she might ask the local radio station for an interview if her target market is the people who tune in every day. This activity is called marketing.

How can I make money now?

3. Find a way to communicate your solution to your target audience through marketing

Activity 2.7 A group of 12 students is looking for your help. They want to organise a cake sale in their school where they would have: • 100 Rice Krispie buns • 20 vegan bars • 5 apple tarts with 8 slices in each tart available for individual sale • 5 gluten-free chocolate cakes with 8 slices in each cake available for individual sale. Calculate: • The cost of the appropriate amount of each ingredient they would need in order to make each product • The time that it would take to prepare and bake everything if they were to split into four groups to make each product • The cost of making and printing 20 posters to put up all over the school. Arising from these calculations, work out the group’s pricing list for each of the four products so that they cover their costs and make it worth their while to put in all the time and effort. Assume that they will sell everything.

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5. Brainstorm Claudine then puts together a list of ideas of what she could do. She thinks about what she is good at and what resources she has. She thinks about what she would enjoy doing and what would fit in around all the activities she is involved in during Transition Year. She thinks about ways she can let her potential customers know about what she can do. She will work out the pricing later, but for now here is what she comes up with. Give grinds Claudine got a very good grade in her Junior Cycle Maths and Business Studies exams. She has detailed study notes and loves to help others with things that they’re struggling with in school. Target market

Parents of students who are finding Maths and/or Business Studies difficult in First, Second or Third Year in secondary school

Way to solve their problem

Two hour-long grinds per week for eight weeks focusing on the student’s problem areas plus photocopies of Claudine’s excellent notes

Communication method

Create a colourful poster and pin them up in the local supermarkets where parents are likely to be doing their grocery shopping

Fill out surveys Claudine has a laptop, an internet connection and a lot of opinions! She could fill out paid surveys for an hour every day and collect cash or rewards along the way. Target market

Market research companies that are interested in the views and opinions of teenagers

Way to solve their problem

Fill out surveys online

Communication method

Search online for these sites, fill out a profile and start filling out surveys

Babysit Claudine is happy to play with kids, to take responsibility for their safety while their parents go out for a couple of hours and to watch TV in a family’s house if the children are asleep.

Target market

Parents of young children who need to go somewhere on their own or who want to go out for the evening

Way to solve their problem

Mind the children when the parents are gone, come up with games to play before bedtime and take full responsibility for the kids’ safety until their parents return home

Communication method

Claudine can ask her parents to send a text to their friends in the area with young children who might be interested in hiring a babysitter

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People who would find these items of use in their own home

Way to solve their problem

Exchange these items for money and then post them safely to the buyer

Communication method

Create a profile on eBay or DoneDeal, upload a high-quality picture of the goods with a description and respond to any queries

Walk dogs Claudine loves dogs and she loves going for walks in the area with her friends. She could offer to walk the neighbours’ dogs for money. Target market

Dog owners in the area who don’t have time to walk their dogs

Way to solve their problem

Pick up the neighbour’s dog from their house, walk the dog for 2 kilometres and bring it back safely to its owner

Communication method

Share posts on social media and ask local community groups to share them with their audiences too

Write social media content Claudine loves to scroll through social media feeds reading influencers’ posts, her friends’ updates and random things that pop up that are of interest. She could brainstorm some ideas for social media content for a local business, for example by making infographics on Canva, short videos on Animoto or taking pictures of their goods and services from her smartphone. She could post them on the business’s social media channels and set up profiles for them if they don’t have any yet. She could share them on her own profile and ask her friends to do the same. Target market

A business that doesn’t have a very big or active social media presence

Way to solve their problem

Come up with ideas for engaging with their customers on social media, then implement those ideas on the social media platforms on behalf of the business

Communication method

Look at a business’s social media channel and if there isn’t one or if it isn’t very active, send an email to the business owner pointing out that you noticed the lack of activity and asking them if they would be willing to talk to you on the phone about your ideas for making it better

Chapter 2

Target market

How can I make money now?

Sell things on online marketplaces Claudine walks around the house. She notices books that nobody has read in a long time. She has clothes in her wardrobe that she doesn’t wear any more. There are picture frames that are still in boxes. She even has a giftset from last Christmas that she hasn’t opened yet. Claudine could ask her parents for permission to sell the things in the house that they no longer use (one person’s trash is another person’s treasure!) through websites such as eBay or DoneDeal.

Work in a shop as a retail assistant Claudine is interested in fashion and clothes. There are a couple of clothes shops in her local town. She could ask them if they have any jobs coming up over the summer or in advance of a busy time, such as Christmas. Target market

Clothes shop (or any type of shop)

Way to solve their problem

Be available to serve customers, answer their questions with a smile and helpful information and learn how to use the till and other technology

Communication method

Look at the clothes shop’s website to see if they currently have any jobs available before applying with a cover letter and CV

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Start a sponsored podcast Claudine enjoys podcasts. If she made her own podcast using Audacity, she could interview local female entrepreneurs about their business journey, like the Savvy Women Online series. In order to make some money out of it, she could ask those entrepreneurs to pay for recording the interview, sharing it across iTunes, Spotify and other channels as well as other digital media. Further, they could upload the podcast on their own site too. Target market

Local female entrepreneurs

Way to solve their problem

Produce a piece of content and distribute it to potential new customers

Communication method

Look up the contact details of various female entrepreneurs and send them an email outlining how the sponsored podcast idea could help them and their business

Be an extra in a movie Claudine’s friend told her that he was once in a movie and that all he needed to do was stand still! Claudine likes the sound of that and it would be a pretty cool experience to be in a film with professional actors! Target market

Movie producers

Way to solve their problem

Be part of a film team and follow the director’s instructions

Communication method

Find an entertainment agency, such as MovieExtras.ie, that places people in paid movie and TV sets

Join Upwork As Claudine comes to the bottom of her list, she wonders if she could find people and businesses around the world who are looking for people to do some writing, fill out paperwork, give customers some support and other types of jobs that can be done online. Rather than proactively go to others, could there be a forum where others would come to her? Target market

Businesses and individuals who need people to do various jobs

Way to solve their problem

Put together a proposal of how you can do the job that the business or individual wants

Communication method

Log into Upwork, examine the jobs available and make an offer with a proposal

Activity 2.8 Split the class into six different groups. In each case, the group needs to come up with: • A product or service • A clear description of a target market • A plan to communicate with the target market (i.e. a marketing plan) • A financial plan, including a price per product, a breakdown of the costs and expected profit • A request for a loan of the amount that the group needs to start the business and the details of what they would spend the money on. (If the business doesn’t need any money to get started, there isn’t any work for the group to do on this step except prove how you’re going to do everything you plan to do without money.) Each group needs to present their idea to the class and answer questions put to them by their classmates. Best of luck, Claudine, with your ways to generate money actively. Soon you will have the money to invest so that you can generate money passively too!

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Career spotlight Susan Joe Kavanagh, HayesCulleton, CFA, Head CFA, ofEntrepreneur, Performance Author Measurement and Economist and Risk Analysis Xx? Did you always know that you wanted to work with numbers? IXxpicked every subject I could in my Leaving Cert with a number. I studied Higher Level Maths, Applied Maths, Physics, Accounting and Chemistry (as well as Irish, English and French). I’ve always been fascinated by the stories that numbers can tell and when I discovered variables in algebra in Fourth Class, I was totally intrigued!

What did you want to be when you grew up? In Transition Year, I was sure that I wanted to become an actuary. This is a job where you calculate complex issues relating to insurance and pensions. It seemed like the most interesting job with Maths that I could find. I went on to earn a degree in Financial Maths and Economics in NUI Galway with this clear idea in mind.

Why did you change your mind and become an entrepreneur? Ever since I was a child, I’d always wanted to start my own business. However, I thought that was something you did after working in a job for several years. During my first month of college, I became a founding member of the Business Society and listened to entrepreneurs every week who came in to talk about their journey. On one occasion in Second Year, a stock market training company spoke to us about investing. I took their training course and asked them if I could work with them part time and then I found an opportunity that I hadn’t considered before – an education business where I could teach other people how to use numbers with the same passion that I do.

What has completing the CFA® charter meant for you? The world of finance is wide and deep. It’s hard to know where to stop or start. The CFA Program gives you the boundaries you need to get an excellent understanding of what really matters. In addition, if you travel to any country in the world (and I’ve been fortunate to work with clients in several countries so far), those three letters are recognised as the gold standard of quality. I’ve also volunteered with CFA Institute on various interesting projects around the world and it’s opened doors to work with some incredible people.

What advice would you give to young people getting started in their careers today? Expect to change every aspect of your career as you move through it. This can be as tough or as exciting as you make it. It’s so important to recognise that learning more about what you’re interested in (and that will likely change with time) and having an open mind to new opportunities will bring you on a wonderful path that can be nerve-racking sometimes. Also, it’s crucial to recognise that everybody matters. You never know who will be writing your next reference or how somebody you worked with in a previous job could be responsible for deciding whether or not you get the next job. Treat everybody with respect and recognise that anybody may be able to help (or hinder) you. Finally, follow up on opportunities when they’re given to you – ‘the opportunity of a lifetime must be taken within the lifetime of the opportunity’.

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End-of-chapter exercises

Chaptersummary summary Chapter

1 Differentiate between active and passive methods of making money.

Chapter 2

How can I make money now?

2 Search for the Global Entrepreneurship Monitor Report for the United States online and find six statistics in it. Compare these against the GEM Report for Ireland and comment on the differences. 3 Name a target audience for each of the following goods or services. (a) Healthy snack bars (e) Tour guide (b) Yoghurts with lots of fruit (f) Lawyer (c) Sports TV channels (g) A ruler (d) Doctor 4 If a person is experiencing the following, describe a service that a businessperson could offer them to help. (a) Sick (g) Wants to celebrate (b) Sad (h) Misses somebody in another country (c) Lonely (i) Tired (d) Eager to learn (j) Stressed (e) Curious (k) Wants to treat themselves (f) Always late (l) Needs to protect their property 5 Break down the cost of producing 100 friendship bracelets, including supplies, staff and marketing. 6 If you wanted to reach the following target markets, what marketing activity could you conduct? (a) Transition Year students in Cork (b) Parents of newborn babies in Galway (c) Businesspeople in Dublin (d) Employers seeking STEM graduates (e) Women who are interested in engineering in Ireland (f) Men who are interested in fashion in Argentina (g) People who want to set up their own business who are studying in Irish universities 7 Brainstorm a list of five ways that you could make money today that aren’t outlined in this chapter. 8 Pick one of the suggested ways to make money in this chapter and outline how you would start a business to do so. Include the following information: • A product or service • A clear description of a target market • A plan to communicate with the target market (i.e. a marketing plan) • A financial plan, including a price per product, a breakdown of the costs and expected profit • A request for a loan of the amount that you will need to start the business and the details of what you would spend the money on. (If the business doesn’t need any money to get started, there isn’t any work for you to do on this step except prove how you’re going to do everything you plan to do without money.)

JOURNAL QUESTION

What do you think about the idea of making money passively?

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Chapter

How much money can I afford to spend?

Learning objective

Let’s set the scene

Learning outcomes

John and Irene have decided to move in together. Until now, John has lived with his parents in Dublin and Irene has lived with friends since going to university in Galway. Before deciding where they might rent, they need to figure out how much they can afford to spend on accommodation.

• Understand how the impact of individual decisions affects the household.

• Differentiate between needs and wants. • Use the spending calculator on the Competition and Consumer Protection Commission (CCPC) website. • Understand how to treat fixed and variable expenditures in a budget. • Make a list of incomes and expenditures. • Appreciate the difference between before-tax and after-tax income. • Develop ways to bring a household budget from a deficit to a surplus.

Literacy links

• Expenditure, needs, wants, fixed, variable, budget, income, deficit, surplus

What is important to you? The first thing they both do is write a list of the top three things that are really important to each of them so that they can allocate money towards those things. They know that living together is all about compromise, so if they can take what is important to each other into consideration as well as be realistic, both their relationship and their budget are likely to work out.

John’s list: Numeracy links

• Addition and subtraction • Calculations using inputs • Decisions made from outputs

Cross-curricular links

• Business Studies: Managing a business and a household • Maths: Inequalities • Accounting: Budgeting • Economics: Costs

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Irene’s list:

1 Live where my commute 1 Live close to public transport to work is 30 minutes or less 2 Have my friends over for a dinner party once per 2 Get the premium channel month as I love to cook TV package to watch all and entertain the sports live action 3 Go away for a week-long 3 Put money into further study over the next holiday in the sun once two years per year

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Expenditure Next, they need to work out their estimated combined expenditure. Expenditure: An amount They can do this by either taking out a sheet of paper and writing down of money spent. the amounts and details of what they expect to spend or they can use the spending calculator on the Competition and Consumer Protection Commission (CCPC) website. They go through each category of expenditure listed on the CCPC spending calculator and estimate what they might spend in each case. Irene John

My employer pays for my phone, so I don’t have that one. However, I see ‘Gifts’ is on this list. I wouldn’t have thought of that. Including Christmas, birthdays and other things, I’m guessing I spend about €400 on those. 19.30 We have a free canteen where I work. I have a €25 package of phone credit and data on my phone that I pay every month. 19.31

Irene

I go out for my lunch every day at work and at the weekend. That costs about €12 per day. 19.33 I wear make-up every day for work and mostly at the weekend too. I’m guessing I spend about €40 per month on cosmetics. 19.34 John and Irene may also have expenditures relating to: Utilities (e.g. phone, electricity, internet, heating) Food Transport Clothes

Medical and dental Hobbies Going out Savings.

Activity 3.1 Make a list of other things that John and Irene might spend their money on.

Needs and wants Everybody has two broad categories of expenditures: needs and wants.

Needs are broken down into two further categories: fixed and variable.

Needs: Goods and services that are essential or very important, such as food and shelter.

Fixed: Any cash outflow that remains constant regardless of the level of activity.

Wants: Goods and services that we want to have but aren’t vital, such as holidays and music concert tickets.

Variable: Any cash outflow that changes in proportion to usage.

Fixed need: For example, a mobile phone package could cost €25 for unlimited calls, texts and data usage. Therefore, no matter how much you use your phone, the cost is still the same. Variable need: For example, the more you use your electricity to power electrical devices (e.g. mobile phones), electrical appliances (e.g. fridge, television), etc., the higher your electricity bill will be.

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Fixed

Wants Variable

Types of expenditure

Activity 3.3 Estimate all the needs and wants in your household. Total all the money that you think is spent in your home. Ask a parent or guardian to tell you how accurate your estimate is. John and Irene continue doing this until they’ve worked out everything they might want to spend their money on. At the end of this exercise, they will have a good estimate of their expenditure for the entire year.

Budget Now they need to examine their budget. In doing this exercise, John and Irene can figure out how much they want to spend versus how much money they’re earning. This will help them to identify what they can afford to pay in rent without putting themselves under too much financial pressure. Like they did above, they can compare their list of expenditures to their salaries on paper or use some online tools. First, they start by evaluating their income. John

Budget: An estimate of income and expenditure for a set period. Income: Money received, especially on a regular basis, for work done or by investing.

Chapter 3

Needs

Sort the following expenditures into the correct category: fixed needs, variable needs or wants: • Groceries • Heating bill • Cinema tickets • A subscription to a music streaming • Fixed monthly loan service repayment

How much money can I afford to spend?

Activity 3.2

Expenditure

We both earn €30,000 per year. Therefore, we have an income of €60,000. 19.40 No we don’t, John. We earn that money before tax, so we only have what’s left after that. 19.45

Irene

For a quick estimate of how much John and Irene make after tax, you can use the online calculator on the Salary After Tax website. Using current data, it shows that when they take out government taxes on their earnings, they each take home €25,427. In turn, this implies that they each have €2,119 in their pocket after taxes on a monthly basis. Since this is the only figure that matters, they put this number into their budget. Gross income: The amount of money that is paid (e.g. from an employer) before any taxes are paid. Net income: The amount of money received after all income taxes are paid (i.e. gross income from an employer less all income taxes).

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Next they use the budget planner on the CCPC website. Afterwards, they put in the figures they estimated during the expenditure exercise into the budget. After they add everything up, it comes to €53,380. They’re excited to see what’s left over so that they can start looking at houses or apartments to rent. John and Irene’s original household budget

Salaries (€)

Salary 1

25,427

Salary 2

25,427

Expenditure (€)

Needs expenditure Phone

€25 per month for Irene

300

Electricity

€200 per month estimate

2,400

Groceries

€150 per week, including dinner party items

7,800

TV package and licence

€100 per month, including sports and movies, and €160 for TV licence

1,360

John’s car

€150 per month for running costs plus €200 loan repayment per month

4,200

Cosmetics

€40 per month on Irene’s make-up

480

Public transport

€50 per month for Irene’s transport

600

Education

€4,000 per year for Irene’s education

4,000

Wants expenditure Holidays

Seven days in a five-star hotel in Barbados with spending money

6,000

Clothes

€300 per month between John and Irene

3,600

Going out

€200 per week on entertainment

10,400

Gifts

€1,000 each per year on Christmas, birthdays and other occasions

2,000

Eating out

€200 each per week on eating out at restaurants or takeaways

10,400

Total

50,854

Deficit

53,540 (2,686)

What can you do if you have a budget deficit? Uh-oh. John and Irene don’t have any money left over at all. In fact, they would have overspent by €2,686 over the entire year, so their budget is in deficit. They won’t be able to rent anywhere and would even need to borrow money in this scenario. What can they do? There are two things you can do if you have a budget deficit: you can increase your income and/or decrease your expenditure. John and Irene set out to do exactly that.

Decrease your variable needs expenditure The first thing they could do is decrease their variable needs expenditure. John researches the average electricity bill in Ireland and is pleasantly surprised to learn that the average electricity bill is €1,035 a year or €172.50 for each two-monthly bill.

Deficit: When money outflows exceed money inflows.

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Salaries (€)

Salary 1

25,427

Salary 2

25,427

Expenditure (€)

Needs expenditure Phone

€25 per month for Irene

300

Electricity

€90 per month estimate

1,080

Groceries

€150 per week, including dinner party items

7,800

TV package and licence

€65 per month, sports channel only, and €160 for TV licence

940

John’s car

€150 per month for running costs plus €200 loan repayment per month

4,200

Cosmetics

€40 per month on Irene’s make-up

480

Public transport

€50 per month for Irene’s transport

600

Education

€2,000 per year for Irene’s education

2,000

Wants expenditure Holidays

Seven days in a five-star hotel in Barbados with spending money

6,000

Clothes

€300 per month between John and Irene

3,600

Going out

€200 per week on entertainment

10,400

Gifts

€1,000 each per year on Christmas, birthdays and other occasions

2,000

Eating out

€200 each per week on eating out at restaurants or takeaways

10,400

Total

50,854

Surplus

Activity 3.4 What is the difference between the original budget and the revised budget?

Chapter 3

John and Irene’s revised household budget

How much money can I afford to spend?

Irene talks to her employer about her future education ambitions. They’re very happy to hear about this, as it will be of benefit to them too. Therefore, they agree to fund 50% of the cost. John calls the TV company and asks them if there are any special discounts available if they were to take only the sports channels and not include the movie package. They agree to drop their price from €100 to €65 per month. John and Irene think they must have saved a lot of money by now, so they revisit their budget.

49,800 1,054

Surplus: When money inflows exceed money outflows.

John and Irene are disappointed that while they now have a surplus, they only have a very small amount left over for the year. Their idea of living together now seems rather unrealistic. They’re both new in their jobs, so there isn’t a possibility of a promotion or more pay soon. They’re both very busy at work, so they don’t have time to earn more money separately. What can they do now?

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Revise your wants expenditure John and Irene need to review their wants expenditure. While John really wanted the holiday in the sun, he wants to live with Irene more. Therefore, he suggests a weekend away in a European city or else a week’s ‘staycation’ on the Wild Atlantic Way in Ireland. He estimates this would save €4,500. Irene says that she often ends up buying clothes just because she works in the city. If she puts her time into her study she won’t have time for window shopping, so she reduces the clothes budget from €300 per month to €100 per month. Irene adds that since they will be living together now, they’re not going to be going out as much to the cinema or other places. Therefore, she thinks they can live on €100 per week of entertainment spending money. John also agrees to make his own lunch every day rather than eating out. He smiles as he says that he hopes he will be invited to Irene’s dinner parties, as she is a wonderful cook, so he won’t need to eat out as much. Therefore, they reduce the eating out budget to €150 per week. John and Irene’s final household budget

Salaries (€)

Salary 1

25,427

Salary 2

25,427

Expenditure (€)

Needs expenditure Phone

€25 per month for Irene

300

Electricity

€90 per month estimate

1,080

Groceries

€150 per week, including dinner party items

7,800

TV package and licence

€65 per month, sports channel only, and €160 for TV licence

940

John’s car

€150 per month for running costs plus €200 loan repayment per month

4,200

Cosmetics

€40 per month on Irene’s make-up

480

Public transport

€50 per month for Irene’s transport

600

Education

€2,000 per year for Irene’s education

2,000

Wants expenditure Holidays

European weekend break or Irish staycation

1,500

Clothes

€100 per month between John and Irene

1,200

Going out

€100 per week on entertainment

5,200

Gifts

€1,000 each per year on Christmas, birthdays and other occasions

2,000

Eating out

€150 each per week on eating out at restaurants or takeaways

7,800

Total Surplus

50,854

35,100 15,754

They’ve now worked out that they can put away €15,754 every year! Therefore, if they were to spend €1,200 per month on rent, they would still have a little money left over afterwards. They agree to put €1,000 into a savings account in case of any emergencies. Any money left over after that will be used to fund some small treats throughout the year or when they go on holiday. Best wishes on your future, John and Irene!

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Career spotlight Noel O’Halloran, CFA, Chief Investment Officer What subjects interested you in school? During my school years I always liked mathematics and business subjects. I was drawn to do an engineering degree, as it is a very broad degree and I always believed (and still do) that it prepares you to work in many other professions apart from engineering. I graduated with a first-class honours degree in engineering from University College Cork.

How did you move from engineering into finance? I then worked in industry for three years as a practising engineer. At that early stage, I was attracted to how exciting the investment industry was and particularly how it’s always changing so that it can offer customers better solutions to their problems all the time. During my three years working as an engineer, I studied for the Certified Diploma in Accounting and Finance to provide a nice bridge into business and accounting and next I undertook the financial analyst exam programme.

What are you responsible for in your job? I have overall responsibility for the bottom line performance of our firm’s total assets under management. That includes everything from structuring the team of portfolio managers and analysts, asset allocation decisions across asset classes and the bottom line performance of our stock picking.

What advice would you give to young people today about interacting with CFA Society Ireland? I would encourage active participation in events of CFA Society Ireland as a good way to network and continuously learn. For example, for several years I have been a judge in the Irish final of the CFA Institute Research Challenge, where teams of students from Irish universities research an Irish listed company and present a detailed investment report to a panel of judges.

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Chapter 3

How much money can I afford to spend?

End-of-chapter exercises

Chaptersummary summary Chapter

1 Define the following terms: (a) Needs (b) Wants (c) Fixed needs (d) Variable needs 2 Make a crossword (complete with clues) using the following words: • Budget • Inflow • Deficit • Needs • Expenditure • Outflow • Fixed • Salary

• • • •

Tax Utilities Variable Wants

3 Put the following expenditures into the correct category (fixed need, variable need or wants): • House rent • Fixed Wi-Fi monthly bill • Blow-dry hair treatment • Subscription to a movie channel • Washing powder • Bread 4 Calculate the following budget and identify if the household has a surplus or deficit. • The combined gross salary is €30,000. • The expenditure is made up of the following: Expenditure (€) Needs expenditure Phone

300

Electricity

1,080

Groceries

7,800

TV package and licence Car

780 2,400

Cosmetics

480

Public transport

600

Education

2,000

Wants expenditure

Holidays

1,500

Clothes

1,200

Going out

4,000

Gifts

2,000

Eating out

2,000

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5 Calculate the following budget and identify if the household hasChapter a surplus or deficit. summary • The combined gross salary is €37,000. • The expenditure is made up of the following: Expenditure (€) 300 1,200 8,500 780 5,000 1,200 600 2,000

Wants expenditure Holidays Clothes Going out Gifts Eating out

5,500 1,200 4,000 2,000 6,700

6 How can a household (a) increase a surplus (b) decrease a deficit and (c) turn a deficit into a surplus?

Chapter 3

Phone Electricity Groceries TV package and licence Car Cosmetics Public transport Education

How much money can I afford to spend?

Needs expenditure

7 Imagine that you’re starting a university course in September in Dublin. Search online for the Technological University Dublin Cost of Living Guide and prepare a budget for yourself. Next, check out the part-time jobs available in Dublin that you could work in to supplement the costs of going to university. You can also refer to the list of ideas in Chapter 2.

JOURNAL QUESTION

How do you feel about making a budget for your household when you’re living away from home?

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Chapter

Where can I save my money?

Learning objective

• Understand the different savings and bonds products available and how savers decide which to choose.

Learning outcomes

• List the key decisions that a saver needs to consider before choosing a product. • Compare a bank savings product to a government bond in Ireland. • Understand how a government borrows from people and repays them with interest. • Find the coupon, maturity date and price of a bond in a table.

Literacy links

• Investing, saving, lump sum, deposit account, provider, product, AER, term, interest earned over the term, government bond, coupon

Numeracy links

• Comparing coupons and yields to maturity

Cross-curricular links

• Business Studies: Finance • Maths: Return, interest • Economics: Capital factor of production, monetary policy, banking sector, national income, government policy

Let’s set the scene Chloe has some money set aside and she wants to put it on deposit or invest it in some way. Chloe doesn’t want to take a lot of risk. If she saves or deposits money, she wants to know how much it will grow to, by when and what will happen along the way.

Activity 4.1 Risk profile quiz: How much risk do you like to take? 2 Given the best and worst case returns of the 1 You are on a TV game show and can choose four investment choices below, which would one of the following. Which would you take? you prefer? (a) €100 in cash (a) €200 gain best case; €0 gain/loss worst case (b) A 50% chance of winning €500 (b) €800 gain best case; €200 loss worst case (c) A 25% chance of winning €1,000 (c) €2,600 gain best case; €800 loss worst case (d) A 5% chance of winning €10,000 (d) €4,800 gain best case; €2,400 loss worst case Scoring: Question 1: a = 1, b = 2, c = 3, d = 4 Question 2: a = 1, b = 2, c = 3, d = 4 The higher the score, the higher the investor’s willingness to take risk. Discuss the results of this quiz with your classmates and teacher.

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Factors to consider before you decide where to save your money Chloe talks to a financial advisor, who explains that saving is actually a subset of investing. Investing

Investing: Putting some money at risk in order to make a return. Saving: Taking little risk to make a small return.

The financial advisor tells Chloe that she has a range of options. However, before she talks through any of those, it’s important to consider a couple of things.

How long do you want to put your money on deposit for? If Chloe puts her money on deposit for a period of time, it means she won’t have access to that money for that period of time. Therefore, she needs to think about how long that period of time would be. The longer she puts her money away, the greater the return that she should get. Therefore, she needs to decide how much return she would like while also knowing that she won’t be able to use that money for a while.

Chapter 4

Saving is a subset of investing

Where can I save my money?

Saving

Would you prefer a higher income every year or higher returns in the future? The financial advisor asks Chloe if she would like some income every year of her investment. Chloe is a little surprised. Of course she would like some income every year – who wouldn’t? The financial advisor then says that she has to decide between having a higher income on an annual basis or more money in the future with less income along the way (i.e. more growth of her money).

What is the annual return that you would like? The financial advisor asks Chloe how much return she would like to make. Again, Chloe is surprised by this question but is guessing that if she wants a higher return, there is going to be a catch. The financial advisor tells her that it’s possible to make a significant return if she invests, but there would also be a considerable amount of risk that she would need to take. On the other hand, she could take very little risk but then she would make very little return.

What is the rate of tax that you would pay on the return? The financial advisor also tells Chloe that she will have to pay tax on the money generated from the return. Therefore, she needs to consider some other aspects of her tax affairs when making these decisions. (We will discuss this in more detail in Chapter 11.) Transition Year Finance

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Lump sum deposit accounts Chloe has a lot to think about now and she’s not sure where to start. The financial advisor smiles and says to take it one step at a time. The financial advisor takes her to the CCPC’s website and chooses the ‘Lump sum deposit accounts’ option from the ‘Money Tools’ dropdown menu. Chloe asks her to explain what lump sum and deposit account mean. A lump sum is a once-off sum deposited into an account (e.g. Lump sum: A once-off fixed amount Chloe transfers €500 to the account on a once-off basis when deposited into a bank account. she opens it). In contrast, a regular saver would put an amount Deposit account: The saver may be in regularly (e.g. Chloe saves €50 per month in the account). locking up their money for some A deposit account is different from a current account. With months or years. a current account, Chloe could take money out any time she wanted. Now that Chloe understands these terms, the financial advisor then asks three quick questions: How much do you want to deposit? What type of account would you like? How long can you save for?

How much do you want to deposit? Chloe wants to deposit €5,000.

What type of account would you like? Chloe asks what choices she might have. The financial advisor sets out three options for her: An instant access account means that she can get her money out any time that she wants it – she could go to the ATM and take it all out if she wanted to. The interest rate on this type of account is low because she has immediate access. A notice account means that Chloe can get the money out of the bank at any time, but not instantly. She has to let the bank know in advance (i.e. give notice) that she wants her money, so it’s not as convenient as an instant access account. Given that the bank will know when she wants the money before she actually gets it, they’re willing to offer her a higher interest rate. A fixed term account means that the money is put away for a particular length of time that Chloe agrees to at the beginning. Since the bank would have access to her money for the full period, they know exactly how long that is (in contrast to the instant access and notice accounts), so they’re willing to offer the highest interest rate to her. Type of account

Description

Interest rate

Instant access account

Same access as a current account

Low

Notice account

Can get access to your money, but you need to give notice

Higher

Fixed term account

The money is locked away for the full length of the savings period without having any access to it at all

Highest

Chloe chooses the fixed term account.

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How long can you save for?

Product

AER

Term

Interest earned over the term

TY Bank

Aran 60 Month Fixed Term

0.05% AER (gross term 0.26%)

60 months

€13.00

TY Bank

Achill 48 Month Fixed Term

0.05% AER (gross term 0.21%)

48 months

€10.50

Chloe asks the financial advisor to explain what each of the columns means. Provider: The name of the bank that offers the savings accounts. Product: The name of the specific product that Chloe would need to ask for if she wanted to take this offer. Annual equivalent rate (AER): The rate of interest she would make per year. Term: The length of time that Chloe would lock up the amount of her money with the bank. Interest earned over the term: The amount of money that Chloe would make if she saved her money in this product with this bank for the full term.

Activity 4.2 Design a word cloud online using Wordle or with markers and paper including all the new terms that Chloe learned during her meeting with the financial advisor.

Chapter 4

Provider

Where can I save my money?

Chloe can save for over three years. The financial advisor puts Chloe’s answers to these questions into the CCPC’s online lump sum deposit accounts calculator and shows Chloe the results.

Activity 4.3 Use the CCPC’s online lump sum deposit accounts calculator to find results for the following savers: (a) Saver A has €40,000 to put in a fixed term deposit account for two years. (b) Saver B has €10,000 to put in a 21-day notice account. (c) Saver C has €1,000 to put in an instant access account. In each case, share the following details with the saver: • The term • The provider • The interest earned over the term • The product • The AER Chloe thanks the financial advisor for her time and goes home to think.

Transition Year Finance

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Government bonds As you learned in Chapter 1, Chloe could also buy government bonds. Government bond: When a person or business lends money to the government in exchange for a return.

Activity 4.4 Pick five countries and find out how much each country owes today, i.e. the total debt of each country. Chloe searches online for how to buy government bonds and comes across the Ireland State Savings website, where she can learn about the different products available to her. She learned enough in her last meeting with the financial advisor to figure out the terminology now for herself. In the case of the 3 Year Savings Bonds, product highlights are as follows: 100% protection by the state: Her money is being loaned to the government. Tax free to Irish residents: There wouldn’t be any tax on this return. No fees, charges or commissions: There wouldn’t be any costs to lending this money to the government. Fixed rate of return: There wouldn’t be any question about how much money she would earn. Minimum €50 up to maximum €120,000 per individual per issue: She could easily invest her €5,000 here. Access to your initial investment and any interest earned with seven days’ notice: She could withdraw her money at any stage if she asked for it seven days before she needed it. To benefit from the full return, you must hold the product to maturity. See terms and conditions for details on the returns if you encash early: If she withdrew her money early, she wouldn’t get the full return.

Activity 4.5 Examine two other products on the Ireland State Savings website and write the explanations as if you were going to email Chloe about them, e.g. ‘Dear Chloe, I suggest that you take a look at these two State Savings products…’. However, Chloe has heard that there is a different way of lending money Coupon: A payment made to the government. In this case: by the government to the The government would pay a coupon each year. people (called bondholders) The government would pay back €100 for every bond at the end of who own the bond. the life of the bond. This €100 is called the face value of the bond. You can sell the bond at any stage, from the time that you buy it right up to the time that the government gives the €100 back to all the bondholders. The amount that you would pay for this bond changes every day based on how many people are willing to buy vs. sell the bonds.

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Chloe starts to feel overwhelmed again! She calls her financial advisor back and asks her to talk her through this. The financial advisor directs Chloe to the Irish Stock Exchange website, as that is where she can see all the details relating to the Irish government bonds that she is interested in. Code

Name

Details

B4S3JD4

IRISH GOVERNMENT BONDS

3.90% Treasury Bond 2023

€113.243

B6X95T9

IRISH GOVERNMENT BONDS

3.40% Treasury Bond 2024

€114.643

B4TV0D4

IRISH GOVERNMENT BONDS

5.40% Treasury Bond 2025

€127.870

BV8C941

IRISH GOVERNMENT BONDS

1.00% Treasury Bond 2026

€106.670

BDHDPR4

IRISH GOVERNMENT BONDS

0.9% Treasury Bond 2028

€106.953

BH3SQ89

IRISH GOVERNMENT BONDS

1.1% Treasury Bond 2029

€108.824

BJ38CR4

IRISH GOVERNMENT BONDS

2.4% Treasury Bond 2030

€122.068

BFZRQ24

IRISH GOVERNMENT BONDS

1.35% Treasury Bond 2031

€112.450

The financial advisor explains that Chloe needs to look out for three things: The maturity date: For example, she would receive €100 face value back from the government in 2023 in the first case if she invested her money today. The coupon rate: For example, she would get €3.90 per €100 face value of the first bond in the table above. The price of the bond: For example, she would need to pay €113.24 for the government bond in the first case.

Chapter 4

Source: Irish Stock Exchange

Where can I save my money?

Price

Activity 4.6 Find the following information from the Irish Stock Exchange table above. (a) What is the coupon of the 2030 bond? (b) When would Chloe get repaid if she were to buy the last bond on the list? (c) How much would it cost to buy the 2.4% Treasury Bond 2030? (d) What is the coupon of the 2026 bond? (e) When would Chloe get repaid if she were to buy the fifth bond on the list? (f) How much money would it cost to buy €100 worth of the 3.4% Treasury Bond 2024?

Activity 4.7 Visit the Irish Stock Exchange website today and do the following. (a) Compare how the prices of the bonds have changed from the table above. (b) Identify if any new government bonds have been created since the table was written. Best of luck with your savings or lending decision, Chloe! (You will learn more about this subject in Chapter 18.)

Transition Year Finance

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Career spotlight Kate Bowden, CFA, Vice-President of Risk Did you ever have a teacher who influenced your career choice? I had a great maths teacher at school who contributed to my enjoyment of the subject and ultimately my decision to study for a degree in Computer Science with Maths and Statistics as minor subjects at University College Dublin (UCD). Following a year working in the IT industry, I wanted to grow my understanding of the business world and I returned to full-time study in the Graduate Diploma in Business Studies at the UCD Michael Smurfit Graduate School.

What job did you have while studying for the CFA® exams? I was working for a German bank at the time and my role was full of variety. I was responsible for monitoring payments, preparing legal documentation when we took on a new airline customer and recording all the details when the bank bought and sold aircraft. One of my ‘tasks’ was watching from the control tower while an Airbus A340-300 that was destined for part-out [to be broken down and sold as parts] made its final descent on a runway surrounded by the cotton fields of Mississippi in the US!

How has studying the CFA Program helped you? The broad nature of what you study as part of the CFA course was helped by my previous studies and it provided me with the knowledge to understand the bigger picture as well as the skills to interpret the smaller details. Through working and studying at the same time, I had the opportunity to put what I was learning into practice and to see the real-world application of what I was learning. Events and networking opportunities organised by CFA Society Ireland were also very useful in helping me decide my future career path.

What do you do in your daily job now? My current job in an airline leasing company involves making decisions with our eyes wide open. My job is to ensure that we understand the risks that we’re taking on when entering a lease with a new airline customer and in particular their ability to pay us rent for the use of that aircraft. My job involves a lot of communicating what’s going on to other people in the company. I have specific responsibility for a group of airlines in Europe, Russia and the Middle East. I travel regularly within these regions to meet airline management and discuss what’s changing in those markets.

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End-of-chapter exercises

Chaptersummary summary Chapter

3 Find the coupon, maturity date and bond price for five bonds issued by each of the following governments: (a) France (d) US (b) Italy (e) Japan (c) Germany (f) China 4 Research the name of the tax that is applied to interest earned on income in Ireland. What is the current rate of this tax? 5 Which type of account (instant, notice or fixed term) would be suitable for each of the following savers? (a) Saver 1 is a parent saving for the big household expenses (e.g. Christmas or back-to-school), so they would need to know how much they need 30 days in advance. (b) Saver 2 has inherited €50,000 and does not have any plans for the money for the next three years. (c) Saver 3 needs a place for her employer to pay her wages and then she can access the money for day-to-day expenses.

Chapter 4

2 Research the products currently available on the State Savings website and answer the following questions in each case. (a) How long does the saver’s money need to be tied up for? (b) What is the annual income that the saver receives? (c) What is the overall return to the saver over the full duration of the savings period? (d) Can the saver withdraw money at any time over the full duration of the savings period? (e) What taxes does the saver pay on the return?

Where can I save my money?

1 Define the following terms: (a) Deposit (b) Government bond

6 Find the current price of each of the following government bonds: (a) 10 year German government bond (b) 2 year Greek government bond (c) 1 year UK government bond (d) 5 year Australian government bond (e) 4 year Irish government bond

JOURNAL QUESTION

How would you describe your risk profile?

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Chapter

How do I spend money in other countries?

Learning objective

Let’s set the scene

Learning outcomes

Maria has been saving up for a short holiday and is trying to decide where to go: Spain or the UK. She loves the beach in Malaga, the vibrant culture of Madrid as well as the art and nightlife of Barcelona. However, she loves the shopping in London, the architecture in Cambridge and the lovely walks in the English countryside. Also, her friend Rebecca recently moved to Bristol and she would love to catch up with her. That settles it! She is going to choose the UK.

• Understand when and how to consider foreign exchange transactions and how to factor them into costs.

• Identify when foreign exchange transactions are needed. • Find the theoretical and practical exchange rates between various currencies. • Research the costs relating to foreign exchange transactions. • Understand what fintech is and how foreign exchange companies form part of the fintech industry. • Consider the impact of foreign exchange on the cost structure when exporting. • Compare the result of engaging in foreign exchange transactions with different vendors. • Differentiate between exports and imports.

Foreign exchange There is another consequence of Maria choosing the UK instead of Spain. If she were going to Malaga, Barcelona or Madrid, she could use the same euros that she has in her pocket right now. Now that she’s going to the UK, she will have to buy some sterling in a foreign exchange.

Literacy links

• Import, foreign exchange, fintech, exports

Numeracy links

• Calculating amounts in different currencies • Obtaining foreign exchange rates

Cross-curricular links

• Business Studies: Management and planning, marketing, international business • Maths: Currency conversion • Economics: Exports and imports, invisible trade, factor of enterprise, international trade • Accounting: Translating amounts into euro

Money Matters BOOK.indb 36

No matter where Maria goes and independent of the currency she uses, this activity is called an import. Since Maria is travelling to another country and buying goods and services from a business in that different country, this represents an import.

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Import: When money is spent buying goods and services from another country. Foreign exchange: A system for buying and selling the currencies of other countries.

Why do we have foreign exchange? • To buy goods or services in other currencies • To sell goods or services into other currencies • To invest in stocks, bonds and other financial assets in other currencies. Maria searches online for the euro to sterling exchange rate and finds that on today’s date, €1 = £0.85.

Activity 5.1 Search online for today’s EUR to GBP exchange rate. In theory, this means that for every €100 she will get £85. Similarly, in exchange for every £85 on the way back to Ireland, she will get €100. In practice, however, this doesn’t happen. Banks or bureaux de change will exchange your money into a different currency for you, but they need to charge you for the service or else there isn’t any reward for them in doing this. As a result, Maria is likely to get less than £85 for every €100 that she exchanges. Similarly, Maria will need to pay more than £85 in order to get €100 on the way back. Specifically, she needs to look for the ‘we buy’ and ‘we sell’ numbers on offer to her for exchange business.

Chapter 5

• The United Nations currently recognises 180 currencies that are used in 195 countries.

How do I spend money in other countries?

Did you know?

‘Bank buys’ rates Currency

< €900

≥ €900

Currency

< €900

≥ €900

UK pound sterling

0.8717

0.8591

US dollar

1.1408

1.1297

Canadian dollar

1.5105

1.4959

Swiss franc

1.1005

1.0898

Swedish krone

10.9716

10.8651

Australian dollar

1.7013

1.6848

New Zealand dollar

1.7624

1.7453

South African rand

17.0373

16.8719

Currency

< €900

≥ €900

Currency

< €900

≥ €900

UK pound sterling

0.8188

0.8255

US dollar

1.0766

1.0855

Canadian dollar

1.4256

1.4373

Swiss franc

1.0365

1.0472

Swedish krone

10.3326

10.4391

Australian dollar

1.6023

1.6188

New Zealand dollar

1.6598

1.6769

South African rand

16.0449

16.2103

‘Bank sells’ rates

In this case: For every €100 she transfers into sterling, if the amount is greater than or equal to €900, she will get £82.55. For every €100 she transfers into sterling, if the amount is less than €900, she will get £81.88. For every £85.91 she transfers into euro, if the amount is more than or equal to €900, she will get €100. For every £87.17 she transfers into euro, if the amount is less than €900, she will get €100. Transition Year Finance

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Activity 5.2 Search online for today’s ‘we buy’ and ‘we sell’ rates from an Irish bank. Write a short step-by-step guide for somebody who wants to find the information and understand what it means. Maria also has another option: she can simply go to an ATM when she gets to the UK and withdraw money directly or use her card. This is very convenient for her, as she neither needs to take time out of her working day to go to the bank to collect the sterling nor does she have to set up a new account. However, this method also has fees. These fees (called commission charges) may be a flat fee or a percentage of the value withdrawn (e.g. 1% of euro value).

Did you know? • The seven most traded currencies in the world are: • • • •

Euro Sterling US dollar Japanese yen

• Australian dollar • Canadian dollar • Swiss franc

Activity 5.3 Find today’s exchange rates for each of the following. (a) Euro/sterling rate (i.e. €1 today will buy how many pounds sterling?) (b) Sterling/US dollar rate (i.e. £1 today will buy how many US dollars?) (c) Euro/yen rate (i.e. €1 today will buy how many Japanese yen?) (d) US dollar/yuan rate (i.e. USD $1 today will buy how many Chinese yuan?) (e) Euro/krone rate (i.e. €1 today will buy how many Danish krone?) (f) Canadian dollar/Swiss franc rate (i.e. CAD $1 today will buy how many Swiss francs?)

Fintech The ability of individual people to conduct foreign exchange transactions online today falls under the umbrella of fintech.

Fintech: Fintech is a combination of the words financial and technology. It describes the use of technology to deliver financial services and products to consumers.

Activity 5.4 Go to the Fintech Ireland website and look up the latest version of the All-Ireland Fintech Map. Make a list of all the categories of fintech in your copybook.

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Impact of currencies on exports Maria rings Rebecca and tells her about her plans. Rebecca is delighted that she will get to see her. They talk excitedly about where they will go. Perhaps a trip to Bath Spa, a quirky food market or a day trip to one of the Welsh cities of Cardiff or Swansea? They start talking about dates, but then Rebecca has an idea. Maria sells nappy cakes – hampers of baby goods that are arranged like a tiered cake. She sells them at €60 each. It costs her €30 for the materials that she puts into them, so she makes €30 profit per nappy cake. While Rebecca was out and about, she noticed posters advertising the Baby and Toddler Show, which will take place during the week that Maria is planning her trip. Rebecca suggests that Maria take a stand at the show, potentially selling 20 nappy cakes at £50 (as €60 multiplied by the EUR/GBP rate is taking the exchange rate into consideration). This would be worth £1,000 to her in total. (Note: If Maria buys these supplies from a UK company, they will be classed as imports, as she is buying goods from a supplier outside of Ireland. If Maria sells her nappy cakes to customers in the UK, they will be classed as exports, as she is selling goods to people outside of Ireland.)

Chapter 5

Read the case study on the Bloomberg website of how the Collison brothers from Limerick built one of the largest fintech companies in the world (‘How two brothers turned seven lines of code into a $9.2 billion startup’) and present a summary to the class.

How do I spend money in other countries?

Activity 5.5

Exports: Sales of goods and services to other countries.

If Maria made a 50% profit on £1,000, she would have £500 profit. This would be wonderful, but she tells Rebecca that she needs to take some things into consideration: 1 She would need to pay the organiser of the show a fee to sell her goods at the show. 2 She would need to spend some of her holiday working at the stand or extend her trip to Bristol so that she could have both work time and holiday time. 3 If she were to bring over enough materials to make 20 nappy cakes, she would have to pay a lot of money to check in her luggage. This would eat into the profits that she would make. 4 What if she didn’t sell £1,000 worth of goods at the show? There is a risk that she may fail. 5 What if more people than she expects want to buy her nappy cakes? Rebecca thinks about these things and comes up with potential solutions for each one. Transition Year Finance

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Point #1 Maria is right about there being a fee to exhibit at the show. Rebecca phones the organiser and asks her for the details. She explains that her friend from Ireland is interested in travelling over, has a hobby of making nappy cakes that she has turned into a small business and would like to exhibit at the show. She has built up a significant Instagram following in Ireland, so if the organiser ever ran the event in Ireland, Maria would be happy to promote it on her social media feed to help her attract visitors. The organiser agrees a price of £100 for Maria to exhibit at the show.

Point #2 Rebecca said she would be delighted if Maria were to stay in Bristol with her for a little longer. Then they would have some more time together and she would be most welcome.

Point #3 Rather than bringing a lot of materials in checked luggage, Rebecca suggests that Maria buys her materials in bulk from a local supplier in Bristol and gets them delivered to Rebecca’s address, where they would be waiting for her when she comes over. Of course, Maria would need to order these materials in sterling. Rebecca has heard about online brokers who will exchange money from one currency to another, but only if it’s going from one bank account to another. This is how this works.

Maria’ s bank account

Currency account

Supplier’s bank account

How money moves between the three parties Generally, online brokers offer a more competitive rate because they don’t have to store cash, they don’t have branches (i.e. physical buildings) and they don’t have to pay employees to serve customers in physical buildings. If Maria wanted to grow her export business, she could turn to her Local Enterprise Office or Enterprise Ireland. They provide financial support, help and direction for business owners who want to find opportunities in international markets.

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Activity 5.6

Rebecca understands that Maria might be nervous and that there is always a risk, but imagine if it worked! Imagine if Maria gained the experience of selling her products in a beautiful city like Bristol, earned enough money to cover the entire trip and met new customers – that alone is worth the risk. However, Rebecca tells Maria that she will bring any remaining nappy cakes into her workplace and sell them at a discounted price of £40 per hamper so that she won’t lose out.

Point #5 While it would be wonderful to sell all her stock, Maria may be playing it too safe. She could sell a lot more than £1,000 worth of nappy cakes, and if so, she can simply take the customer’s name and email address, ask them to pay for the nappy cake on her website, make the hamper while she is still in Rebecca’s house and have it delivered. All sorted! Best of luck, Maria!

Activity 5.7 Maria’s niece in Transition Year hears all about her plan and would love to set up her own business. Maria suggests that she applies for the Student Enterprise Programme organised by the Local Enterprise Office so that she can experience an entrepreneurial journey of her own. Look up the Student Enterprise Programme website to learn more about it.

Chapter 5

Point #4

How do I spend money in other countries?

Search online for today’s exchange rates at TransferMate or CurrencyFair. Maria needs to transfer enough euros to cover £500 of expenses. (a) How much will this cost her in euro using one of the online companies? (b) Compare these rates to a bank’s rates.

The Student Enterprise Programme, an initiative run by the Network of Local Enterprise Offices of Ireland, is Ireland’s largest and most successful student enterprise programme, with over 26,000 second-level students taking part each year. Students from First Year to Sixth Year get to set up and run their own business and find out what it’s really like to be an entrepreneur by taking part in this eight-month-long enterprise education learning programme. The programme runs from September to May and students get to do everything a real-life entrepreneur would do, from coming up with the business idea to marketing, sales and preparing a business plan. At the end of the programme in May, one student business from each region gets to compete at the National Final for the ‘Student Enterprise of the Year’ award.

Source: Student Enterprise Programme.

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Career spotlight Barry Glavin, CFA, Chief Investment Officer How did you get started in finance? I left University College Dublin in the early 1990s with a degree (BA in Politics and Philosophy). With jobs scarce in Dublin at the time, I decided to go to France for a year, learn French and figure out what to do with my life. In Paris I found a job with a wholesale tour operator. What started out as a job turned into an incredible experience working for a fast-paced, always-changing, global business that was using technology in an exciting way to be better. I spent almost five years there, worked with great people and learned a lot. One of the advantages of living abroad is that you can make friends very quickly with people who are also in the same position. Around that time in Paris, the stock exchange was looking to hire lots of English speakers to serve a rapidly growing international client base. I decided to explore a career change and go for it!

What jobs have you worked on since? I’ve been in financial markets ever since, trading and investing in different assets classes, but for most of the last 20 years I’ve focused on analysing the share of companies in the industrial sector.

Coming from a non-finance background, what was your experience of taking the CFA® exams? As someone with no formal finance-related education, I felt the CFA charter was essential. The actual content itself was relevant to what I did every day. It allowed me to get a better understanding of every aspect of researching and decision-making in relation to investing. It allowed me to get a better understanding from my job too, as I was able to link my studies and my work together very well. It also gave me a very clear sense of my responsibilities as a member of the investment profession.

What happened when you came back to Dublin? In 2006, I came back to Dublin to work on researching stocks again. I became the manager of my team. After several years of leading that, I was appointed to my current job, which involves having responsibility for every aspect of the investment process at the firm.

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End-of-chapter exercises

2 Give two reasons why we need foreign exchange in the world today. 3 Write this table in your copybook and fill in the missing sections using the exchange rates below. Currency code

Full name of the currency

One country where the currency is used

Exchange rate of €1

Equivalent of €1,075

AED

Arab Emirates dirham

United Arab Emirates

3.9017

4,194.33 AED

AUD

1.7262

CAD

1.4917

CHF

1.0153

CZK

26.1734

GBP

0.8652

HRK

7.2914

JPY

114.5472

MXN

25.0015

NZD

1.7624

PLN

4.3441

SEK

10.5497

TRY

6.876

USD

1.0734

ZAR

19.0391

How do I spend money in other countries?

(b) Fintech

Chapter 5

1 Define the following terms: (a) Foreign exchange

Chapter summary

4 Research the following export statistics on the ‘External Trade’ section of the CSO website (click the ‘Statistics’ tab at the top of the page, then click ‘External Trade’ under the ‘Economy’ column). (a) What value of goods did companies in Ireland export last year? (b) What value of services did companies in Ireland export last year? (c) What value of goods did companies in Ireland export last year to the UK? (d) What value of goods did companies in Ireland export last year to the US? (e) How much did international tourists spend last year in Ireland? 5 Calculate the difference in cost if an Irish business wanted to buy £10,000 worth of stock from a UK supplier if the exchange rate changed from €1 = £0.65 to €1 = £0.80. 6 Calculate the difference in cost if an Irish family wanted to spend USD $5,000 on a holiday to Disneyland in California if the exchange rate changed from €1 = $1.25 to €1 = $1.05.

JOURNAL QUESTION

Would you like to set up your own business at some point in the future? Why or why not?

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Chapter

How do I get access to short-term cash?

Learning objective

• Understand how credit card debt works and identify the situations where a credit card is and isn’t useful.

Learning outcomes

• List the characteristics of a credit card. • Recommend a certain credit card offering for a case study with specific needs. • Identify how to avoid common credit card pitfalls. • Explain the concept of a minimum repayment. • Calculate how long it would take to repay credit card debt. • Determine when credit cards are and aren’t useful.

Let’s set the scene Aleksander is a college student. He is going to Berlin for the summer and has €600 in his bank account. This is enough for two weeks’ accommodation, €10 per day for food, €50 for public transport and €100 for unexpected expenses. In preparation, Aleksander has researched some jobs online in Berlin. He posted in the Irish Business Network Berlin group and sent his CV to some recruitment companies based there. He is starting work in a café next week. However, he needs to make sure he has access to funds in case the job falls through and he needs a deposit for accommodation and money for any emergencies. A credit card is one possible solution for Aleksander.

Literacy links

• Credit card, annual percentage rate (APR), minimum repayment, repayment period, store card, debit card

Numeracy links

• Using an online calculator to generate outputs • Analysing interest rate costs • Evaluating repayment periods

Cross-curricular links • • • •

Business Studies: Costs of finance Maths: Compound interest Accounting: Creditors Economics: Factors of production, capital Credit card: A small plastic card issued by a financial services institution that allows the holder to purchase goods or services on credit.

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Chapter 6

It is a form of borrowing: If Aleksander takes a credit card from his bank and uses it to book a flight, he will owe that money to the bank until he pays it back. It incurs an interest rate: In order to have access to that money, the bank will charge an interest rate on borrowed funds. If Aleksander pays off the full bill every single month, he won’t incur any credit card interest at all. The government charges stamp duty on holding a credit card: As soon as Aleksander signs up for a credit card, the government will require the bank to take a small annual stamp duty fee directly from Aleksander’s credit card account. A statement of account will be created: Aleksander will be able to log in to his account online and see what he has spent money on, how much he has spent, when repayments are due and other information. A credit limit will be imposed: Aleksander will be granted a maximum amount that he can borrow according to his ability to repay. If he wants to increase the credit limit in the future, he will need to write to the bank and demonstrate a capability to borrow as well as repay more. Some cards offer additional benefits: Depending on the card that Aleksander chooses, he could also avail of free travel insurance, access to airport lounges and more.

How do I get access to short-term cash?

Characteristics of a credit card

Activity 6.1 Answer the following questions. (a) What is a credit card? (b) Give two examples of credit cards available in Ireland. (c) List six characteristics of credit cards.

How does Aleksander choose the best credit card for him? Aleksander visits the Competition and Consumer Protection Commission (CCPC) website and searches for the credit card comparison tool. He collects the following information. Provider

Product

APR charged on purchases

Introductory rate on balance transferred

Skellig Bank

POINT Visa Credit Card

13.8%

None

Innisfree Bank

Purple MasterCard

16.1%

0% for 12 months

Bere Bank

Silver Visa Card

17%

3.83% for 12 months from account opening

Valentia Bank

Dolphin Credit Card

18.25%

0% for 6 months

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Aleksander considers his options by asking the following questions: Annual percentage rate (APR): Does he want to choose a card with his existing bank? The interest rate charged on If Aleksander is already a customer of a bank and has a current purchases. Specifically, it is an account, he might want to keep everything together in the annualised rate that considers same institution. all the costs involved with your Does he ask about a specific card offering? If Aleksander credit card, including interest, has come across a card offering on his social media feed or stamp duty and any other regular on television, he may want to check that out first and then charges that may apply. compare it to others. Is Aleksander looking for the cheapest interest rate in the market? If Aleksander wants to pay the least amount of interest, he could select the options with the lowest APR and then pick out the best one. Does he have a balance (i.e. an amount of debt unpaid on another credit card) that he is transferring and wants a good introductory offer? If Aleksander already has a balance from another credit card, then he could look for an option that gives him a zero or low-interest cost on the balance for a period of time.

Example Choose the most appropriate option from the table below for the following people to investigate further. (a) Customer 1 has an account at Inch Bank and wants to apply for a credit card at her institution. (b) Customer 2 saw the Points+ Credit Card advertised on TV last night and wants to look into it in more detail. (c) Customer 3 wants the lowest interest rate on any future purchases he might need to make. (d) Customer 4 has a balance of €2,000 and wants to transfer it to a new card at the lowest interest rate for the longest time possible. Provider

Product

APR charged on purchases

Introductory rate on balance transferred

Skellig Bank

Points+ Credit Card

20.6%

0% for 2 months

Innisfree Bank

Silver Visa Card

17%

3.83% for 12 months from account opening

Bere Bank

Super Duper Silver Credit Card

19.6%

0% for 7 months

Valentia Bank

Dolphin Card

20.6%

0% for 6 months

Inch Bank

Our Credit Card

18.25%

0% for 6 months

Solutions: (a) Customer 1 might check out the Our Credit Card because she already has an account with Inch Bank. (Note: Customer 1 needs to check out other offers too, as she may be missing out on a better deal in another bank by simply looking for convenience.) (b) Customer 2 could look up the Points+ Credit Card. (Note: Customer 2 needs to read the card’s terms and conditions thoroughly before deciding.) (c) Customer 3 should choose the Innisfree Bank Silver Visa Card, as it has the lowest APR on the list at 17%. (Note: Customer 3 should click on the filter button in the ‘APR charged on purchases’ column on the CCPC website to find the lowest APR in the entire list.) (d) Customer 4 should examine the Bere Bank Super Duper Silver Credit Card, as it has a 0% interest rate on a balance transferred for the longest period (i.e. seven months). (Note: Customer 4 should click on the filter button in the ‘Introductory rate on balance transferred’ column on the CCPC website to find the best balance transfer offer in the list.)

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Activity 6.2 Visit the CCPC’s website and compare the credit card offers today to those set out on page 46.

Treating a credit card balance like extra cash If Aleksander arrives in Berlin and uses his credit card as if he owned Minimum repayment: The the money as opposed to having borrowed it, he could quickly rack smallest amount of money that up a serious bill. The interest rates on credit cards can be very high, you are required to pay to your as you’ve already seen. If Aleksander is careless about his spending, credit card provider each month. he could owe a huge amount of interest. Repayment period: The time For example, let’s say that Aleksander splashes out and ends up with between the first payment on a €5,000 of credit card debt. He pays the minimum repayment of €100 per form of borrowing and when it month and has an interest rate of 20%. He then uses the ‘clearing your is completely paid off. credit card calculator’ on the CCPC website to see how long it would take to pay off the entire balance. Aleksander is shocked to discover that it would take nine years and one month to pay off his debt. However, as he reads down to the end of the page, it gets worse!

Please note: This calculator shows the potential saving you could make over a defined period of time if you switch to the chosen credit card and stop using your card completely. The numbers provided by the clearing your credit card calculator are estimates and can vary depending on factors not included in the calculations above. You should always check with individual providers before selecting a financial product.

Chapter 6

Let’s go back to Aleksander’s scenario and consider what, if anything, could go wrong for him.

How do I get access to short-term cash?

What could go wrong for Aleksander?

In other words, he would have to stop using his credit card completely in order to make this happen. As a result, he would be right back at the beginning, as he still wouldn’t have access to any short-term cash in the event of an emergency and is saddled with a decade of debt. Next, Aleksander uses his smartphone calculator to work out that: Nine years and one month is 109 months. €100 per month multiplied by 109 months equals €10,900. That means that he would pay €5,900 in interest payments over that timeframe – double the amount that he originally borrowed!

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Activity 6.3 Using an online minimum repayment calculator, find out how long it would take the following customers to pay their entire credit card debt, assuming they stop using it from now on. Credit card debt

Minimum monthly repayment

APR

€5,000

€100

€15,000

€250

12%

€3,584

€50

13%

€4,377

€75

9.5%

Length of time until the full debt is repaid

Spending on a store card to get a discount and forgetting to pay off the balance Aleksander is in a grocery store and when he arrives at the counter, the shop assistant asks him if he would like to sign up for a store card to get a discount of 15% on his shopping bill. Store card: A credit card given out by a retail store (rather than a bank or financial institution).

Aleksander figures that this must be a good deal, so he doesn’t read the small print and agrees right away. In fact, the shop assistant tells him, he will get extra discounts in the future if he uses the card in the shop for his purchases. Over the next month, Aleksander remembers to bring the card every time he goes to the shop. He has spent about €250 on groceries over that time, but he forgets to pay it off and to use it again. The shop sends him letters with the bill and he thinks, ‘I’ll open it tomorrow, when I get paid.’ When he eventually opens it two months later, he sees that the bill is much higher than he thought. Next, he reads the small print and sees that the interest rate on the card is 31%! Aleksander pays the money and cancels the card, but he can’t go to a concert with his friend at the weekend because he is now left with just enough to live on for the week.

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Using a credit card to withdraw money

Debit card Later, Aleksander is telling his friend David about his research on credit cards. David is confused and asks, ‘Why don’t you just use a debit card?’

Chapter 6

How do I get access to short-term cash?

Aleksander is at the ATM one day and tries to withdraw €75 to buy some books for college, but he has insufficient funds. He knows that he is going to get paid next week from his part-time job, but rather than wait until then, he would rather get the money now because it’s inconvenient to walk back to the ATM again. He uses his credit card to take out the money instead. After all, if he clears his bill completely, then he won’t have to pay any interest at all, right? Wrong! Many credit card companies charge an even higher rate of interest on cash withdrawals starting immediately after the cash is withdrawn. If Aleksander does this mindlessly, then he could end up paying a lot of interest rather than simply waiting until he has the money in his account.

Debit card: A card that enables the holder to transfer money electronically from the balance in their bank account when making a purchase.

There are some key differences between a credit card and a debit card: In order to use a debit card, you need to have enough money in your bank account to cover the expenditure. In the case of a credit card, you can borrow money on top of what you have in your account. In the case of a debit card, the money is transferred from the current account holder’s bank account to the retailer’s bank account. In the case of a credit card, the money is transferred from the credit card company’s account to the retailer’s bank account.

Some final considerations Aleksander’s other friend Mary then tells him that she also got a credit card last year before going travelling and got access to a variety of benefits. For example, she got travel insurance, purchase protection, free flights, discounts on eating out in restaurants, etc. She also mentions that she felt safer with a card rather than a lot of cash in case she lost some money or any got stolen along the way. Also, she could use her card in different countries while she was travelling. In other words, she could use the card to buy goods and services, so she didn’t need to get cash in other currencies. (See Chapter 5 for more on foreign exchange.) After all this research and these conversations, Aleksander can now make an informed decision. Best of luck with your summer in Berlin, Aleksander!

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Career spotlight Francis Carter, CFA, Head of Legal Did you study law or finance first? My background before moving into the world of finance was in law, having graduated from NUI Galway. After qualifying as a solicitor, I gained a Postgraduate Diploma in Applied Finance Law from the Law Society of Ireland. I am qualified to practise law in Ireland, England, Wales and the State of New York. I worked for and achieved my CFA® charter after that. I have worked in Galway, Toronto, Paris and Dublin.

What do you do in your current job? I manage all the legal issues of the bank’s business. This includes giving legal advice on everything that the business does, and I work closely with senior people right across the company. In particular, I am in constant communication with the traders and funding teams in our company. I ensure that we’re aware of and comply with all the legal rules in relation to the business. I also lead negotiations for a team based in Paris that engages in financing transactions for the business.

What has completing the CFA charter meant for you? Becoming a CFA Charterholder has increased my finance-related ‘real world’ skills. My role requires me to examine complex financial issues from a legal point of view and the knowledge gained through the CFA Program greatly assists me in doing my job. The qualification enhanced my reputation as a valuable member of the management team and uniquely positions me to better serve the interests of the business while at the same time reducing its exposure to certain risks. All this combined has made my work more rewarding.

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End-of-chapter exercises 1 Define the following terms: (a) Credit card (b) Annual percentage rate (APR)

Chapter summary

• Withdraw

3 Outline four characteristics of a credit card. 4 What is one difference between a debit card and a credit card? 5 Imagine you have a credit card balance of €1,500. Your current minimum monthly repayments are €50 and the APR is 22.4%. Using the CCPC’s clearing your credit card calculator online, determine the following: (a) How long it would take to pay off the entire balance (b) The amount of interest you would pay over that timeframe (c) The amount of interest, as a percentage of the borrowed amount, you would pay over that timeframe 6 Write this table in your copybook and fill in the correct numbers in the last column using the Clearing Your Credit Card Calculator on the ConsumerHelp.ie website. Credit card debt

Minimum monthly repayment

APR

€5,500

€40

13%

€14,300

€50

€53,384

€500

20%

€377

€20

19.5%

Chapter 6

2 Create a crossword (complete with clues) using the following words: • APR • Debit • Percentage • Balance • Interest • Purchases • Credit • Minimum • Repayment

How do I get access to short-term cash?

Length of time until the full debt is repaid

JOURNAL QUESTION

You hear somebody say that they are going to spend €1,500 on their credit card for a week’s holiday. What is your reaction?

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Chapter

How can I retire comfortably?

Learning objective

• Understand how pensions are funded and what underpins the amount that somebody receives in their pension.

Learning outcomes

• Analyse how much the government spends on pensions. • Use the Pensions Authority online pension calculator. • Understand how tax relief works. • Trace the path between monthly payments in today and monthly payments out at retirement.

Literacy links

• Pension, occupational pension, Pay Related Social Insurance (PRSI), tax relief, Personal Retirement Savings Account (PRSA)

Numeracy links

• Salary and tax calculations using the Pensions Authority online pension calculator

Cross-curricular links

• Business Studies: Human resource management • Maths: Calculating percentages to make decisions • Economics: Government spending

Let’s set the scene Sarah has just started her first job at the age of 22. After four years of studying finance in college, she is working in a large company with lots of exciting prospects for the future. The company is even going to pay for her to take the professional accounting exams.

Starting a pension Sarah’s starting salary is €28,000. This works out at €2,000 per month after tax. Sarah had a part-time job during her secondary school and university years. She always had to ask her parents for money to buy books for studying, when she got insured on their car, etc. Therefore, this is a big jump. Financial independence at last! She starts to daydream about all the things she can spend her money on. She has never been to America and it would be great to see New York … a new wardrobe of the clothes she couldn’t afford before … bringing her little sister out for breakfast every weekend … During her first week in the new job, Sarah has a meeting with Jack, a staff member in the human resources (HR) department. HR is responsible for hiring, firing and taking care of all aspects related to the company’s employees. Jack talks to her about starting an occupational pension. Pension: A regular payment made during a person’s retirement from an investment fund that they and/or their employer has contributed to during their working life. Occupational pension: A pension provided by an employer.

‘Is he serious?’ Sarah thinks. ‘A pension? I’m only 22! And it’s hardly time to start thinking about retiring during the first week of my first proper job … is it?’

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State pension Activity 7.1 (a) Check out the retirement ages (i.e. when people receive their pension from the government) in different countries in the graph below. At what age do people in the following countries become eligible for their state pension? (i) Portugal (PT) (iii) Estonia (EE) (v) Norway (NO) (vii) Germany (DE) (ii) Slovenia (SL) (iv) Ireland (IE) (vi) Greece (EL) 57

69+

FI*

NO*

SE*

AU 55

*Lower age limit of flexible retirement age

Men Women

How can I retire comfortably?

Chapter 7

69+

Decided new retirement age Indexed to life expectancy

Source: Finnish Centre for Pensions (b) What age would you like to retire at? How do you think your life would be different from life before retirement?

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Sarah asks Jack, ‘Doesn’t the government give everybody a pension anyway?’ Jack explains that the government offers a contributory pension to people who contribute towards it. Sarah is confused. She says, ‘I knew that I would have to pay tax, but not pay into a pension too.’ Jack tells her that’s what her PRSI payments every week are for. Salary: Less: Tax Take-home pay:

Pay Related Social Insurance (PRSI): The main source of funding for social welfare payments, which is collected from employees through tax based on the amount of their pay.

€28,008 € 4,005 €24,003

The difference between her approximately €28,000 salary per year and the actual amount of monthly take-home pay she gets (approximately €4,000 less) takes PRSI into consideration. ‘Brilliant!’ Sarah thinks. ‘If my taxes are putting money into some sort of a pension, then I don’t have to do anything more. Empire State Building, here I come!’ Jack then asks her if she knows how much the state pension is and at what age it starts. Sarah thinks that it must be at least as much as what she is earning now and guesses that it starts at age 65. Jack says, ‘It’s approximately €13,000 per year. Also, you must make 520 PRSI contributions before you can receive that. And given your age, the state retirement age could be 68 for you – and that could change depending on what governments decide in the future. Therefore, not everybody gets it.’

Activity 7.2 Follow these steps to find out how much the government currently spends on pensions. • Visit the Where Your Money Goes website. • Click on the ‘Social Protection’ button in the ‘Total Expenditure’ figures. • Click on the ‘Pensions’ section of the bar chart. • Find the ‘State pension (contributory)’ section of the next bar chart – this is how much the government currently spends on pensions. (You may need to find these figures for the previous year, depending on when the revised estimates are published.) Sarah’s jaw drops. ‘Only €13,000 per year? That’s less than half of my current salary!’

Pension: €13,000 × 100 = 46.4% Annual salary: €28,000

Activity 7.3 Use the Central Statistics Office website to find the average annual salary in Ireland today. Compare it to these figures: ‘The average annual earnings increased by 3.6% to €40,283 in 2019, from €38,871 in 2018. This compares to an annual increase of 3.3% in 2018 from €37,637 in 2017.’

€42k €40k €38k €36k

20 19

20 17 20 18

20 16

20 15

20 14

€34k

Source: Central Statistics Office

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Jack then shows Sarah how the Irish pension system ranks internationally in this bar chart.

9.4 9.3 8.4 6.9 6.9 6.8 6.7 3.8 2.0

13.4

21.5 19.4 18.4

35.5

49.6

Source: OECD

Activity 7.4 Use the chart above to answer the following questions. (a) Where is pension poverty most prevalent? (b) Where is pension poverty least prevalent? (c) From the data presented, which continent has the lowest prevalence of pension poverty? (d) How does Irish pension poverty compare to other countries in Europe? (e) How does Irish pension poverty compare to countries in Asia? (f) What countries have lower pension poverty than Ireland? (g) What countries have pension poverty at more than double Ireland’s rate?

How can I retire comfortably?

*Income poverty refers to income below half the national median equivalised household income

South Korea Australia US Japan Turkey UK Germany Italy Poland Ireland Greece Spain Canada France Netherlands

Chapter 7

Where pension poverty is the most prevalent – percentage of people aged 65+ living in relative income poverty in selected OECD countries, 2016*

Activity 7.5 Write a short report discussing the state pension for a country other than Ireland. Use the comparative tables on the Mutual Information System on Social Protection (MISSOC) website to help your research.

Using an online pension calculator Let’s go back to Sarah. While Sarah is just 22 right now and is earning a starting salary, she would like to think that she could retire at 65 and have at least two-thirds (66%) of what she is earning now. Jack tells her that she can work out how much she would need to put away each month in order to achieve that by using the Pensions Authority’s online pension calculator. The Pensions Authority is the government body set up in Ireland to regulate pensions, advise the government on its policy and inform people about everything related to pensions. They log on to the calculator on the Pensions Authority website and put in the following information: Sarah’s age Her current annual gross salary Her intended retirement age Her target pension as a percentage of her pre-retirement salary (in other words, this is how much of her current salary she would like to receive in retirement) Whether or not she is currently in a pension scheme.

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After they hit the calculate button, they get the following information: How your annual target pension is made up

Your pension from state retirement age (currently this starts at age 66)

Projected pension from your current pension arrangement

€0 pa

Current state pension

€12,912 pa

Projected retirement pension

€12,912 pa

Projected pension shortfall to be funded

€5,568 pa

Total target pension in retirement

€18,480 pa

*pa = per annum (per year) Sarah feels like crying! She would have to save enough in her pension pot to generate a pension income of €5,568 every year just to be able to live on two-thirds of her current salary. At retirement there are a number of ways to take those benefits, Jack says, but that’s a decision Sarah would need to make then. However, Jack then gives Sarah some good news: the government will give her some money back in the form of tax relief based on every single pension contribution that she makes. Jack explains that the Irish government collects tax on her salary every month. Tax relief: The However, when she puts the after-tax money into her pension, the government puts the cancellation of tax that they collected from her directly into her pension. Therefore, she doesn’t get the a proportion tax relief money back into her bank account, but rather into her pension. of income tax ‘Could you explain this in numbers?’ Sarah asks. normally due on ‘Certainly,’ says Jack, who works out from the website how much Sarah needs to earned income. contribute to give her a pension of 65% of her income, including the state pension. He says, ‘You need to pay €278 a month, but because of tax relief, it’s really only €222 a month.’ The age you start your pension contributions

Yearly contributions as % of salary

11.9% pa

Yearly contributions

€3,332 pa

Gross per month

€278

Less tax relief

(€56)

Net contributions per month

€222

Salary: Less: Tax relief Take-home pay:

€278 € 56 €222

‘So that means that if I want to put €278 into my pension, I have to put in only €222 of my own take-home pay?’ says Sarah. ‘Yes,’ says Jack, ‘but it gets better. The more you earn, the higher the tax that you pay. Therefore, if you’re paying more tax on a higher salary in the future and put money into your pension, the government gives your pension the money back that you’ve paid in tax on that contribution, up to certain limits.’ Sarah thinks this actually sounds good. In fact, it’s probably a good thing that the government puts something in place for people to have money to live on after they’ve finished their time in the workforce. ‘It actually gets even better,’ adds Jack. ‘As your employer, we are offering to pay a certain percentage of your salary into your pension scheme if you agree to match it. Not every employer does this, but we take good care of our staff in this company, so it’s a bonus we’re willing to offer you right away. ‘For example, based on your salary today and the extra benefit we’re willing to offer you, we will put €130 into your pension each month if you agree to match it (in other words, you also put in €130). If you then put in an extra contribution of €22 (called an Additional Voluntary Contribution, or AVC), then you will have received your goal (i.e. €130 + €130 + €17 = €277, which is very close to €278). The overall cost to you of making the €147 contribution is actually just €118 after tax relief and you get the €130 contribution from us for free!

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The age that you start your pension contributions

Yearly as % of salary

11.9% pa

14% pa

16.8% pa

20.7% pa

Yearly contributions

€3,332 pa

€3,920 pa

€4,704 pa

€5,796 pa

Gross per month

€278

€327

€392

€483

Less tax relief

(€56)

(€65)

(€78)

(€93)

Net contributions per month

€222

€261

€314

€390

How can I retire comfortably? Chapter 7

‘It’s worth pointing out again that when your income is higher, you will be able to avail of an even greater tax relief when you fall into the higher tax bracket.’ Sarah quickly asks, ‘If I don’t put any money into my pension, then will you still put in that certain percentage?’ Jack smiles and politely says, ‘No, we won’t. If you’re not committed to your own welfare after retirement, then we won’t be either.’ Sarah is really torn! On one hand, she wants to be able to spend her money on whatever she wants today. On the other hand, if she puts money into her pension now, she will get extra money from the government and from her employer. She’s tempted to wait for a few years, so she asks Jack, ‘If I enjoy my money for a little while first and then start a pension in about 10 years, would that be a good compromise?’ Jack goes back to the Pensions Authority online pension calculator and shows her what would happen then:

If Sarah started putting her money into a pension at age 32, she would have to save €314 per month (including the tax relief) compared to €222 per month if she started her pension at age 22. Jack says, ‘When you’re 32, you might want to buy a house, have children or do other things. You would have lost all the tax relief available from the government and the extra money that we’re offering you for a full 10 years. It’s completely up to you, but it’s important that you think about all these things.’ Sarah does take the time to think it through. If she doesn’t start a pension or even puts it off, she won’t get the extra government money and she won’t get the extra 5% in company contributions. She would probably start to worry about all this at some stage in the future too. ‘Okay,’ Sarah says. ‘Let’s do it!’ However, Sarah has one last question for Jack. ‘Where can you go to ask questions about pensions if you’re unsure about any of this?’ Jack directs her back to the Pensions Authority website, as the site is easy to navigate, simple to read and is available for everybody to ask any question, as basic or as complicated as they like. It can also be tailored to your own situation by answering a few questions about yourself from the website’s dropdown menus on the home page, including what stage in life you’re at, your work situation and whether or not you already have a pension. Jack tells her that he has one last point of his own. ‘If you want to add more money into the pension above what we have talked about today, then you certainly can and the government will give you more tax relief up to a certain limit. That’s called Additional Voluntary Contributions because it’s extra money, you’re volunteering to do it and there is more going into your pension fund. Just a thought, Sarah!’ Transition Year Finance

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PRSAs Later, that week, Sarah meets her friend Mairead, who works for herself (i.e. she is self-employed), for coffee. She tells her about the conversation that she had with Jack. She asks Mairead what she does about her pension. After all, if she doesn’t work for a company, then how could she have an occupational pension? Mairead says that she has a personal pension called a PRSA. This means that she can put money into it and get tax relief in the very same way that Sarah does. The only difference is that she doesn’t have an employer who will pay an extra 5%. Therefore, anybody in the country can get a pension. It doesn’t matter if they work for themselves, work in a company, don’t have a paid job or anything else. Personal Retirement Savings Account (PRSA): A pension designed for self-employed people, unemployed people, homemakers, carers and any employee who doesn’t contribute to an occupational pension scheme.

Mairead says, ‘I learned all about PRSAs on the—’ Sarah interrupts and finishes sentence for her: ‘On the Pensions Authority website? That’s where all the information seems to be!’ Best wishes with your pension, Sarah!

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Career spotlight Noel Friel, CFA, Chief Investment Officer What did you do right after college? After my degree in Management Science and Information Systems Studies from Trinity College Dublin, I chose to do a graduate programme at a consultancy firm in Dublin. This programme allowed recently graduated people to do a six-month placement in each of the firm’s core business areas before choosing one. My first placement was in the pensions department. Next, I moved to the investments department, which I found hugely interesting. In fact, when the time came for my next move, I chose to exit the graduate programme and remain in investments.

What do you do in your current job? My current role involves working with two sets of trustees for two pension funds on investment strategy. This is mainly deciding how much to invest in various asset classes, such as equities, bonds, infrastructure, property and hedge funds, in order to achieve a certain level of investment return for a given level of risk. I make a lot of presentations about economic, pension and investment topics. I sit on the board of a number of other property, infrastructure and forestry funds too.

Why did you choose to complete the CFA® charter? From an early stage in my career, there was really no question for me as to what course I needed to study to give myself the best career opportunities. I knew I needed a globally recognised professional qualification, so the CFA charter was the only one for me. While the exams weren’t easy, it was a very worthwhile exercise and has been a tremendous asset in my career. The CFA Program helped me to bridge the gap between textbooks and the real world of finance. It has brought me up to date on the fast-paced, ever-changing finance industry and it really helped me to develop my ability to analyse investments.

What do you hope CFA Society Ireland members get from your work with the society? I am deeply involved with CFA Society Ireland and especially with regard to overall strategy. I also help with planning our ongoing events. We try to ensure that our events are practical and useful to members. Constant learning is a crucial area in finance and in CFA Institute. We hope that these events help our members in this regard. Constant learning is also an essential ingredient in your future success. We hope that the events we run help our members to widen their investment knowledge and open their minds to different points of view from different people.

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End-of-chapter exercises

Chaptersummary summary Chapter

Chapter 7

How can I retire comfortably?

1 Define the following terms: (a) Pension (b) Occupational pension (c) Tax relief (d) PRSI (e) PRSA 2 Create a crossword (complete with clues) using the following words: • Contributions • Matching • Pension • Employer • Occupational • Tax relief

• Shortfall • State

3 Research what the contributory state pension is in Ireland today and at what age it’s paid out. 4 Research how much the government spent on pensions last year. The Where Your Money Goes website can be very useful for this. 5 Research pension poverty in the world today. 6 Compare the Irish state pension today to that of the EU average. 7 Advise each of the following people on how much they need to put into their pension out of their take-home pay starting today if they are to reach their goal. Use the Pensions Authority online pensions calculator. Person 1

Person 2

Person 3

Person 4

€23,000

€35,000

€55,000

€100,000

Age

Intended retirement age

Target pension as a % of pre-retirement salary

50%

60%

35%

45%

Current salary

8 In each case in question 7, how much tax relief would each person’s pension receive each month? 9 In each case in question 7, how much more would each person have to personally contribute if their employer paid 3% of their gross salary into the pension and they wanted to reach the goal outlined in the table? 10 In each case in question 7, how much more would each person have to contribute if they waited five more years to begin contributing to an occupational pension?

JOURNAL QUESTION

What percentage of your first month’s salary of a job that you take after finishing your education will you put into your pension? Why?

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Chapter

How can I get a loan to buy a house?

Learning objective

• Understand the process that an applicant for a mortgage needs to go through and the reasons for the bank’s decision.

Learning outcomes

• Interpret the role that the deposit, loan-to-value and loan-to-income details have in calculating a mortgage. • Appraise the impact of the length of the loan on the total amount to be repaid. • Contrast the risks and responsibilities of fixed and variable rate mortgage-holders. • Use an online mortgage calculator. • Establish the criteria that a bank looks for when issuing a mortgage. • Outline the steps required for a person or couple who are having difficulty repaying their mortgage.

Literacy links

• Mortgage, loan-to-value (LTV) ratio, deposit, loan-to-income (LTI) ratio, fixed rate mortgage, variable rate mortgage, Mortgage Arrears Resolution Process (MARP)

Numeracy links

Let’s set the scene Danny and Emer want to apply for a mortgage. They’re married and have been renting for five years, since they started living together. Over those five years, they saved €60,000.

Loan-to-value ratio Mortgage: A loan to buy a house. It is an amount that a bank loans to a person or group of people and is repaid back over the life of the loan with interest.

Danny and Emer’s savings breaks down to €30,000 each … Which breaks down to €6,000 each per year …. Which breaks down to €115.38 each per week (for the past five years). They have absolutely no idea where to start, so they search online for some basic information. The first thing they come across is loan-to-value (LTV) ratio. Loan-to-value (LTV) ratio: This ratio is what banks and other lenders use to express the ratio of a loan to the value of an asset purchased.

• Calculating savings, income, loan amounts and repayments

Cross-curricular links

• Business Studies: Managing a household budget • Maths: Household income, interest repayments • Economics: Land factor of production, monetary policy, demand and supply, price, banking sector

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For example, let’s say that somebody wants to buy a house for €100,000. They need to borrow €80,000, as they have €20,000 in savings. The loan-to-value ratio is 80%, as the loan is €80,000 in comparison to the value of the property, which is €100,000. The bank asks for this information because if they were to lend a customer the entire value of the house, they would be taking on a lot of risk. Further, they would be right to worry that if the customer doesn’t have any money at all to put into the house, they may be in danger of not repaying their loan either. By asking a customer to give them the information about the loan-to-value ratio, it gives the bank a good insight into the risk they’re taking with a customer.

Activity 8.1 Copy this table into your copybook and fill in the missing sections. Customer no.

Loan (€)

Value (€)

€100,000

€180,000

€100,000

€60,000

€89,000

Loan-to-value ratio (%) 90%

€80,000 47%

€120,000

78%

€800,000

89%

Danny and Emer would ideally like to borrow at an LTV ratio of 80%. Therefore, they would like to borrow €240,000 for a house with their €60,000 savings. These savings would thus become a deposit. In other words, they would pay the €60,000 as the first payment when buying a house and then pay back the rest to the bank over time. Deposit: A sum payable as a first instalment on the purchase of an asset.

Loan-to-income ratio However, Danny and Emer wonder if the bank will lend them this money. Loan-to-income (LTI) ratio: This ratio is what banks and other lenders use to express the ratio of a loan to the income earned by the person or people who are applying for the loan.

Banks ask for the information about their income and the amount they want to borrow because if a customer is using a lot of their income to pay back their mortgage, they won’t be able to afford food, clothes, getting their hair cut, going to the doctor, entertainment or other things that a household spends money on. Therefore, the bank needs to be realistic about how much a customer can pay back over time without putting the customer under pressure, as otherwise the customer might not be able to repay their loan, which puts the bank at risk. Danny and Emer find out that the bank will lend them 3.5 times their earnings. They wonder if that is before or after tax, so they research that too. It is their income before tax, i.e. their gross income. Danny is a teacher earning €34,929 per year. Emer is a nurse earning €32,426 per year. Combined, this is €67,355. If they multiply this by 3.5, this comes to €235,742.50.

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Gather a selection of images from Instagram or another photo-sharing app of your ideal house in Ireland. Store them on a Padlet board. Next, visit the Daft website to find a similar house, i.e. number of bathrooms, bedrooms, location, etc. Make a note of the asking price for that house. Consider whether or not Danny and Emer could afford to buy it during the rest of this chapter.

Working out how much a bank will lend to you On Thursday afternoon at 4:30 p.m., Danny is finished in school and Emer has yet to begin her night shift, so they meet Angela, an independent financial advisor. Angela takes them through the key things they need to be aware of, i.e. the deposit, the LTV and the 3.5 times LTI. They’re glad they did their homework beforehand, as sometimes all these different terms can be confusing. The first thing Angela asks is the value of the home they would like to buy, the amount they would need to borrow and how many years they want to pay back the loan. Danny says they want to buy a €300,000 home and they would need to borrow €240,000 in order to do that. Emer says that they want to pay the loan back over the Mortgage calculator longest period of time possible, as they know that having children can be expensive. If they could pay back the 1 2 3 Mortage Applicants Results mortgage over as long a period as possible, they would have more breathing room in their day-to-day spending. Product type First time buyer Trading up Switch Angela puts all this data into the Mortgages.ie online mortgage calculator. Investment property Next, Angela asks about their income and their dates of Value of new home birth and puts this information into the calculator too. € 300,000 Emer asks her why their dates of birth matter and Angela tells her that the bank will only give a mortgage term up to Amount to borrow when the older member of the couple is 70. In other words, € 240,000 it’s unrealistic that either Danny or Emer will be in full-time Mortgage term paid employment when they’re 70. Therefore, the longest 35 Years term of a mortgage that they can get is until the older of the two is 70. Next Back

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How can I get a loan to buy a house?

Activity 8.2

Chapter 8

This presents a problem because they’re €5,000 short. Emer also mentions that they will need some money for furniture, etc., so they can’t use every cent of their savings. They’re feeling a little down in the dumps now. Should they decrease the amount that they want to borrow? Should they save more money over the next year? Should they wait until they get a job promotion? They’re feeling frustrated because they have already been saving for five years now. They’ve also talked about having children soon and they don’t want to have to move to a new house in the middle of a pregnancy or when a baby is very young. Danny suggests that they make an appointment to see a financial advisor. Perhaps there is some information that they are missing or maybe they’re not asking all the right questions. Anyway, it can’t hurt to have a conversation with a person who talks to people all day long about mortgages.

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Remember! Remember the discussion about pensions in the last chapter? It would be too much to expect that somebody who isn’t in employment would be able to find the money to pay a mortgage then too. Danny is 31 and Emer is 29. Since Danny is older, the bank will subtract his age from 70: 70 years – 31 years = 39 years Therefore, this couple can get the maximum length of the bank’s mortgages, which is 35 years. Angela clicks ‘Next’ on the mortgage calculator and shows Danny and Emer the results. Bank One 3 Year Fixed

€832.48 monthly

2.3% interest rate

Bank Two 2 Year Fixed

€832.48 monthly

2.3% interest rate

Bank Three 2 Year Fixed

€832.48 monthly

2.3% interest rate

She explains the following: They can get a fixed rate or variable rate mortgage. Based on the results that have been generated on the calculator, they would need to pay back €832.48 every month for 35 years if they were to borrow this money.

Mortgage calculator ✓

Mortage

Applicants

Results

Application Joint

Single Applicant

Age next birthday

32 Years Annual income

Fixed rate mortgage: You can fix the rate of interest that you pay on a mortgage for a period of time so that you know exactly what you’re paying back. A bank will only allow you to do this for one year or a few years at a time. Variable rate mortgage: You will have to repay your mortgage at whatever interest rate the bank requires at the time. If the interest rate rises, you will have to pay more; if the interest rate falls, you will be asked to pay less. You take the risk of not knowing what will happen next month or next year.

€ 34,929 Applicant #2 Age next birthday

30 Years Annual income

€ 32,426 Back

Emer’s heart jumps. Maybe they were wrong when they worked this out at home. If they were to get a mortgage and buy the home of their dreams with €300,000, they would actually save hundreds of euro every month! If their rent is currently €1,500 per month and the mortgage would be €832.48 per month, then they would have €667.52 extra per month. That would be huge for them! Emer wonders if they can apply right away and is already thinking about who she will ask to her housewarming party. It’s as if Angela is reading her mind, because Angela then tells the couple that this isn’t quite as good as it looks. She clicks on the first option and shows them the information on the next screen. • • • •

Loan amount: €240,000 Total cost: €384,390 Total interest: €144,390 Property price: €300,000

• Loan-to-value ratio: 80% • Three years of €832.48 per month (2.3% interest rate) • 32 years of €922.97 per month (3.05% interest rate)

The mortgage interest rate would increase after the first three years and would go up by €90 per month. However, now it’s Danny’s turn to get a shock. He points to the screen and asks Angela if it’s true that they would end up paying €144,390 in interest – they would basically be paying back the entire loan and almost half again to the bank! That’s a lot of money!

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Angela says that his understanding is completely correct. After all, the bank is taking a big risk lending them a lot of money over such a long time. That’s how mortgages work. Also, of course, instead of renting (where you don’t own anything more with each new month’s rent), by paying back a mortgage, you get closer and closer every month to owning your home completely. Angela then tells them that they would pay back less interest if they were to repay the mortgage over a shorter period of time. Also, if they have already been paying higher rent, then it’s likely that they could afford to do this. She runs the calculator again with just 25 years of a term and finds the following results: 2.3% interest rate

In this case, they would be repaying a lot more money every month, but they would shave 10 years off their loan. Danny asks how much they would pay in interest in this case. • • • • • • •

Loan amount: €240,000 Total cost: €360,427 Total interest: €120,427 Property price: €300,000 Loan-to-value ratio: 80% Two years of €1,052.67 per month (2.3% interest rate) 23 years of €1,214.36 per month (3.7% interest rate)

Angela points out that the interest would cost €120,427 if they were to take this option. Therefore, they would save approximately €24,000 in interest and would have 10 fewer years of paying back this money. However, they would need to pay a lot more every month for the next 25 years.

Activity 8.3

How can I get a loan to buy a house?

€1,052.67 monthly

Chapter 8

Bank One 3 Year Fixed

Emer asks Angela to talk them through the details of one of the variable rate mortgages that are available. From the information below, find the following information for Emer. (a) How much would Emer and Danny pay every month at the beginning? (b) How long would this last? (c) What would the rate of repayment be after that time? (d) What would the interest rate be? (e) How much would Emer and Danny pay back in interest over the entire life of the loan? (f) How does the cashback benefit work? How much would Danny and Emer receive in cash? (g) How does this compare to the other options discussed at the meeting with Angela so far in terms of the following? • Monthly interest repayment • Fixed versus variable • Interest repayment over time • Cashback • Life of the loan Prima Bank discounted variable (2% cashback and rebate)

€1,201.50 monthly

• • • •

• Loan-to-value ratio: 80% • One year of €1,201.50 per month (3.5% interest rate) • 24 years of €1,264.59 per month (4% interest rate)

Loan amount: €240,000 Total cost: €378,620 Total interest: €138,620 Property price: €300,000

3.5% interest rate

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Danny and Emer agree that it makes sense to pay a higher amount of money for 25 years so that they can pay it off more quickly and save money on interest. Besides, they have been paying a higher rent all along anyway, so they may as well continue with this for now. Emer says that they don’t want to wait any more and asks Angela to get started with the application. Angela smiles as she says, ‘I love your enthusiasm, but I have to test what the bank is willing to lend you.’ Emer is confused. If they have already been paying rent of €1,500 every month and now they would have a mortgage that’s less than that, then surely the bank doesn’t need any more evidence than this? They have five years’ history of paying this rent. What more proof would the bank need? Danny asks Angela to explain what’s involved in this test. Angela points out that if either of them lost their job, decided to leave their job to take care of a child or an elderly relative or if either of them got sick, their ability to repay would be in serious trouble. The bank wants to protect them from that, so the bank will only lend them 3.5 times their gross salary. Ah, yes, Danny and Emer think, they remember coming across that in their research earlier. Emer starts to worry. She knew when she calculated this earlier with Danny that they didn’t have enough. What if Angela realises this and tells them to go home and come back when they have higher salaries? Angela then says she needs to open another calculator to work this out. As she turns to her screen, Emer looks at Danny and sees from the expression on his face that he’s worried too, but they both stay quiet and hope that Angela’s calculator comes up with a different figure from theirs (even though they know that’s not possible). Angela asks for their dates of birth and their salaries again, then asks them some other interesting questions. She asks if they work for the public sector (i.e. if the government pays their wages) or the private sector (i.e. if they work for a company that makes its money by selling to customers at a profit). They both tell Angela that they work for the public sector, as Danny is a teacher and Emer is a nurse. Emer asks what difference that makes and Angela explains that if you work in the public sector, you have more job security, as the government is far less likely to run out of money than a private company. ‘That’s interesting,’ says Emer. She hadn’t thought about that and it does make sense.

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Maximum mortgage

€235,000

Monthly payments from

€841

Emer’s heart sinks into her shoes. They can’t get it. What a disappointment. She feels like they made a mistake coming in to talk to Angela today. What was the point? They knew they didn’t have the 3.5 times salary figure. All it served to do was raise their hopes and now they have been dashed. Danny, on the other hand, quickly puts a question to Angela. He asks if there is any way that they can increase the amount that they could borrow, as he doesn’t think they can buy what they want to buy with that level of a mortgage. Angela asks if they have any other income. Danny mentions that he wrote a textbook and receives about €5,000 per year from it. Angela says that if he can prove that over several years, then they could possibly add this 3.5 times the amount to the mortgage. Emer quickly does the maths in her head: €5,000 × 3.5 = €17,500. This could make all the difference!

How can I get a loan to buy a house?

How much can I borrow? ✓

Info

Finances

Results

Number of dependants

0 Current monthly rental or mortage payments

€ 1,500 Current monthly savings

€ 1,000 Approximate number of months of savings that can be supported by bank statements

12 Total deposit / equity available

€ 60,000 Back

Transition Year Finance

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Chapter 8

Angela asks if they’re both in permanent employment and paid a salary through the Application Mortgage type school or hospital, and again they both nod First time buyer Joint Single Trading up in agreement. Angela tells them that it’s even Applicant Applicant #2 better if they are, as again, there is a lower Date of birth (DD/MM/YYYY) Date of birth (DD/MM/YYYY) risk that they could lose their jobs. 08/03/1988 26/04/1990 Emer begins to relax a little now, as maybe, Guaranteed annual income Guaranteed annual income just maybe, these two points could make (inlcuded guaranteed allowances) (inlcuded guaranteed allowances) a difference. € 32,426 € 34,929 Angela tells them that she has a few more non-guaranteed annual income non-guaranteed annual income questions. (bonuses, overtime, commision) (bonuses, overtime, commision) How many dependants do they € € have, i.e. is anybody depending Sector Sector on them to take care of them, like Public Public Private Private a child or a sibling with a severe Type Type disability? They both tell Angela that Permanent Permanent Contract Contract they don’t have any dependants. How much are they paying Status Status currently for their rent? Emer says, PAYE PAYE Self-employed Self-employed ‘€1,500 per month – but hopefully, Angela, not for much longer!’ How much are they currently saving every month? Danny tells Angela that they have worked really hard to save €6,000 per year each to build up the deposit. Therefore, that is €12,000 per year between them. That works out at €1,000 per month between them. How many months of their savings can be supported by bank statements? Danny tells her that she can have all five years (or 60 months) of evidence if she would like. What is the total deposit available? Emer reminds her that they have €60,000. ‘Great,’ says Angela. ‘Let me click “Next” and let’s see what we can do for you.’ Emer’s heart is thumping now, as she is so nervous. Whatever this calculator says will decide if she can start picking out baby names and the colours of new curtains and begin a new chapter of their lives. Angela turns her screen around and shows them the result:

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Emer then adds that she could take on overtime of €100 gross per week and this would work out as €5,200 per year. Angela says that would be helpful, but again, she needs to see evidence of it, so this could only be counted after some months.

Activity 8.4 Put all these details into the Mortgages.ie mortgage calculator and find out if the income from Danny’s textbook is enough to make the difference between whether they get the mortgage for the €240,000 or not. Angela then moves swiftly on to the next point. She says that the first step is for them to gather some paperwork together for her. She needs: • Three months of wage slips for both of them • One year of bank statements for both of them • Evidence and details of any other loans • A copy of their employment contract to prove that they are, in fact, in permanent employment. Angela tells them that the preparation for a mortgage can take some time, so they should start gathering everything right away and email it to her as soon as they can so that she can start working on the proposal. Emer asks her if she is sure they can get the amount of the mortgage that appeared on her screen. Angela tells her that it’s only a guideline. She needs to put the entire application together, and only when it’s all sent off will she get a final figure, so they need to get started right away.

Mortgage Arrears Resolution Process (MARP) Danny asks Angela one more question. ‘You mentioned earlier that one of us could get sick or else leave the workforce for a while to take care of a child or children. What if we do find it difficult to pay back the mortgage? What do we do then?’ Angela first reassures Danny that it’s a very good question and a mature thing to ask. After all, if this goes ahead, they’re signing up for a 25-year repayment plan. It’s a long time and lots can happen in life along the way. There is some regulation in place to deal with this. It’s called the Mortgage Arrears Resolution Process (MARP). Mortgage Arrears Resolution Process (MARP): A system that sets out rules of how the lender must deal with borrowers if they have difficulty paying their mortgage.

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Source: Citizens Information Angela thanks them both for their time and walks them to the door. On the way out, Emer tells Danny to start gathering those wage slips and bank statements right away when he goes home. As Emer drives to the hospital to begin her night shift, she suddenly thinks, ‘Would the house be big enough if we have twins?!’

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Chapter 8

Assistance from MABS As soon as you realise that you have a problem with mortgage arrears or other debt, you can start taking action to deal with it. The Money Advice and Budgeting Service (MABS) can help you to do this, either face to face or via the MABS helpline. As part of the Mortgage Arrears Resolution Process, your mortgage lender will ask you to document your financial situation on a Standard Financial Statement. MABS can help you to fill out this statement. In recent times, MABS has taken on a greater role in offering information, advice and assistance to borrowers in arrears. This role includes a Dedicated Mortgage Arrears service and a Court Mentor service for debtors faced with court proceedings. In addition, MABS is centrally involved in the Abhaile scheme for people who are in serious mortgage arrears and at risk of losing their home. This scheme provides a range of services to help you to deal with your situation, including financial advice, legal advice and insolvency advice. Read more on mabs.ie.

How can I get a loan to buy a house?

‘First,’ Angela says, ‘you need to communicate. Come in and talk to us. Next, we talk through your entire financial situation, just like we did today, so that we can get you back on track. After that, there is an assessment made to suggest the best way to move forward. Finally, we move on to a resolution. Perhaps we can extend the loan for longer, and just like you saw earlier, the repayment each month goes down. Perhaps there will be a different package we can switch you to so that it’s easier for you. Also, Danny, the Money Advice and Budgeting Service (MABS) is available to everybody in the country who may be experiencing any sort of money or budgeting problems.’

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Career spotlight Gearóid Casey, CFA, Principal, Credit and Markets How did your career in finance begin? I began my career with a graduate programme in a bank. This was my first taste of investing and I really enjoyed analysing various businesses and industries and learning how broader macro trends impacted the companies we were seeking to invest in. The nature of a graduate programme also means that new joiners benefit from a structured training programme, a lot of support from your manager or other team members and that you can build strong relationships with many other graduates at the same stage of their career.

What are the key things you need to have for your job? The key skills and attributes required for my job include a strong work ethic, organisation and communication skills as well as a curiosity as to how businesses operate. I find that my job is so much easier when I am genuinely interested in why a business should continue to be successful and in particular understanding the sustainability of its competitive position.

Apart from getting paid, in what other ways do you benefit from doing your job well? The rewards of the work include continuous learning, which I feel is very important, satisfaction after a good investment or trade idea and more generally being part of a successful team that continues to grow.

What have you got out of achieving the CFA® charter? The CFA qualification provided me with a solid foundation in finance; helped to develop my organisation and time management skills; and will continue to open doors further down the road in my career given that the qualification is recognised and respected globally.

What advice would you give to young people getting started? My advice to young investment professionals would be to build a strong work ethic, as this is necessary to succeed, continue to build your knowledge and, most importantly, aim to find a job you enjoy – if you do this, continued success and learning should come naturally.

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End-of-chapter exercises

2 Create a crossword (complete with clues) using the following words: • Assessment • Interest • Mortgage • Deposit • Loan-to-income • Principal • Fixed • Loan-to-value • Rates

(d) Loan-to-income • Repayment • Resolution • Variable

3 Copy this table into your copybook and fill in the missing sections. Customer no.

Loan (€)

Value (€)

€90,000

€120,000

Loan-to-value ratio (%)

€50,000

€60,000

€89,000

90%

€100,000 74%

€170,000

82%

€500,000

68%

€94,000

94%

4 If a bank will lend 3.5 times gross earnings, what is the maximum mortgage amount that each of the following applicants could potentially borrow? (d) Applicant 4: €450,000 gross earnings (a) Applicant 1: €70,000 gross earnings (e) Applicant 5: €320,000 gross earnings (b) Applicant 2: €156,000 gross earnings (c) Applicant 3: €230,000 gross earnings

How can I get a loan to buy a house?

Chapter 8

1 Define the following terms: (a) Mortgage (b) Deposit

Chapter summary

5 Calculate the maximum length of a mortgage (in years) that the following people could get based on their date of birth: (g) 5 November 1978 (d) 31 March 1986 (a) 15 May 1972 (e) 14 February 1990 (b) 15 January 1964 (f) 1 October 2000 (c) 24 September 1980 6 Distinguish between a fixed rate and a variable rate mortgage. 7 Using an online mortgage interest calculator, work out how much each of the following would pay back in interest (i.e. cost of credit) over the full life of the mortgage. (a) €100,000 at 3.5% over 30 years (d) €110,000 at 3.2% over 15 years (b) €250,000 at 4.5% over 20 years (e) €400,000 at 3.2% over 25 years (c) €150,000 at 2.3% over 10 years 8 Using the Canva website, create an infographic or flow chart documenting the steps that somebody could take if they get into trouble with their mortgage repayments.

JOURNAL QUESTION

Would you like to own your own house in the future? Why or why not?

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Chapter

How can I buy a house without buying a house?

Learning objective

• Understand how to identify a customer’s needs, spread money across different investments and gain access to the property asset class.

Learning outcomes

• Understand different elements of value. • Explain what a mutual fund is and what value it offers to investors. • Identify why investors seek to diversify. • Research fund information online. • Examine the fees and conditions of investing in a fund. • Describe the functions of a REIT. • Contrast the characteristics of a REIT to a mutual fund.

Literacy links

• Mutual fund, diversification, real estate investment trust (REIT)

Numeracy links • Evaluating returns

Cross-curricular links

• Business Studies: Understanding the reasons why customers buy • Maths: Comparing financial returns • Economics: Monopolistic competition

Let’s set the scene Paul has read all about the property asset class from Chapter 1. He likes the idea of buying a house, renting it out room by room and generating a profit for himself. In fact, how exciting would it be to buy houses across Europe? He would love to rent student accommodation to people studying in Paris, apartments to professionals in Rome, houses to young families in London and office units to start-ups in Berlin.

Mutual funds There is just one problem: Paul has only €3,000 to invest. He wouldn’t get much of a property for that. And besides, Paul is just one guy! How would he be able to manage it all? If somebody needed a new lightbulb in Berlin while he was renovating an apartment in London, he couldn’t just drop everything and go. Paul feels a little down in the dumps as his dream looks like it might stay that way – just a dream. If only he could invest together with other people. But where could he find them? People like Paul often come together to pool their money to invest. Specifically, Paul would like to put his money in a fund that invests in property. Mutual fund: A structure whereby several investors contribute money to invest in one or many asset classes. A money manager manages the fund for a fee. Diversification: The practice of spreading your investments around so that your risk of relying on only one type of asset is limited.

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In its simplest terms, a return is the money made or lost on an investment over some time period. For example, if Paul put his €3,000 on deposit and he earned 1% interest (i.e. if a cash deposit offers a return of 1% per year), then he would have €3,030 at the end of the year. However, the property asset class might offer a return of 8% per year, which means he would have €3,240 at the end of his first year of investment. Paul knows that he would have to take a lot more risk with property, as the price of houses may fall or he may not be able to find people who are willing to rent his property right away, but he also knows that this risk is in exchange for the potentially higher returns on offer, as per what you learned in Chapter 4. Provides access: He can get access to the property asset class through a fund with €3,000, which he couldn’t do if he tried to buy a property with that amount of money on his own. Saves time: Rather than wait until he has the money to buy and rent out properties himself, he can start investing right away through a fund. Also, he wouldn’t have to find the properties and the people to rent them. Further, he wouldn’t have to spend time on organising the paperwork or doing all the other administration. Paul is going to save a lot of time! Makes money: Paul believes that by investing €3,000 in a property fund, he should be able to make a profit in the long term, while acknowledging that there are always risks in investing. Reduces risk: If Paul can pool his money with other people, then if the investment goes down in value, the loss will be shared among everybody rather than just affecting Paul very badly on his own. Connects: Through this property fund, Paul can connect with other investors to put their money together and invest in some properties as a group. Reduces effort: In order to invest in this way, Paul has very little work to do. The fund will find the properties, the tenants and the other investors. Reduces cost: By sharing the costs of managing the fund with other people, Paul saves a lot of money in comparison to taking on the ownership and management of a property himself. Next, Paul looks for some property fund information and comes across the Irish Times Fund Lite website. On this site, he can find details relating to: Fund name: What the name of the fund is and the company that manages the money on behalf of investors. Fund return (over one month, three months, six months, one year, three years and five years): The fund return shows how much the fund’s value has risen or fallen over those timeframes. Transition Year Finance

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How can I buy a house without buying a house?

Remember!

Chapter 9

Paul considers what elements of value an opportunity like this gives him: Reduces anxiety: Rather than worry about buying a property, renting it out and managing it on his own, he would be much less anxious if he could invest in a fund that takes care of all the work and if he could invest with other people to share the costs of doing so. Attractiveness: He believes that the returns on offer from the property asset class are appealing.

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Activity 9.1 In a group of five people, examine the Irish Times Fund Lite website. Each student must copy this table into their copybook and fill it in with different fund performances so that the group has 25 different funds to compare. Property fund name

Management company

1-month return

1-year return

5-year return

(a) Which fund in your group has the highest one-month return? (b) Which fund in your group has the lowest five-year return? (c) How many management companies are included in your entire group’s analysis?

Activity 9.2 Paul needs your help! He would also like to consider investments outside Ireland. He needs sources of information from a company that he has heard about called Morningstar Ireland. Go to the Morningstar Ireland website and click the ‘Funds’ tab at the top of the page. In the ‘Morningstar Category’ dropdown menu, scroll down to select ‘Property – Direct Global’ (leave all the other boxes as ‘All’) to generate a list of funds that invest in property all over the world and gather as much information as you can for Paul.

Disadvantages of property mutual funds Paul has gathered quite a lot of information about property funds at this point. He now realises there are some disadvantages to investing in property mutual funds. Minimum investments: Some property mutual funds require investors to put in a minimum investment. For example, Paul might have to invest €10,000 upfront. As a result, Paul would either have to save more money or not invest at all. Minimum lock-up periods: Some property mutual funds will not allow Paul to take his money out for the first three years or else take out only a certain percentage. This worries Paul, as he may need the money for a different need or want at the time. High commissions: Some property mutual funds charge a high management fee. For example, Paul reads about one fund that costs 2.5% of the fund every year. That means that Paul would have to pay €3,000 × 2.5% = €75 per year in management fees. In four years, 10% of his initial investment would have disappeared in fees. At least 24 hours to get a valuation for his investment: If Paul wants to find out how his investment is performing, he will have to call the fund management company and wait at least 24 hours to be told how well or badly his fund is doing. While Paul didn’t find all these characteristics for each fund that he researched, he is concerned about these issues. He was hoping to find a property investment where there wouldn’t be a minimum investment, where he could get his money back at any time, with a low rate of commission and where he could check the value of his investment at any time.

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Chapter 9

Paul learns that a real estate investment trust (REIT) is listed and traded on an exchange in the same way as a stock. Therefore: Real estate investment trust (REIT): A fund The minimum investment that an investor can of property that lists and trades on a stock make is one share: Paul is delighted with this, as his exchange. €3,000 investment can buy several shares. REIT shares can be bought and sold at any time Market opening hours: during market opening hours: Paul is happy to hear Ireland and UK 8:30 a.m.–4:30 p.m. GMT this, as it means that he can put more money into 2:30 p.m.–9:00 p.m. GMT and take money out of a REIT investment at any time USA during a trading day. REIT commissions are usually 1% and lower: Paul is happy with this, as he still wants access to the property market but doesn’t want to pay high fees. REIT pricing is updated throughout the trading day: Paul is relieved to find out that he can search online for the price of his REIT investment at any time of the day and can find the information instantly.

How can I buy a house without buying a house?

Real estate investment trusts (REITs)

Activity 9.3 Paul needs your help again. Now that he has discovered REITs, he needs to find some information about which one to consider. He has heard about a website called Trustnet that has some useful data. Go to the Trustnet website and click the ‘Investments’ tab at the top of the page, then do the following: • Under the ‘Fund Universe’ dropdown menu on the ‘Price & Performance’ page, select ‘Investment Trusts’. • Under the ‘Asset Class’ dropdown menu, select ‘Property’. • Leave the ‘Sector’ and ‘Management Group’ dropdown menus at ‘All’. Next, you will see a table outlining the fund name, the asset class, the price of the fund, the yield and the one-year, three-year and five-year performances as well as the ongoing charges figure (OCF). Using the Canva website, create an infographic outlining this key information for five different REITs. Best of luck with your investments, Paul!

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Career spotlight Toni Guan, CFA, Senior Enterprise Risk Manager How did you start off in the investment industry? I was always passionate about a career in investment management, and after receiving a bachelor’s degree in Accounting and Finance, I began working in the fund management industry.

When did you decide to study for the CFA® exams? During this initial period, I soon came to realise that the CFA charter is one of the most recognisable and valued qualifications in the investment profession globally. I became a charterholder in 2011. I can safely say that the CFA Program has provided me with a solid foundation for my career development.

What do you think is important in the finance industry? Establishing an effective governance framework, promoting the right culture and embracing new technology are some of the key success factors in the finance industry. Anticipating regulatory changes and staying ahead of the curve will also help the business immensely.

Do you use what you learned during your studies in your job today? In my current role as a Senior Enterprise Manager, I encounter risks and challenges from all functions of the business. The knowledge I gained from the CFA Program has given me great advantages in doing my job more efficiently and productively.

What other benefits have you experienced from being part of the CFA Institute global community? Studying for the exams taught me greater self-discipline and further improved my time management skills. Being a member of CFA Society Ireland provides me with a great opportunity to meet like-minded investment professionals. The society also organises excellent seminars on hot topics within the industry, and in many cases these have saved me doing my own research.

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1 Define the following terms: (a) Mutual funds (b) REITs 2 Identify something that you could buy in a shop or online that fulfils the following purpose: What is it?

What does it do?

How does it do it?

Alarm clock

Reduces anxiety

Since you can rely on the clock to wake you up at a certain time, you can have a peaceful night’s sleep without waking up regularly to check the clock.

Saves time Car insurance

Reduces risk

By having insurance, a driver doesn’t have to worry about a huge financial burden if they crash their car or have an accident involving other vehicles.

Reduces cost Connects 3 Give two advantages and two disadvantages of property mutual funds. 4 List four characteristics of REITs. 5 Find three property-focused mutual funds in the UK and identify the following for each one: (a) The commission to invest (b) The lock-up period (c) The ability to withdraw money early and if there are penalties if you do (d) The one-month, one-year and five-year returns

How can I buy a house without buying a house?

Chapter summary

Chapter 9

End-of-chapter exercises

6 Research five REITs in the market today. Copy this table into your copybook and fill it in. Name of the REIT

1-month return

1-year return

5-year return

JOURNAL QUESTION

Would you like to invest in an asset class (e.g. a bond or a property) on your own or with others in a fund? Why or why not?

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Chapter

How do I go shopping in the stock market shop?

Learning objective

• Understand how the stock market works, how to gain access to it, what generates returns for investors and why investors choose to invest in it.

Learning outcomes

• Understand the basic concept of the stock market. • Establish the connection between risk and return. • Distinguish between private equity and public equity. • Explain the purpose of a stock exchange. • Determine the role of the stockbroker and market maker. • Break down the cost of investing in the stock market. • Follow the flow of money from the investor’s bank account to owning the share. • Contrast trading speculatively and investing.

Literacy links

• Share, shareholder, risk, return, private equity, public equity, stock exchange, stockbroker, market maker, stamp duty, dividend, capital gain, portfolio

Numeracy links

• Currency conversion • Analysing costs • Calculating quantities

Cross-curricular links

• Business Studies: Finance • Maths: Currency conversion, financial maths, capital gain • Economics: Capital factor of production • Accounting: Equity, balance sheet

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Let’s set the scene Colin has often wondered what the stock market is all about. He has heard things on the news and seen information on the RTÉ Business website about the stock market, but he doesn’t quite know how the whole thing works. He phones his friend Zara, as she has been interested in this area for years, and asks her some questions.

What is the stock market? Zara asks Colin what his favourite chocolate bar is. He might say a Mars, Boost, Twix or many others. If you walk into a newsagent, you will see rows and rows of chocolate bars. You can pick one that is plain milk chocolate or has biscuit or caramel in it, is a king-size bar, is on special offer, etc. The stock market is like a big shop, but where pieces of lots of different companies are available. In a similar way to bars of chocolate, there are all types and sizes. You can buy shares in a big company, a small company, a company in the technology industry, a company that is a bank, a company that everybody knows, a company that very few people know about, etc. The difference with the stock market shop is that rather than buying a bar of chocolate to eat it, you buy shares in a company so that you can hopefully sell them later at a profit.

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Share: An investment representing partial ownership of a company. Shareholder: A person or other legal entity that owns shares in a company.

For example, Zara might have a new business idea but needs money to get it started. She can’t sell anything until she gets money to buy supplies and pay employees. She doesn’t want to borrow the money in case her business idea doesn’t work out. Instead, she would like somebody to give her €10,000 to get her started, and in exchange she will give them 20% of her company so that they become a shareholder in the business. That means that they own 20% of the company and are entitled to 20% of the profits. Ownership If Zara makes a lot of money, the shareholder will make some money too. However, if Zara’s business loses the money, the 20% shareholder will also lose their money. Therefore, the shareholder is taking a risk that they may lose it all, but they could be rewarded if Zara’s business is successful. Risk: The possibility of losing money with an investment. Return: In its simplest terms, a return (also known as a financial return) is the money made or lost on an investment over some period of time.

80%

Zara

New shareholder

Chapter 10

Zara explains that a share is a piece of a specific company. If you buy a share you’re buying a piece of a company, and as a result, you’re buying a share (i.e. a piece) of the company’s profits. You’re now a shareholder in that company.

How do I go shopping in the stock market shop?

What exactly is a share?

Can I buy shares in any company? In theory, Zara says, you can buy shares in any company. However, if you want to buy shares in a private company, you would need to approach that company and negotiate directly with the owner. This is called private equity. Private equity: Shares that are transferred between a private company and shareholders.

Activity 10.1 Watch some videos on the Dragons’ Den YouTube channel, then answer the following questions. (a) What was the product or service being pitched by the entrepreneur? (b) Write down three questions the dragons asked the entrepreneur. (c) How much money did the entrepreneur ask for in exchange for what percentage of the business? (d) What offers did the dragons make to the entrepreneur? (e) If a deal was agreed, what were the final terms of the deal? (In other words, how much money was agreed in exchange for what percentage ownership of the company?) However, there are lots of companies listed on the stock market, where you can buy their shares. In other words, some companies have made their shares available to anybody who would like to buy them. These companies are said to have public equity. (For more details on this, see Chapter 12.) For example, CocaCola, Sony and Bank of Ireland all have public shares available. This means that anybody can buy a piece of these companies. Public equity: Shares in a company that is listed on a stock exchange.

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Activity 10.2 Search online to determine whether the businesses listed below are privately owned or publicly traded. (a) Netflix (c) Disney (b) Your local corner shop (d) Dunnes Stores

Activity 10.3 Find 10 companies in the world that have shares that are available to buy on the stock market.

What is a stock exchange? Stock exchange: A market in which shares are bought and sold.

A company can move from being privately owned to being publicly traded through an initial public offering (IPO). An IPO is where a company makes its shares available to the public for the first time on a stock exchange. (You can read more about this in Chapter 12.) Zara points out that there are a variety of stock exchanges all over the world. A company can list its shares on the Irish Stock Exchange, the New York Stock Exchange, the Frankfurt Stock Exchange, etc.

Activity 10.4 Read ‘From Railroads to REITs: A History of Euronext Dublin’ on the Irish Stock Exchange website and chart the timeline on an infographic (you could use the Canva website to help you create this).

Activity 10.5 Search online to answer the following questions. (a) What is the oldest stock exchange in the world and what year did it open? (b) What time does the New York Stock Exchange open and close? (c) How many stock exchanges are there in the world? (d) What are the five largest companies on the Irish Stock Exchange? (e) What do the following letters stand for? (i) LSE (ii) TSX (iii) HSI

How exactly do I buy a stock? If Colin wanted to buy a KitKat or a Twirl chocolate bar, he wouldn’t travel to the headquarters of the company that makes them – he would go his local newsagent or buy one in a supermarket.

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Zara tells Colin that in a similar way, he wouldn’t go directly to the stock exchange and try to buy stock, but rather he would go through a stockbroker. A stockbroker is like the shopkeeper of the stock market.

Market maker: Connects the stockbrokers together who represent buyers and sellers. Their job is to provide prices for stocks and to process transactions of money in exchange for stocks between those buyers and sellers.

Market makers Stock exchange(s) Purchaser’s broker

Seller’s broker

Share purchaser

Share seller

Chapter 10

Colin would set up an account with a stockbroker and put some money into that account. He would get a username and password in order to log into that account. Next, he would put in an order to buy some shares of a company. The stockbroker would then contact the stock exchange on Colin’s behalf in order to find somebody who wants to sell those same shares. In particular, the stockbroker would look for a market maker in the stock that Colin wants to buy.

How do I go shopping in the stock market shop?

Stockbroker: A business that buys and sells securities on a stock exchange on behalf of clients.

How money and shares move through the buying and selling process

How much does it cost to buy a share? Zara points out there are three key costs to buying shares: The price of the share A stockbroker’s fee Government tax (called stamp duty). She takes Colin through the example of buying Kerry Group shares. First, she asks him how much he might like to invest in one company and he tells her €2,000.

Step 1: Find out the price of the share Zara goes online and finds out that today’s price of one share in Kerry Group PLC is €108.70. €2,000 €108.70

= 18.39

She points out to Colin that you can’t buy a fraction of a share with most stockbrokers, so he needs to work out how many shares he can buy. Colin can expect to buy approximately 18 shares. 18 shares × €108.70 share price = €1,956.60

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Step 2: Find out the stockbroker’s fee Colin searches online and finds a company that has the following charge: Shares and ETFs

Per transaction, subject to minimum charge of €14.99

0.50%

In other words, the fee will be 0.5% of the amount of the transaction or €14.99, whichever is greater. Zara then calculates: 0.5% of €1,956.60 = €9.78 Since this amount is lower than €14.99, the cost of Colin’s transaction will be €14.99. The total amount now is: Share cost: Broker’s fee: Subtotal

€1,956.60 € 14.99 €1,971.59

Activity 10.6 Research and compare three different stockbrokers’ fees for the following different customers. Examine an Irish stockbroker, an online broker and an international broker. (a) Customer 1: €10,000 investment divided across five different shares (b) Customer 2: €750 in one share (c) Customer 3: €4,000 investment divided across two different shares

Step 3: Find the government stamp duty rate Stamp duty: A tax on certain instruments (written documents).

Zara tells Colin that he needs to look at the Revenue website to find out if there is a stamp duty on the shares that he wants to buy.

Activity 10.7 Look up the current rates of stamp duty on the Revenue website. Colin discovers that currently there is 1% stamp duty on Irish stocks and 0.5% on UK stocks, but there isn’t any stamp duty applicable to US stocks. Therefore, his cost of buying the shares is now: Share cost: Broker’s fee: Stamp duty: Subtotal

€1,956.60 € 14.99 € 19.57 €1,991.16

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Dividend: A sum of money that a company regularly pays to its shareholders out of its profits. Capital gain: Profit made by selling an investment (i.e. a share) at a higher price than what you bought it for.

Also, as Colin buys Kerry Group shares at €108.70, he hopes that he can sell them at a later stage at a higher price. This is called a capital gain. For example, if Colin sells his shares at €180, he will have made the following capital gain: Individual share price: 18 shares × Individual share price: Less: Transaction cost Less: Buying cost Subtotal Total capital gain:

€ 180.00 €3,240.00 € 16.20 €1,991.16 €2,007.36 €1,232.64

Remember! You have to pay a broker’s fee every time that you buy and every time that you sell.

Investor’s return

Dividend

Capital gain

Chapter 10

Zara explains that there are two key ways that investors make a return (i.e. make a profit). The first is through a dividend. Some companies regularly pay their shareholders a certain amount of money out of their profits. (You will learn more about this in Chapter 13.)

How do I go shopping in the stock market shop?

After I buy stocks, how do I make money?

Two ways that investors make a return

Is the stock market just a big casino? Colin likes to play card games with his friends. Sometimes each player puts a euro into a pot and whoever wins gets the €5 in the pot. Colin wins sometimes and loses sometimes depending on the cards that he gets and the way that he plays them. He wonders if the stock market shop is really just the same – do some people win and others lose based on pure luck? Zara explains the difference. She says, ‘When you’re playing with your friends, you’re basically moving your money around the table – no new money is created at all. The five players each put in €1, but nobody comes along and magically adds anything to the table. ‘The stock market is different. Because the companies that make up the stock market are working at making profits over months and years, new money is brought to the table. The earnings (or profits) of those companies are available to be given to shareholders. Some of this money comes from dividends, which are direct payments that these companies make to those who buy their shares. Otherwise, it can come from higher share prices. Of course, some companies can lose money too or even go out of business, but the key thing is that as a group, companies’ earnings and the stock market have risen over time.’ Zara also emphasises the difference between speculating and investing. Speculating is when you buy shares in the hope that you picked the right company that will go up quickly in the short term – just like the person who puts €1 into a card game and hopes to win the pot. Investing, however, is putting money into a stock or portfolio with a view to capturing the growth of the company’s profits over the long term. Portfolio: A collection of stocks, bonds or other asset classes.

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Does a company’s share price always rise? Zara quickly answers ‘No!’, then shows him a five-year graph of Coca-Cola Company shares on her phone. A share price can change at any moment and the price can never be guaranteed. The share price can rise, but it can also fall. In fact, a share price can fall as low as €0.00 (which means that the investor loses all their money). On the other hand, there isn’t any limit on how high it can go (which means an investor can make unlimited capital gains). $ 60 $ 55 $ 50 $ 45 $ 40 $ 35 2016

2017

2018

2019

2020

Year

Coca-Cola share price, 2016–2020

Activity 10.8 Compare the share price of Amazon today to the share price (a) one month ago (b) one year ago (c) five years ago. Calculate the change in the share price in terms of a percentage. Zara points out that over the past century, the stock market has historically given investors a return of 8.1% per year, on average, before inflation. This includes both dividends and capital gains. It’s very rare that you will see this specific return, but on average, over the long term, this is what investors have generated. (You will learn how to measure and track the average stock market’s return in Chapter 15.)

Activity 10.9 Calculate the capital gain or loss (until today’s prices) for a euro-based investor in each of the following scenarios. (a) A person who bought £1,000 of Scottish & Southern Energy shares on 4 December 2007 (b) A person who bought $3,000 of McDonald’s shares on 4 April 2018 (c) A person who bought €10,000 of CRH shares on 15 May 2016 (d) A person who bought £7,500 of HSBC shares on 14 November 2015 (e) A person who bought $4,000 of Pfizer shares on 24 June 2014

Note! You will learn about Capital Gains Tax (CGT) in Chapter 11. CGT would have to be paid on these gains. Colin thanks Zara and she tells him that he is very welcome. He now knows what the stock market is, how it works, who the key parties are and the role they play, how to find information, how to calculate the cost (including taxes and commissions) and why people invest. That was a very productive conversation!

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Career spotlight Olwyn Alexander, CFA, Global Asset and Wealth Management Leader How did you start off in finance? After completing a general degree in business called Bachelor of Commerce in University College Dublin, I did a one-year Diploma in Professional Accounting. This helped me to then complete all the professional chartered accountant exams.

Have you had the opportunity to travel within your career? Yes, my company offered ‘tours of duty’ to its staff. I was fortunate to live and work in the US on numerous occasions as a result. My first one was to Texas and then I moved to Boston. Later, I went to New York and now I’m back in Dublin.

What advice would you give to young people preparing to start their careers today? In today’s environment, where the pace of change is faster than ever before (and is getting faster), I would advise you to stay current. It’s very important to keep up with technological advances, including machine learning, artificial intelligence and robotics, which are now offering financial advice. I would also encourage you to live and work internationally as much as you can – the experiences are invaluable and it gives you a much greater perspective on the industry.

What are your thoughts on the CFA® charter? I would definitely encourage people interested in the finance industry to get the CFA charter, as it opens doors to a global network of like-minded professionals, no matter where you travel. It is also a recognised brand of quality and professionalism.

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Chapter 10

How do I go shopping in the stock market shop?

End-of-chapter exercises

Chaptersummary summary Chapter

1 Define the following terms: (a) Share (b) Shareholder 2 Create a crossword (complete with clues) using the following words: • Capital gain • Private equity • Shareholder • Dividend • Return • Stock exchange • Equity • Risk • Stock market

• Stockbroker

3 Find today’s share price for each of the following companies: (a) Kingspan (e) Microsoft (b) Lloyds Bank (f) Amazon (c) Disney (g) Berkshire Hathaway (d) Netflix 4 Differentiate between public equity and private equity. 5 What is the purpose of a stock exchange? 6 Calculate how many shares an Irish investor could buy today if they had €2,000 to buy shares in each of the following companies. Assume that the costs of trading are €20 per transaction. (Tip: Convert the amount into the appropriate currency and find out the appropriate rate of stamp duty.) (a) Kerry Group (c) Vodafone (e) Pfizer (g) Bank of Toronto (b) CRH (d) Intel (f) Bank of China 7 Compare the share price of Facebook today to the share price (a) one month ago (b) one year ago (c) five years ago. Calculate the change in the share price in terms of a percentage. 8 Calculate the capital gain or loss (until today’s prices) for a euro-based investor in each of the following scenarios. (a) A person who bought £1,000 of Barclays Energy shares on 4 December 2007 (b) A person who bought $3,000 of Mondelez shares on 4 April 2018 (c) A person who bought €10,000 of AIB shares on 15 May 2016 (d) A person who bought £7,500 of United Utilities shares on 14 November 2015 (e) A person who bought $4,000 of Medtronic shares on 24 June 2014

JOURNAL QUESTION

Imagine that you have €2,000 left at the end of the year and you have a full-time job. You don’t owe any money to anybody. Would you spend the money, save it or put it into the stock market? You can choose only one of the above options. Which would you choose and why?

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Chapter

How much money could I make if I save or invest?

Learning objective

• Understand the impact that amount, time, return, sequencing and taxes can have on the final value of an investment.

Learning outcomes

• Distinguish between simple and compound interest. • Describe your financial ambitions. • Analyse the impact of each of the variables in the compound interest formula. • Work out the impact of volatility on the final value of an investment. • Contrast the outcome of different sequencing of returns. • Assess the impact of euro cost averaging. • Compute DIRT and CGT calculations.

Literacy links

• Volatility, euro cost averaging, Deposit Interest Retention Tax (DIRT), Capital Gains Tax (CGT)

Numeracy links

• Calculating simple and compound interest, tax computations and averages

Cross-curricular links

• Business Studies: Finance • Maths: Averages, statistics, taxes, sequences and series • Economics: Cost of capital

Let’s set the scene Michelle learned all about compounding in school, including the difference between simple and compound interest.

Remember! The concept of interest was explained in Chapters 1 and 4.

Simple vs. compound interest For example, if Michelle were to put €1,000 on deposit at 4% for five years, she knows that she would have more than €1,000 at the end of the timeframe in terms of both simple and compound interest, but they wouldn’t be the same amounts. Amount including simple interest = Amount × (1 + (Interest rate × Number of years invested)) Example 1 If Michelle saved €1,000 at 4% per year for five years, she would input the numbers into the formula in the following way: Amount = €1,000 Interest rate = 4% Number of years = 5 Balance at the end of 5 years

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= 1,000 × (1 + (0.04 × 5)) = €1,200

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However, if she did this using compound interest, the answer would be different. Amount including compound interest = Amount × (1 + Interest rate)Number of years invested Example 2 Using the same figures as in Example 1, the amount in Michelle’s account at the end of the same timeframe would be:

The difference between the two is:

Balance at the 5 = 1,000 × (1 + 0.04) = €1,216.65 end of 5 years

Compound interest amount: €1,216.65 Simple interest amount: €1,200.00 € 16.65 Difference:

Specifically, this amount is due to the interest that compounds. In other words, Michelle will earn interest on her initial deposit (opening balance) in her first year. However, since the total amount in her account rises as a result of the interest, she will earn interest now on both the initial deposit plus the interest. This is called the closing balance. Year

Opening balance

Interest (Opening balance × 4%)

Closing balance (Opening balance + Interest)

€1,000.00

€40.00

€1,040.00

€41.60

€1,081.60

€43.26

€1,124.86

€44.99

€1,169.86

€46.79

€1,216.65

Therefore, in Year 3, Michelle would have €1,081.60 in her account as her opening balance. This is made up of the €1,000 that she had initially as well as the interest that she has earned over the years (€40 + €41.60). Over the course of Year 3, Michelle would generate 4% on that amount, which works out as: €1,081.60 × 4% = €43.26 Adding the two figures together is how we arrive at Michelle’s closing balance of €1,124.86 for Year 3. The process continues for Year 4 and Year 5.

Michelle’s financial dreams Michelle is thinking about all the financial dreams that she has. She would like to buy a house one day, be able to go on big holidays, take time off work to travel in the future, donate money to causes close to her heart, etc.

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Activity 11.1

Put together a picture collage of three key experiences that you would like to have in the future (e.g. holidays in the sun, owning your own home, going to university, travelling to South America, etc.). Michelle knows that the more money she saves or invests, the more money she is likely to have in the future to achieve her dreams. However, Michelle also wants to have a good life today! She wants to be able to go out for dinner sometimes, go on short holidays after working hard in her job and buy the odd piece of technology. While she knows there is a balance between spending and saving, she needs to figure out how much she needs to put away in order to achieve those dreams in the future – and what that money can do if it is put into savings or investments.

Activity 11.3 Go to YouTube and search for ‘Want to Start Savings Habits? How to be Good with Money’ from the Competition and Consumer Protection Commission. Watch the short clip from the RTÉ show How to be Good with Money. Draw a picture of what the two characters from the clip, Salt and Pepper, look like. Which one is happier? Which one has more money over the long term? Which one has more enjoyment? What are the other differences between them?

Variables in compound interest

Chapter 11

Activity 11.2

How much money could I make if I save or invest?

Write down five of your financial dreams.

Let’s help Michelle by revisiting the formula for compound interest. Amount including compound interest = Amount × (1 + Interest rate)Number of years invested There are three variables in the equation: the amount, time and the interest rate or return.

Amount The first variable is the amount of money that you put away. Holding everything else constant, the higher this is, the higher the final amount will be. For example, if Michelle saves €1,000, €5,000, €25,000 or €100,000 at 4% interest for five years at compound interest, it will have a direct impact on the final amount. In the first two cases, Michelle would calculate the following: = Amount × (1 + Interest rate)Number of years invested Amount including €1,000 × (1 + 0.04)5 = €1,216.65 compound €5,000 × (1 + 0.04)5 = €6,083.26 interest As you can clearly see in these examples, the higher the amount of money saved or invested, the higher the amount in the closing balance.

Opening balance

Interest

Closing balance after five years

€1,000.00

€216.65

€1,216.65

€5,000.00

€1,083.26

€6,083.26

€25,000.00

€5,416.32

€30,416.32

€100,000.00 €21,665.29 €121,665.29

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2024

Time

2023

The second variable is time. Holding everything else constant, the longer Michelle invests the money, the higher her closing balance will be. For example, if Michelle saves €1,000 at 4% interest for one, two, five, 10 or 25 years at compound interest, it will have a direct impact on the final amount. In the first two cases, Michelle would calculate the following:

2022 2021

Amount including compound interest

= Amount × (1 + Interest rate)Number of years invested €1,000 × (1 + 0.04)1 = €1,040.00 €1,000 × (1 + 0.04)2 = €1,081.60

Number of years invested

Opening balance

Closing balance

€1,000.00

€1,040.00

€1,000.00

€1,081.60

€1,000.00

€1,216.65

€1,000.00

€1,480.24

€1,000.00

€2,665.84

Interest or return Michelle has different rates of interest available to her. As you learned in Chapter 4, the different rates depend on how long she is willing to save her money for, if and how quickly she wants access to it in the meantime and how much risk she wants to take with her money. All these elements will have a direct impact on the closing balance. The higher the return, the higher the closing balance will be.

Number of years invested

Opening balance

Interest at 8%

Closing balance

€1,000.00

€80.00

€1,080.00

€86.40

€1,166.40

€93.31

€1,259.71

€100.78

€1,360.49

€108.84

€1,469.33

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• 16% total return • 1.5% AER • Tax free

CertSave 5 Years

• 5% total return • 0.98% AER • Tax free

Celtic 4 Years

• 2% total return • 0.5% AER • Tax free

In the case of the Gaelic 10 Year Bonds, for example, investors get 1.5% per annum. They can easily estimate what their savings and investments will amount to in the future, as they know what the rate will be. However, as Michelle looks at the stock market returns, she sees that they could be 5% one year, –10% the next year and 35% the next year. This is because the stock market is a riskier place to put your money, which means that you could lose some of your money and there is much less certainty about how much money you will have in your closing balance. However, the overall returns are likely to be higher for investors to compensate for that risk over the longer term. If you’re willing to potentially lose money some years and not be sure how much you will make, then you’re choosing a riskier investment than putting money on deposit. The only reason you would do that is because you have a possibility of getting a higher return (but this is not guaranteed). 4,000.00

Chapter 11

Gaelic 10 Year Bonds

How much money could I make if I save or invest?

Michelle has also read about the different asset classes in Chapter 1. She knows that some investment rates are fixed and others are variable. In other words, some investments give a fixed return every year.

Price of the S&P 500 index

3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00

1950

2000 S&P 500 stock market index since 1927

US stock market, 1927–2020 *The S&P 500 is a stock market index that measures the stock performance of the 500 largest companies listed on stock exchanges in the US.

Source: Macrotrends.net

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Activity 11.4 Look up the latest version of the chart on the previous page on the Macrotrends website and see how things have changed since 2020. Michelle wonders if this is just a simple matter of finding the highest return she can. After all, if the return is very bad one year and then it’s very good the next year, then it averages out … doesn’t it? She puts this idea to the test by wondering what would have happened if she had invested during the stock market crash of 2008. 30,000 28,000 26,000 24,000 Price of the S&P 500 index

22,000 20,000 18,000 16,000 14,000 12,000 10,000

8,000

2008

2010

2015

2020

Year

US stock market around 2008–2020

Source: Macrotrends.net Michelle can see that if she had been fully invested in the stock market in 2007, she would have lost half her money by the early part of 2009. That’s scary! Let’s look at this scenario. Michelle reads about a time when there was a lot of volatility in the markets, with the following returns: Volatility: The potential for the value of an asset to change quickly and unpredictably.

Year

Return (%)

–10%

–45%

34%

50%

Michelle adds up all these returns and gets a result of 34%. 5% – 10% – 45% + 34% + 50% = 34%

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Investment return

Opening balance

Return value

Closing balance

€1,000.00

€50.00

€1,050.00

–10%

€1,050.00

–€105.00

€945.00

–45%

€945.00

–€425.25

€519.75

34%

€519.75

€176.72

€696.47

50%

€696.47

€348.23

€1,044.70

The closing balance in Year 5 is less than it was after Year 1! Michelle realises this happens because she lost a lot of money in Years 2 and 3. Therefore, there was less money in her closing balance to generate a return. It’s worse again when that lower amount of money also suffers a loss (as in Year 3 here). She wonders if things would be different if those same returns happened in a different sequence (order).

Activity 11.5 Compare the returns, closing balances and final outcome of this sequence of returns to the table above. How does the different sequence affect the final closing balance? Year

Investment return

Opening balance

Return value

Closing balance

–10%

€1,000.00

–€100.00

€900.00

–45%

€900.00

–€405.00

€495.00

€24.75

€519.75

34%

€519.75

€176.72

€696.47

50%

€696.47

€348.23

€1,044.70

Chapter 11

Year

How much money could I make if I save or invest?

Therefore, if she invested €1,000 today and got these same returns over a five-year timeframe, surely she would have €1,000 × (1 + 34%) = €1,340 in her closing balance? She takes out her calculator and puts each figure into the calculation on a compound interest basis.

Michelle doesn’t like the idea of this uncertainty. While she knows that if she takes more risk she is likely to get a better return, she could end up with less than her original amount if the sequence of returns doesn’t work in her favour. She shares her concerns with her friend Joanne when they meet for a coffee at the weekend. However, Joanne has a different perspective. Joanne says, ‘If you’re saving or investing every year, you can take advantage of the lower price through euro cost averaging.’ Euro cost averaging: The process of investing regular amounts rather than putting one lump sum into an investment all at one time.

Joanne explains through an example: Joanne spends €1,000 buying 1,000 shares in Year 1. Her average price per share is €1. The price drops by 20% to €0.80. Joanne’s shares are now worth €800. She still believes there is great potential in this stock, so she invests an extra €1,000 in the stock in Year 2. At €0.80 per share, she can buy 1,250 shares.

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Now we can work out her average price per stock as follows. Step 1: Add up her total investment amount: €1,000 (in Year 1) + €1,000 (in Year 2) = €2,000 Step 2: Add up the total number of shares she has bought: 1,000 shares (in Year 1) + 1,250 shares (in Year 2) = 2,250 shares Step 3: Divide the total investment amount by the number of shares that she has bought: €2,000 (total investment amount) ÷ 2,250 shares = €0.89 As a result, her euro cost average per share is now just €0.89. Joanne then points out that with this extra investment leading to the lower euro cost average, her situation changes as follows:

Before euro cost averaging

After euro cost averaging

Gain Break even

Gain

€ 1.00

Break even

€ 0.89

Loss

Activity 11.6 Analyse the table below to find the following: Year

Opening balance

Price

Extra money invested

No. of units purchased with the extra money invested

Total no. of units

Total amount invested

Average unit price

€0.00

€1.00

€1,000.00

1,000

€1,000.00

€1.00

€1,040.00

€1.04

€1,000.00

962

1,962

€2,000.00

€1.02

€1,745.77

€0.89

€1,000.00

1,124

3,085

€3,000.00

€0.97

€1,727.68

€0.56

€1,000.00

1,786

4,871

€4,000.00

€0.82

€5,504.06

€1.13

€1,000.00

885

5,756

€5,000.00

€0.87

€5,755.80

€1.00

€1,000.00

1,000

6,756

€6,000.00

€0.89

€8,106.96

€1.20

€1,000.00

833

7,589

€7,000.00

€0.92

(a) The average unit price in Year 2 (b) The total number of units held by the investor by Year 5 (c) The number of units purchased using the additional €1,000 in Year 6 (d) The total value of the investor’s shares at the beginning of Year 3 (e) The year when the investor held the stock at the lowest average unit price (f) How much the stock price needs to rise in Year 4 to generate a gain for the investor

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Chapter 11

Michelle wonders if there is anything else that she should find out before she invests her money. Joanne tells her that she should also check out any taxes that she might have to pay. Michelle looks up the Revenue website for any taxes on interest and gains from buying and selling stocks.

How much money could I make if I save or invest?

Taxes on interest and gains from buying and selling stocks

Tax on interest She learns that Deposit Interest Retention Tax (DIRT) is applied on interest. Deposit Interest Retention Tax (DIRT): A tax that’s applied to interest payments received by the saver.

Example: Michelle saves €5,000 at a 6% interest rate and receives €300 during the year. In that year the DIRT rate is 40%, so the bank will collect €120 from her account and transfer it to the government.

Tax on capital gains She learns that Capital Gains Tax (CGT) is applied to the gains that a person makes when selling shares at a profit in the stock market. Capital Gains Tax (CGT): A levy charged on the positive difference between the sale price of the asset and its original purchase price.

Example: Michelle invests €3,000 in a stock, then sells the stock later for €5,000. In that year the Capital Gains Tax rate is 33%. She calculates the amount of Capital Gains Tax due as follows. Sale amount: €5,000 Buy amount: €3,000 Capital gain: €2,000 Capital Gains Tax (€2,000 × 33%) = € 660

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Activity 11.7 Research the current rate of Capital Gains Tax in Ireland today. Michelle learns that if she had a loss from a previous transaction, she could use it to offset it against her gains. This has the effect of reducing her tax bill. Example: Michelle invests €3,000 in a stock, then sells the stock later for €5,000. However, she also had a loss of €1,000 from a previous stock investment. In that year, the current Capital Gains Tax rate is 33%, so she calculates the amount of Capital Gains Tax due as follows. Sale amount: €5,000 Less: Buy amount: €3,000 Capital gain: €2,000 Less: Previous loss: €1,000 Taxable gain: €1,000 Capital Gains Tax (€1,000 × 33%) = € 330 Finally, Michelle finds out that everybody in Ireland can make a certain amount of gains every year tax free. This is called a tax-free allowance and it is taken directly off her tax bill. Example: Michelle invests €3,000 in a stock, then sells the stock later for €5,000. However, she also had a loss of €1,000 from a previous stock investment. The Irish government currently offers a tax-free allowance of €1,270. The Capital Gains Tax rate is 33%. She calculates the amount of Capital Gains Tax due as follows. Sale amount: €5,000 Less: Buy amount: €3,000 Capital gain: €2,000 Less: Previous loss: €1,000 Taxable gain: €1,000 Less: Tax-free allowance: €1,270 Capital Gains Tax bill € 0 Note: There is no such thing as a negative Capital Gains Tax bill – the government doesn’t give you money back if you lose money on your investments. Therefore, while the answer to this might seem like it should be –€270, the bill is €0 since it can’t be negative. All the best with your investments, Michelle!

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Career spotlight Caitriona MacGuinness, CFA, Head of Defined Contribution and Mastertrust, Partner Did you always know that you wanted to work in finance? Growing up, I always had a passion for numbers along with business and this was clear in the subjects I studied in school. As a result, I decided to go to NUI Galway and study for a Bachelor of Commerce (International) degree. I also had the experience of spending a year studying in Göttingen, Germany. My studies got me interested in economics and finance in particular. Therefore, I decided to undertake a Master’s in Financial Services at the Michael Smurfit Graduate School of Business in University College Dublin.

What jobs did you have in the early part of your career? In the initial stages, I researched the European stock market and then was asked to examine stocks all over Asia. After that, I managed a pool of money that specialised in the emerging markets and I managed a full team in that job.

What skills do you need for your current job? Today, I lead a business and a group of employees. Together, we need to think strategically about how our company plays a role in the industry. My current job needs me to be able to analyse companies and developments in the financial industry and markets. Strong communication skills are also critical for success and leadership qualities are so important when managing a team.

What has completing the CFA® charter meant for you? Achieving the charter has been a wonderful advantage within my career to date. In the companies I have worked for, the CFA charter has been recognised as being the best qualification within the finance industry and a sign of quality.

How has being an active member of CFA Society Ireland helped you? I have been an active member of CFA Society Ireland since I became a charterholder. This has also helped my career a lot, as I’ve met lots of great people in the industry right here in Dublin. I first got involved with the society to launch the University Research Challenge, which has been very successful in the society. In fact, I have judged the European finals of the Challenge for two years. I was President of CFA Society Ireland from 2014 to 2016 and while this was a busy period, it was very rewarding to help guide the society to continue to move forward in Ireland.

What advice would you give to young people getting started in their careers today? While the charter is important and it is tempting to focus solely on getting better at researching or other technical skills, it is important to realise that other things are also critical to success in the industry, such as communication and getting on well with people. Second, as a mother of two children, while life is never quiet and it does take a lot of work, it is possible to combine a successful career and a busy home life.

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Chapter 11

How much money could I make if I save or invest?

End-of-chapter exercises

Chaptersummary summary Chapter

1 Calculate the simple interest and compound interest each year over 10 years: (a) Amount €10,000 Interest rate 6% (b) Amount €50,000 Interest rate 10% (c) Amount €500 Interest rate 7% (d) Amount €100,000 Interest rate 3% (e) Amount €1,000 Interest rate 9% 2 Make a crossword (complete with clues) using the following words: • Average • Return • Balance • Simple • Compound • Unit • Interest 3 Calculate an investor’s closing balance if she saves €2,500 at 4% interest for the following lengths of time at simple interest: (a) 1 year (c) 5 years (e) 20 years (b) 3 years (d) 10 years 4 Calculate an investor’s closing balance if he saves €2,500 at 4% interest for the following lengths of time at compound interest: (a) 1 year (c) 5 years (e) 20 years (b) 3 years (d) 10 years 5 Calculate the closing balance for a deposit of €20,000 after six years if it was invested at the following fixed rates using simple interest: (a) 3% (c) 1% (e) 20% (b) 14% (d) 9% (f) 17% 6 Calculate the closing balance for a deposit of €20,000 after six years if it had been invested at the following fixed rates using compound interest: (a) 3% (c) 1% (e) 20% (b) 14% (d) 9% (f) 17% 7 Compare your answers to Questions 3 and 4 as well as your answers to Questions 5 and 6 to see the different effect that simple and compound interest has on the closing balances. 8 Calculate the final closing balance for the following sequence of returns based on an initial amount of €10,000.

Year 1

Year 2

Year 3

Year 4

Year 5

(a)

16%

(b)

14%

12%

56%

34%

–20%

(c)

–15%

16%

23%

(d)

–4%

12%

34%

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9 Analyse the table below to identify the following. Opening balance

Price

Extra money invested

No. of units purchased with the extra money invested

Total no. of units

Total amount invested

Average unit price

€0.00

€0.50

€1,000.00

2,000

€1,000.00

€0.50

€1,120.00

€0.56

€1,000.00

1,786

3,786

€2,000.00

€0.53

€2,271.43

€0.60

€1,000.00

1,667

5,452

€3,000.00

€0.55

€2,290.00

€0.42

€1,000.00

2,381

7,833

€4,000.00

€0.51

€4,543.33

€0.58

€1,000.00

1,724

9,557

€5,000.00

€0.52

(a) The average unit price in Year 2 (b) The total number of units held by the investor by Year 5 (c) The number of units purchased using the additional €1,000 in Year 4 (d) The total value of the investor’s shares at the beginning of Year 3 (e) The year when the investor held the stock at the lowest average unit price (f) How much the stock price needs to rise in Year 4 to generate a gain for the investor 10 An investor saves €3,000 at 4% interest rate. Calculate the amount of DIRT that she pays if the DIRT rate is 35%. 11 An investor saves €1,500 at a 3% interest rate. Calculate the amount of DIRT that he pays if the DIRT rate is 41%. 12 An investor invests €4,000 in a stock, then sells the stock later for €7,000. The current Capital Gains Tax rate is 30%. He doesn’t have any losses and the government doesn’t offer any tax-free allowance on capital gains. Calculate his Capital Gains Tax bill.

Chapter 11

Year

How much money could I make if I save or invest?

Chapter summary

13 An investor invests €5,000 in a stock, then sells the stock later for €10,000. She had a loss of €2,000 from a previous stock investment. The Irish government currently offers a tax-free allowance of €1,270. Calculate her Capital Gains Tax bill. 14 An investor invests €20,000 in a stock, then sells the stock later for €21,000. He has no previous losses and the Irish government currently offers a tax-free allowance of €1,270. Calculate his Capital Gains Tax bill. 15 An investor invests €8,000 in a stock, then sells the stock later for €6,000. She has no previous losses and the Irish government currently offers a tax-free allowance of €1,270. Calculate her Capital Gains Tax bill. 16 Research what the capital gains rate and capital gains tax-free allowance are in the UK. 17 Research what the capital gains tax rate and the capital gains tax-free allowance are today in Ireland.

JOURNAL QUESTION

Would you prefer to take the risk of buying stocks with the volatility that comes with them but with a higher return or the safety and stability of buying government bonds but with a lower return?

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Chapter

Where does a business get finance and why do people give it to them?

Learning objective

• Understand the different ways that a business can raise finance to either start up or grow as well as what the providers of that finance want in return.

Learning outcomes

• Classify the sources of finance that a business owner can get. • Appraise the choice an entrepreneur has between keeping profits and reinvesting (i.e. bootstrapping). • Give a reason why governments issue grants to businesses. • Explain the commitment that a company signs up to by taking on debt. • Understand the difference between private equity and public equity.

Let’s set the scene Noel is an entrepreneur and always has been. As a small child, he ran an imaginary travel agency where his clients were his teddies. During his teenage years, he gave grinds in subjects that he did well in, worked part time in an office and a range of other things described in Chapter 2.

How can Noel fund his companies? In college, Noel was part of the Business Society and started his first business at 21 mentoring people who were interested in the stock market. In his twenties, he set up his first company and then set up another one every five years. Noel now owns a group of five companies and has been in business for 25 years.

Literacy links

• Bootstrapping, grant funding, debt, private equity, public equity Business 1

Numeracy links

• • • •

Revenue Costs Profit Amounts paid for a share in a business

Cross-curricular links

• Business Studies: Finance • Maths: Currency conversion, financial maths, capital gain • Economics: Enterprise factor of production, market economy, government policy • Accounting: Long-term liability, equity, profit and loss statement, balance sheet

Money Matters BOOK.indb 100

Business 5

Business 4

Business 2

Business 3

Business ventures

08/02/2021 15:20

Bootstrapping Noel runs educational summer camps all over Ireland and the UK. Here is what his profit and loss account looks like. Category

Bootstrapping: Using profits generated through sales to reinvest in the business.

Subtotal

Amount

Sales

€

200,000

€

105,500

€

94,500

Accounting

€

1,500

Advertising

€

5,000

Bank charges

€

150

Staff

€

60,000

Room hire

€

7,500

Insurance

€

850

Postage and printing

€

500

Staff training

€

10,000

Catering

€

15,000

Other costs

€

5,000

Profit (EBIT – earnings before interest and tax)

Chapter 12

Less: Costs

Less: Interest

€–

Profit (EBT – earnings before tax)

€

94,500

Less: Corporation tax (12.5% × EBT)

€

11,813

Net profit

€

82,688

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Money Matters BOOK.indb 101

Where does a business get finance and why do people give it to them?

There are five ways that Noel can fund his companies and it’s likely that he will use several of them at any one time. Bootstrapping: Using profits generated through sales to reinvest in the business. Grant funding: Applying for government money from state agencies including Enterprise Ireland or the Local Enterprise Office. Debt: Borrowing money from a bank or other financial institution and paying it back with interest over time. Private equity: Selling part of his business for money privately to another individual or legal organisation, whereby they would be entitled to a proportion of the business’s future profits. Public equity: Selling part of his business for money publicly to other people and legal organisations, whereby they would be entitled to a proportionate part of the business’s future profits. Let’s go through each option with Noel.

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At the end of the year, Noel can choose what to do with his profits. He can take them out of the company for his own spending wishes and saving needs. This is his reward for taking the risk of being an entrepreneur and all the work that he has put into the business during the year. Alternatively, he can choose to buy more training equipment, put more money into advertising and marketing next year or employ more staff. This is an example of bootstrapping, i.e. using existing profits to invest in the development of the business in the future.

Grant funding Grant funding: Government money from state agencies, including Enterprise Ireland and the Local Enterprise Office.

A grant is a sum of money awarded to a business by the government with a particular objective in mind. This could be to: Support job creation (i.e. to help entrepreneurs offer more jobs to people in their businesses) Encourage exports (i.e. to help companies sell more goods and services in other countries around the world) Boost innovation (i.e. to give funding to people with ideas for doing things better, as otherwise they may not be developed and go to waste). The two main bodies responsible for this in Ireland are the Local Enterprise Office (LEO) and Enterprise Ireland. The Local Enterprise Office is the first place that people can look for information and support on starting or growing a business in Ireland. The Local Enterprise Office provides advice, information and support to you in starting or growing your business. Enterprise Ireland is the government organisation responsible for helping Irish companies grow all over the world to support sustainable economic growth, regional development and secure employment.

Activity 12.1 Search online for the Local Enterprise Office in your county. Research the following for Noel: • All the events that they’re hosting in the next three months • An example of a grant that he could apply for • Download the application form from the website and look at the questions they will want Noel to answer • The contact details of the Local Enterprise Office in case Noel has any questions.

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Source: Enterprise Ireland

Where does a business get finance and why do people give it to them?

The Innovation Voucher initiative was developed to build links between Ireland’s public knowledge providers (i.e. higher education institutions, public research bodies) and small businesses. Innovation Vouchers worth €5,000 are available to assist a company or companies to explore a business opportunity or problem with a registered knowledge provider. In an independent survey of companies that participated in the Innovation Voucher Programme: 97% of respondents would be willing to recommend the programme to other businesses. There was an increase in company turnover of €11.83 per € 1.00 of Enterprise Ireland investment in the Voucher Programme.

Chapter 12

out Noel tells you that he has applied for an Innovation Voucher in the past. He filled ent departm research any the form for a voucher of €5,000, which he could spend in ng in a university on the island of Ireland. He wanted to explore if, and how, e-learni would could help his business. He wanted to investigate the use of different tools that and website his open his business to webinars, how to build different products on to the about exciting technologies that he could use in the future. After that, Noel spoke . business own his in forward move people in that research department about how to for thinking They worked out a tailored plan for him and it opened a whole new way of him. It was very useful and he would recommend it to any company.

CASE STUDY

CASE STUDY: Innovation Vouchers

Activity 12.2 Visit the Local Enterprise Office or Enterprise Ireland website and find a business support (search for ‘financial supports’ on the LEO website or ‘funding supports’ on the Enterprise Ireland website). Write a short report including: • Details of the support • Who is eligible to apply • A suggestion of a business that could benefit from the support • The impact that this support could have on customers, staff or the community.

insert 12_09 - photo businessman at starting line

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Debt One of the most traditional ways that a company can raise money is to ask a bank to lend to them so that they can build their business. They would need to fill out the bank’s application form and be able to show that their business is strong enough to be able to pay back the money and any interest related to the loan fully and on time. The bank would then work out how much interest it would charge on the loan, how long it would take Noel to repay it and how much he would end up paying over the entire life of the loan. For example, let’s say that Noel wanted to borrow €8,000 for three years. He visits the Microfinance Ireland website to use their loan calculator. He inputs the information and sees that he would need to repay €248.94 per month. How much do you want to borrow? The minimum loan offered is €2,000 and the maximum is €25,000

€8,000

Proposed loan term (years)

Monthly repayments

€248.94

Total loan repayment

€8,961.84

Debt: Borrowing money from a bank or other financial institution and paying it back with interest over time.

Noel doesn’t just repay the €8,000 that he borrowed. He must pay back a total of €8,961.84. This equals €961.84 in total interest.

Activity 12.3 Help the following businesspeople answer the following queries using the Microfinance Ireland loan calculator. (a) Businessperson A wants to borrow €5,000 over three years. What can she expect her monthly repayments to be? (b) Businessperson B wants to borrow €10,000 over five years. What can he expect the total loan repayment to be? (c) Businessperson C wants to borrow €15,000. They want to know what the difference would be in the monthly repayment if they were to pay back the money in two years vs. five years. (d) Businessperson D wants to borrow €25,000. They want to know what the difference would be in the total amount repaid if they were to pay back the money in seven years vs. 10 years.

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Remember! Remember from Chapter 10 that by purchasing a share, the investor is buying a part of the company and is entitled to that same part of the company’s profits. Noel could approach people he knows and ask them if they might like to buy part of his company to provide money for the business to grow and to receive some of his profits. For example, at the beginning of his business journey he phoned his sister-in-law, who is very talented at building websites, and said, ‘I will sell you 10% of my company for €50,000 if you will also help to develop my websites.’ (Noel figured out this number by taking 10% of the €500,000 he expects the business to be worth in a few years’ time.) His sister-in-law invested the money and spent two hours every week reviewing and improving Noel’s websites.

Activity 12.4 Search online for the ‘10 Most Successful Shark Tank Businesses’ video on YouTube and watch the 10-minute video. For each of the 10 cases, write down how much each of the investors paid the entrepreneur in exchange for what percentage of their business. Use the table format shown below in your copybook. Business name

Amount the investor paid ($)

Where does a business get finance and why do people give it to them?

Private equity: Selling part of a business for money privately to another individual or legal organisation, whereby they would be entitled to a proportion of the business’s future profits.

Chapter 12

Private equity

Company percentage exchanged by the entrepreneur (%)

Public equity Public equity: Selling part of a business for money publicly to other people and legal organisations, whereby they would be entitled to a proportionate part of the business’s future profits.

Noel has great plans for the business and he believes that profits are Remember! going to grow significantly over time. Now Noel would like to give everybody (i.e. all members of the public) Refer back to Chapter 10: the chance to benefit from the high growth plans he has for the business. How Do I Go Shopping in At the same time, he would like to sell some of his own shares in the the Stock Market Shop? business and his sister-in-law would like to do the same. Noel isn’t doing this because he wants to stop working in his business. Instead, it’s because he has put so much effort in over the past 25 years that he would like to take some money out now and put it into a savings pot for himself. Alternatively, rather than sell shares in the business and keep the money themselves, Noel and his sister-in-law might simply want to grow the business. In order to raise money, they sell some of the shares of the business to other people so there is a pot of money now to build, grow and expand. Transition Year Finance

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The first thing he needs to do is understand how an initial public offering (IPO) works. Here are the steps that he needs to take: 1 Talk to all the people who make decisions in the company: He needs to explain to everybody why he thinks it’s a good idea to take the company public (i.e. make the shares available to everybody) and what the business needs to do to get ready. 2 Prepare his profit and loss account and balance sheet: Noel needs to prepare these financial accounts so that people interested in investing in his business can find out all about the company’s finances. They will want to know how much the business sells every year, how much it makes in profit, how much it pays to staff, how much property the business owns and lots of other information. 3 Choose an investment bank: An investment bank helps companies like Noel’s to find investors who have money to put into companies so that they can grow. They know how to manage the paperwork, deal with all the rules and regulations needed and can give Noel advice about what he needs to do. 4 Meet and speak to investors about his company: He needs to tell his company’s story to people who are interested in buying shares in the business through the stock exchange. He may need to go on TV and radio to answer questions that journalists have about the company. He could share live videos on social media, talking about the history of the business and its growth plans for the future.

Activity 12.5 Search online for the ‘Facebook’s Initial Public Offering – An IPO Case Study’ video on YouTube. Watch the 5-minute video, then answer the following questions. (a) Name one of the Facebook founders (i.e. the people who set up the company). (b) How much did Yahoo! offer to buy the company for in 2006? (c) What is the name of the investment bank that co-ordinated the Facebook IPO? (d) At what price did Facebook go to market? (e) If you had bought Facebook shares on the day that it went public and still held its shares today, what return would you have made? (f) Name three of the brands that Facebook owns.

Activity 12.6 Using the Canva website, create an infographic of the key characteristics of all five sources of finance. Best of luck to Noel with his IPO!

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Career spotlight Thomas Plunkett, Investment Technical Manager What course did you study in college? I studied my undergraduate degree in University College Dublin and got a B.Sc. Honours in Economics and Finance in 2003.

How did your course lead you to a job? From university I went on to work as a junior-level fund accountant and spent three years in my first job. However, I made sure to keep upgrading my skills and completed the course to become a member of the Certified Institute of Management Accountants (CIMA).

How has your career developed since? Over the next six years, I worked as a supervisor and then a manager in two different companies. I went travelling for a little while and then worked as a contractor – rather than being a direct employee of a company, I agreed to do certain jobs for them for a short period of time. After working with the valuation of hedge funds and private equity, I changed roles and for the past three years I have been an investments manager for a life insurance company. This involves responsibility for fund investment choices for policyholders and also oversight of the company’s bond portfolio. Being a CFA candidate was essential to getting this opportunity.

Are the exams tough? The CFA® Program is tough and nobody should be fooled into thinking that it’s not. Don’t underestimate the commitment needed to complete the Program. But it’s worth the effort, as having the CFA designation after your name shows the hard work you did to obtain the globally recognised qualification.

What other benefits have you experienced from being part of the CFA Institute global community? I have been volunteering as a member of the Develop Future Professionals Committee for CFA Society Ireland for the past two years. I have very much enjoyed meeting everyone involved with the society, helping students and organising events.

insert 12_11 - photo analysing funds

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Where does a business get finance and why do people give it to them? Chapter 12

End-of-chapter exercises

Chaptersummary summary Chapter

1 Explain in your own words the five types of financing that companies can avail of. 2 Distinguish between EBIT and EBT. 3 Describe the three objectives that Enterprise Ireland has for helping Irish companies to grow. 4 Use the Microfinance Ireland loan calculator (or another online calculator) to answer the following questions. (a) Businessperson A wants to borrow €10,000 over four years. What can she expect her monthly repayments to be? (b) Businessperson B wants to borrow €50,000 over 10 years. What can he expect the total cost of the loan to be? (c) Businessperson C wants to borrow €75,000. They want to know what the difference would be in their monthly repayment if they were to pay back the money in seven years vs. 10 years. (d) Businessperson D wants to borrow €25,000. They want to know what the difference would be in the total amount repaid if they were to pay back the money in three years vs. 10 years. 5 In your copybook, compare and contrast the similarities and differences between public and private equity in a Venn diagram like the one here. 6 Document the four steps in the IPO process. 7 (a) Record as many words as you can relating to finance. Use the table below to find the value of each word that you have noted. Example: Bootstrapping = (3 + 1 + 1 + 1 + 1 + 1 + 1 + 1 + 3 + 3 + 1 + 1 + 2) = 20 points 1 point

A, E, I, L, N, O, R, S, T, U

2 points

D, G

3 points

B, C, M, P

4 points

F, H, V, W, Y

5 points

8 points

J, X

10 points

Q, Z

Public equity

Private equity

(b) Using the above values, what is the highestscoring word based on this topic that you can create?

JOURNAL QUESTION

Imagine that you earn €40,000 per year and you have €1,000 to put into an investment. Which of the following would you prefer and why? The stock of a company that is profitable and grows by 5% per year The stock of a company that isn’t profitable but is currently working on a vaccine for a virus, and if it works the business will be hugely profitable A bank deposit that offers a 1.5% fixed rate for three years in a row

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Chapter

How do I get a regular income from the stock market?

Learning objective

• Understand how some companies pay dividends and how investors make decisions based on these dividends.

Learning outcomes

• Calculate a dividend yield. • Examine a company’s dividend history. • Determine the sustainability of a dividend payment.

Let’s set the scene Sinéad recently graduated from college and now works as a trainee accountant in Galway. She is looking at her bank account and sees that she has €2,000 that she won’t need for a couple of years. She wants to invest it, but she doesn’t like the idea of putting money away for a long period of time without getting anything back. If only she could invest today in the knowledge that her money could rise in the future as well as getting a small amount of money on a regular basis. Great news, Sinéad – this is possible through a dividend.

Literacy links

• Dividend, dividend yield, annual dividend growth rate, dividend cover

Dividends

Numeracy links

Dividend: A sum of money that a company regularly pays out of its profits to its shareholders.

• Calculating dividend yield

Cross-curricular links

• Business Studies: Company profit decisions • Maths: Calculating yields • Accounting: Dividend yield ratio

Money Matters BOOK.indb 109

Some companies choose not to pay any dividends at all and instead reinvest all their profits back into the business, pay down debt or other things. Other companies choose to pay dividends out of their profits today to shareholders, while many companies commit to paying a dividend in the future from their future expected profits. Dividends are usually paid in the form of a cash payment deposited in a shareholder’s account. Sinéad wonders why companies would just give money away to the people who are shareholders. If a company can pay a dividend on an ongoing basis to a group of investors, then it must be expecting to generate profits in the future. This is a good sign! If people (including Sinéad!) want income from their shares, they will look for and buy these types of shares. In Chapter 10, you learned that investing in a company means that you can get a share of their profits. You can get that through the dividend received or through the profit made by selling their shares at a higher price than you bought them at.

08/02/2021 15:20

Advantages and disadvantages of dividends from the investor’s perspective Advantages: The investor receives a payment on a quarterly (four times per year), semi-annual (twice per year) or annual (once per year) basis. The investor can use this money to reinvest in more shares or for any other purpose (rather than the company using the money as it wishes). Disadvantages: If a company pays a dividend, it cannot reinvest all the firm’s profits to fund business expansion or pay down debt, which means the share price may not rise as much in the future. The investor must pay income tax on the dividends (in some countries, this tax rate can be higher than on capital gains).

Dividend yield For Sinéad to compare the dividends between companies, she needs to learn about the dividend yield. Dividend yield: The ratio of a company’s annual dividend compared to its share price. It is expressed as a percentage.

Annual dividend per share Share price

100 1

Example: Sinéad researches that Company A has a share price of €10 and issued one dividend this year of €0.50. Annual dividend per share Share price

100 1

€0.50 × €10

100 1

= 5%

Sinéad then finds out that Company B has a share price of €15 and issued one dividend this year of €1.20. Annual dividend per share Share price

110

100 1

€1.20 × €15

100 1

= 8%

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Annual dividend per share Share price

100 1

€1.50 × €20

100 1

= 7.5%

Sinéad would like to earn as much income from her shares as possible. For her own clarity, she puts each choice into a table. She puts them in order of dividend yield, from the highest to the lowest. Company

Share price

Dividend

Dividend yield

Company B

€15

€1.20

Company C

€20

€1.50

7.5%

Company A

€10

€0.50

Note: Sinéad needs to be aware that if the company is giving out too much profit in the form of dividends and not holding on to some reserves in case of difficult times, it could put the whole company and the dividend in danger in years to come. The other reason the yield could be high is if the share price fell after the announcement of the dividend.

Activity 13.1

Company

Share price

Dividend

Company 1

€4

€0.50

Company 2

€6

€1.00

Company 3

€45

€5.50

Company 4

€34

€10.50

Company 5

€78

€10.50

Company 6

€23

€6.50

Company 7

€12

€0.75

Company 8

€56

€15.00

Company 9

€26

€0.00

Company 10

€89

€0.50

Money Matters BOOK.indb 111

Rank

Chapter 13

Copy this table into your copybook and fill it in by calculating the dividend yield for each company, then assign them a rank. For example, the highest dividend yield would be #1 and the lowest dividend yield would be #10.

How do I get a regular income from the stock market?

Finally, Sinéad completes her analysis by getting the data for Company C, which has a share price of €20 and a dividend of €1.50.

Transition Year Finance

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Dividend yield

08/02/2021 15:20

Dividend history

Did you know? • Bank of Montreal has been paying out dividends since 1829.

CASE STUDY: The Dividend Payers Look at the following table of The Dividend Payers’ dividend history for the years 2017–2019 (note that the dates use the US system of month/day/year).

Payable

Amount ($)

Payable

Amount ($)

11/15/19

0.43

11/15/17

0.40

08/15/19

0.43

08/15/17

0.40

05/15/19

0.43

05/15/17

0.40

02/15/19

0.42

02/15/17

0.39

Total dividends in 2019:

1.71

Total dividends in 2017:

1.59

11/15/18

0.42

11/15/16

0.39

08/15/18

0.42

08/15/16

0.39

05/15/18

0.42

05/16/16

0.39

02/15/18

0.40

02/16/16

0.38

Total dividends in 2018:

1.66

Total dividends in 2016:

1.55

What can we learn from this?

CASE STUDY

Next, Sinéad wonders about the company’s dividend history, i.e. when it started paying a dividend. To find this information, she needs to go to the ‘Investor Relations’ section of a company’s website or search online for the firm’s dividend history.

Did you know?

• The Dividend Payers has increased its dividend

• Colgate-Palmolive has paid dividends every single year since 1895.

each year in the following way: • Investors in 2017 received 4c more per year than in 2016. • Investors in 2018 received 7c more per year than in 2017. • Investors in 2019 received 5c more per year than in 2018.

• The Dividend Payers pays out a dividend every quarter. • The Dividend Payers increased its dividend in the second quarter of the year in 2017, 2018 and 2019.

• If The Dividend Payers’ share price was $66.87 in 2019, then we can work out the dividend yield as follows:

Dividend (previous year) × 100 1 Share price

112

$1.71 $66.87

100 = 2.56% 1

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Dividend yield Share price

Activity 13.2 Search online for companies that pay good dividends. Find their dividend histories and compare how much the dividends paid out have changed (i.e. increased or decreased) over the past three years.

Dividend growth rate

Chapter 13

As Sinéad observed with The Dividend Payers, companies can choose to increase their dividend over time. She likes the sound of that, as if she invests today and can generate a dividend yield of, say, 5%, this might grow to a higher number in the future! Sinéad decides to examine another company’s dividend history, but this time she would like to examine the annual dividend growth rate. Annual dividend growth rate: The increase in a stock’s dividend compared to the year before. It is expressed as a percentage.

Dividend (current year) – Dividend (previous year) Dividend (previous year)

How do I get a regular income from the stock market?

Note: The higher the dividend, the higher the dividend yield if the share price stays the same. The higher the share price, the lower the dividend yield if the dividend stays the same.

100 1

For example, if Company X had a dividend of €0.75 in the current year and a dividend of €0.60 last year, we would calculate the annual dividend growth rate as: (€0.75 – €0.60) × €0.60

100 1

= 25%

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Activity 13.3 Using the data below from Kerry Group PLC’s dividend history, copy the blank table into your copybook and fill it in by calculating the annual dividend growth rate from the years 2010 to 2019. (Note: Kerry Group pays a semi-annual dividend. The first is called the ‘interim dividend’ and the second is called the ‘final dividend’.) Interim dividend

Final dividend

Payment date

Amount

Payment date

Amount

13/11/2020

25.90c

15/05/2020

55.1c

15/11/2019

23.50c

10/05/2019

49.2c

16/11/2018

21.00c

18/05/2018

43.9c

10/11/2017

18.80c

19/05/2017

39.2c

18/11/2016

16.80c

13/05/2016

35.0c

13/11/2015

15.00c

15/05/2015

31.5c

14/11/2014

13.50c

09/05/2014

28.00c

15/11/2013

12.00c

10/05/2013

25.00c

16/11/2012

10.80c

11/05/2012

22.40c

11/11/2011

9.80c

13/05/2011

20.0c

12/11/2010

8.80c

Year

Interim dividend (c)

Final dividend (c)

Total dividend (c)

Euro change compared to previous year (c)

Annual dividend growth rate (%)

2012

10.8

22.4

33.2

3.4

11.41

2011

9.8

20.0

29.8

2020 2019 2018 2017 2016 2015 2014 2013

Activity 13.4 Search online for Kerry Group’s dividend history to find the current interim and final dividend payments. Have they increased, decreased or stayed the same as the previous year?

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Dividend cover: The ratio of a company’s earnings per share to its dividend per share.

While the past doesn’t predict the future, there is one clear way of getting a good indication. Ask this question: Is the company earning more than it’s paying out in dividends? In other words, is the company earning enough profits to comfortably pay a dividend?

Remember! Revenue (or sales) – Costs = Profits (or earnings) For example, if a company is generating profits of €8.50 per share and is expecting to pay out €2.50 per share in dividends, we know that it can comfortably do so. We would expect this year’s dividend to be sustainable as a result since €8.50 per share > €2.50 per share. However, if the company was earning only €2.50 in profits and had expected to pay out €8.50 per share, then that dividend would be very unlikely to be paid since €2.50 per share < €8.50 per share.

Activity 13.5

Chapter 13

Sinéad then wonders how sustainable these dividends are. After all, even if companies have been paying out dividends for decades, how can she tell if they’re going to continue or even grow?

How do I get a regular income from the stock market?

Dividend sustainability

Determine whether the two companies below are likely to be able to pay out the following dividends. Earnings per share

Dividends per share

(a)

€8.50

€4.50

(b)

€2.50

€4.50

Is the dividend likely to be paid?

Activity 13.6 Draw this triple Venn diagram in your copybook. Fill in the characteristics of each specific circle, the characteristics the circles have in common with each other and the characteristics that each pair of circles have with each other.

Dividend yield

Dividend cover

Dividend growth

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Activity 13.7 (a) Create a crossword (complete with clues) using the following words: • Annual • Final • Payout • Cash • Growth • Rate • Dividend • Income • Reinvest • Earnings • Interim • Safety (b) Explain each of the terms from the crossword.

• Shareholders • Yield

Best wishes with your investments, Sinéad!

Career spotlight Oliver McClure, CFA, Head of Research How did you get started in finance? My path to a career in finance began with a first-class honours degree in Accounting and Finance from the University of Edinburgh. From there I began working as an equity research analyst, i.e. considering all the details about a stock so that we could decide about buying, selling or holding it. After that, I worked as a manager of a portfolio (i.e. a pool of stocks), which included stocks from all over the world.

What do you do today? My job involves looking for and finding undervalued stocks, i.e. those where we think their share price is a lot lower than it should be. This involves developing a deep understanding of industries, companies and, most important, how those companies use their own money to build their business.

How did you feel when you started studying for the CFA® exams? At the time the CFA Program was just becoming popular in Ireland and my employer gave me a lot of encouragement to do it. I don’t think I appreciated the real boost it would give to my career at an early stage. As I look back, I can see that it gave me a springboard in my career to aim for better opportunities faster.

What does the CFA Program not give you? It does not make you an expert in every single aspect of investing. The key is that it equips you with a breadth of knowledge that gives you the ability to understand, at a high level, what you don’t know while at the same time giving you the tools and skills required to further your knowledge in specialist areas.

What other benefits have you experienced from being part of the CFA Institute global community? Having volunteered with CFA Society Ireland for over 10 years, three of those as president, I have had the opportunity to build a network both in Ireland and internationally. I would strongly encourage all members of CFA Society Ireland to attend the society events, as you will meet some really interesting people.

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1 Define the following terms: (a) Dividend (b) Dividend yield (c) Dividend growth (d) Dividend cover 2 Why do companies choose to give dividends to shareholders? 3 Why do investors choose to buy shares in companies that give them dividends? 4 State two disadvantages that investors face if they buy stocks that pay dividends. 5 Calculate the dividend yield for each of the following five companies. (a) Company 1 has a share price of €56 and a dividend of €6.78 (b) Company 2 has a share price of €36 and a dividend of €0.38 (c) Company 3 has a share price of €106 and a dividend of €16.08 (d) Company 4 has a share price of €5 and a dividend of €0.08 (e) Company 5 has a share price of €38 and a dividend of €2.07 6 From your calculations in question 5, rank the companies in order of their dividend yield (highest to lowest). 7 Determine whether the following projected dividends are sustainable by calculating the dividend cover. (a) Company A has an earnings per share of €5.60 and a projected dividend per share of €2.30 (b) Company B has an earnings per share of €0.60 and a projected dividend per share of €2.30 (c) Company C has an earnings per share of €5.60 and a projected dividend per share of €12.30 (d) Company D has an earnings per share of €5.60 and a projected dividend per share of €5.60 (e) Company E has an earnings per share of €2.60 and a projected dividend per share of €12.30

How do I get a regular income from the stock market?

Chaptersummary summary Chapter

Chapter 13

End-of-chapter exercises

8 Research three different stocks and find the following information in each case, then present your findings to the class. (a) Dividend yield (b) Dividend growth (c) Dividend cover

JOURNAL QUESTION

Would you prefer to buy the stock of a company that reinvests all its profits back into the business or a company that pays a dividend?

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Chapter

How do I know if a business really makes money?

Learning objective

• Understand the impact that time, return, sequencing and taxes can have on the final value of an investment.

Learning outcomes

• Compose and validate a price. • Differentiate between fixed and variable costs. • Incorporate quantity demanded into a pricing composition. • Consider hidden costs in a pricing composition. • Evaluate profit and the factors that drive profit. • Assess a company’s earnings and earnings growth.

Literacy links

• Fixed cost, variable cost, profit, marketing, earnings per share (EPS), earnings growth, P/E ratio

Numeracy links

• Calculating profit • Analysing different scenarios • Measuring earnings growth

Cross-curricular links

• Business Studies: Management and planning, marketing, getting started in business • Maths: Determining a price, evaluating profit • Economics: Enterprise factor of production, international trade • Accounting: Earnings per share, earnings growth, price/earnings ratio

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Let’s set the scene Mike studied to be a teacher, then went to Shanghai, China for five years to teach English. At first it was difficult to settle in because life was so different – the primary language is Mandarin, the culture and traditions are so different and the city is huge, with a population of almost 25 million. But it was also so exciting! Mike joined the Shanghai GAA team and met lots of Irish people; he joined a language group and met people from other countries through that; and he met lots of local people through the work he did in his school.

What’s next for Mike? Mike has decided to move back to Ireland and is wondering about his career options. Should he apply to work in a school as a teacher or look at something different? Mike is going to be travelling back in March, as he is the best man for his brother’s wedding. He will have to make up his mind about what to do long before the school year starts in September and may have to get another job in the meantime. It just so happens that as he is thinking about this, the principal calls him in to his office one day. He tells him that they’re thinking of bringing 40 students on a study tour and perhaps they should consider Ireland. He knows that Mike is returning to Ireland in March, so if he could organise the tour for April and go with the group all over Ireland, they would be happy to give Mike the money. Mike thinks this could be a very interesting idea and starts putting a plan in place.

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Afternoon

Evening

Arrive in Dublin Airport Welcome session

Lunch in Dublin Walking tour of Dublin and visit to Dublinia

Dinner in Dublin

St Patrick’s Cathedral and EPIC experience

Lunch in Dublin GAA lesson

Bus to Galway Dinner in Galway

Local school visit

Galway Atlantaquaria

Dinner in Galway

Drive through the Burren to Liscannor Cliffs of Moher visit

Drive to Turoe Pet Farm in Loughrea

Dinner in Galway

Drive to Donegal

Glenveagh National Park, Donegal Drive to Derry

Peace Bridge tour Dinner in Derry

Drive to Giant’s Causeway Giant’s Causeway Visitor Experience

Lunch in Belfast Shopping in Belfast

Dinner in Belfast

Titanic Belfast

Lunch in Belfast National Museums Northern Ireland

Drive to Dublin Dinner in Dublin

Drive to airport

Fly to China

Mike presents this itinerary to his principal, who loves it. In particular, he likes the idea of connecting directly with a school in the area, travelling to a variety of regions around the country and including an experience of our national sport. Now Mike needs to work out a price for the principal. Mike makes a list of the costs and separates them into fixed costs and variable costs.

How do I know if a business really makes money?

Morning

Chapter 14

Day

Fixed and variable costs Fixed cost: This cost stays the same independent of the amount of goods produced or the usage of the service. Variable cost: This cost varies with the amount of goods produced or the usage of the service.

Cost

Fixed or variable?

Why?

Accommodation

Variable

The higher the number of people on the tour, the more rooms will be needed.

Flight

Variable

The higher the number of people on the tour, the more plane tickets will be needed.

Bus

Fixed

One bus will need to be hired, regardless of whether there are 10 or 30 people on the tour.

Tour guide

Fixed

One tour guide will need to be hired, regardless of whether there are 10 or 30 people on the tour.

Food

Variable

The higher the number of people on the tour, the more breakfasts, lunches and dinners will be needed.

Entry tickets

Variable

The higher the number of people on the tour, the more entry tickets will be needed.

Group insurance

Fixed

The price of the insurance will depend on the number of people on the tour.

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Activity 14.1 Create a pie chart of the projected percentages of cost across the categories, either using a spreadsheet program such as Microsoft Excel or Google Sheets or using paper and markers. (Look at the sample pie chart here to help you.) Compare the cost projections to the actual costs while you go through this chapter.

Cost 15%

20%

50%

15% Accommodation

Flights

Food

Entry Tickets

Mike makes some enquiries about the fixed costs first and finds the following. Fixed costs: Tour guide at €500 per day for 7 days Bus hire at €700 per day for 8 days Group insurance Total

€3,500 €5,600 € 750 €9,850

Mike realises that in order to move forward he needs to know how many people will be on the tour, so he sends an email to the principal. Inbox

Inbox

From: Mike (Teacher) To: Principal Chang

From: Principal Chang To: Mike (Teacher)

Dear Principal Chang,

Dear Mike,

To follow up on our conversation about the itinerary, could I ask how many students and teachers you expect to travel on the study tour in April?

Based on previous years, we expect that 30 students and two teachers will go on the tour. I would appreciate if you could send the price to me by Friday.

Kind regards, Mike

Kind regards, Principal Chang

Mike now needs to spread the fixed costs between the 32 people so that he receives enough money to cover everything. Total fixed costs = €9,850 ÷ 32 = €308 Now Mike needs to work out the variable costs per person.

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This is the cost of staying at a hotel in each location. Mike needs to book enough rooms to accommodate everybody every night. He makes some calls to hotels in the area and he finds that the average price is €99 per person per night. Therefore, this works out as: Accommodation: €99 × 7 nights = €693 per person

Food This is the cost of each person’s breakfast, lunch and dinner. Mike had asked the hotels to include breakfast in their accommodation price, so he doesn’t have to add anything extra for that. He looks into the costs of local cafés and restaurants and finds that he needs to budget €12 per lunch and €25 per dinner for each person. Therefore, this works out as: Lunch: €12 × 7 days = €84 per person Dinner: €25 × 7 days = €175 per person Daily food budget: €37 × 7 days = €259 per person

Entry tickets

Chapter 14

This is the cost of gaining access to the various tourist attractions on the itinerary. Mike needs to look up each one of these and call them, as perhaps they can offer a group discount. He budgets €10 per entry and his proposed itinerary includes 10 different paid activities. Therefore, this works out as:

How do I know if a business really makes money?

Accommodation

Activities: €10 × 10 activities = €100 per person

Flight This is the cost of taking a return flight from Shanghai to Dublin. He looks up flights online using a website that compares all airline prices and calls some travel agents to get an estimate of a price. The reason they can’t guarantee it is because prices can change over time, so he makes a note of the estimate price. Flight estimate: €650 per person

Total Now that he has worked all that out, it’s time to put it all together. Costs (per person)

Amount (€)

Fixed costs

308

Accommodation

693

Food

259

Activities

100

Flight

650

Total

2,010

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Activity 14.2 In groups of four, research the costs of this trip by doing the following: • Check out the Skyscanner website for return flights between Dublin and Shanghai. • Find a price for hotels in the various locations on the Booking.com website. • Look up local cafés and restaurants and identify what price you would need to factor in for lunch and dinner. (Remember to include drinks too.) • Research each of the activities listed in the itinerary and find the entry cost to each one. • Add up the total per person and compare it to Mike’s work. (Assume the fixed costs are the same as in the story.)

Emergencies and unexpected developments Mike thinks he should probably add in €190 per person in case there are any extra costs he hasn’t thought of, so perhaps he should go back to Principal Chang with a price of €2,200 per person.

Wages At this stage, Mike is pretty tired! He has spent all his evenings on the phone back to Ireland making enquiries and has racked up a significant phone bill in doing so. He would have to ensure that he doesn’t have anything else on during the week of the tour and he hasn’t even started answering any individual questions that anybody on the tour might have. This is actually quite a lot of work. Also, if he were going to take on more tours, he might have to employ some people to help him. He hadn’t taken any of this into consideration.

Remember! It’s important to factor wages into the list of costs. Mike adds another €200 per person to cover the cost of all the work that he has done, so now his costs add up to €2,400 per person.

Profit After doing all this, Mike wonders what would happen if the tour didn’t go ahead. He has spent hours and hours working all this out, so if it doesn’t go ahead then he would feel like he had wasted all that time. He could have been looking for a new job at home, out playing GAA with his friends or simply relaxing in the evenings. Also, what would happen if anything went wrong on the tour? What if one of the hotels overbooks them or a restaurant charges more than he had budgeted for? Mike then realises that he has already taken a risk – and will continue to take a risk – in doing this. He has given up a lot of time already and must take responsibility for everything that happens during the tour. Therefore, he needs to be compensated for taking on the risk. This is what profit is for. Profit: A financial gain, i.e. the difference between sales and costs.

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Costs (per person)

Amount (€)

Fixed costs

308

Accommodation

693

Food

259

Activities

100

Flight

650

Emergencies + unexpected developments

190

Wages

200

Profit

100

Price

2,500

How do I know if a business really makes money?

Mike factors in a profit of €100 per person and arrives at the final price of €2,500.

Activity 14.3

Chapter 14

In groups of three, design a tour of your county for a group of international students who speak English from Brussels, Belgium. They want to spend three days visiting your region and learning about Irish culture. They would also like to visit your school. What would you organise for them? Where would you take them? What experiences would you want them to have? Where would you suggest they stop on the way from the airport? Design a full itinerary for the three days and put together a price, including flights, accommodation, food, entry tickets to any paid activities, your own group’s wages and some profit. Assume the fixed costs remain the same as in Mike’s case (i.e. add in €308 per person for the bus hire, tour guide and insurance).

Marketing At this stage, Mike starts to wonder if he could organise lots of tours. Perhaps rather than getting a job as a teacher when he goes back to Ireland, he could do this instead. That would be great! He could bring students from all over China to experience Blarney Castle in Cork, Kildare Village for shopping, the Ring of Kerry, the Book of Kells in Trinity College, Newgrange in County Meath, Glendalough in County Wicklow and so much more. He could show them Irish experiences such as cooking Irish food, learning Irish dancing, going to Croke Park for a hurling or camogie match or bringing them to see a traditional Irish music session, walking through the English Market in Cork, going surfing in Kerry, climbing Croagh Patrick in Mayo … However, Mike realises that he got lucky this time because Principal Chang approached him directly about this idea and he was going to be back in Ireland by the time they came anyway. Therefore, he was the right person in the right place at the right time – and all without competition. If Mike is really going to make a business out of this, he is going to need to do some marketing. Marketing: The action or business of promoting and selling products or services.

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Mike could plan some meetings with other schools in Shanghai. He could create a website with examples of study tour experiences. He could set up social media profiles using Instagram, Facebook, Twitter, WeChat and others. He could sponsor the Shanghai GAA team and ask the players to recommend his new business to any contacts they have in their own schools. Mike will have to factor these marketing costs into his price in the future.

Activity 14.4 Outline five other marketing ideas that Mike could use to promote his new business.

Earnings per share (EPS) Mike considers how he might invest the money that he makes from these study tours. He likes the idea of investing in the stock market. Now that he has put so much work into figuring out his own profit margin, he wonders how he might analyse the profit of a company that is listed on a stock exchange. He knows that large companies make millions or even billions in profit, but how much would he get … and how? Mike studies the idea of earnings per share (EPS). Earnings per share (EPS): This is calculated as a company’s profit divided by the outstanding shares of its common stock – in other words, the company’s profit for the year divided by the number of shares that all shareholders hold.

Mike then wonders where this money goes. If he buys shares in a company, does he get some of its profits directly into his bank account?

Remember! Profit means the same thing as earnings. A company’s profit is divided into two key areas: it is paid out as dividends or reinvested in the company (including paying down debt). In some cases, a company pays out a dividend. This is a payment from the company directly to shareholders. A company can either choose to do this or it can reinvest its profits right back into the company. (You learned a lot about dividends in Chapter 13.)

Company earnings

Dividends

Reinvested in the company

‘Share prices follow earnings’ However, whether a company does or doesn’t pay out a dividend, the other way that Mike can benefit from a company’s earnings is through a rise in the share price. If a company makes money consistently over time, then it’s likely that more shareholders will want to own their shares. The more people who buy a company’s shares, the higher the price can go. That’s how Mike can make money in the stock market: By receiving a dividend directly from the company By selling his shares at a higher price than he paid to buy them. You can find a company’s earnings per share by searching online for ‘Revenue EPS Nasdaq’.

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(i) Tesla (j) Ford

Earnings growth People interested in buying a stock or those who own a stock are going to be interested in the profit level of the company. However, they’re also going to want to know how that company has grown those profits in the recent past as well as how they will grow into the future. Earnings growth: The change of earnings per share over a period of time in terms of a percentage.

For example, Stock Z began the year with an EPS of €1 and this grew to €1.30 by the end of the year. The earnings growth rate was: €1.30 – €1.00 €1.00

= 30%

In the case of Facebook, the company consistently made more money over the five years shown in this graph. We can see this because the EPS has been rising in the bottom section of the graph below, while the share price in the top section of the graph has followed.

Chapter 14

Find the earnings per share on the Nasdaq website for each of the following: (a) Twitter (c) Disney (e) Nintendo (g) Vodafone (b) Snapchat (d) Aer Lingus (f) Bank of Ireland (h) Apple

How do I know if a business really makes money?

Activity 14.5

340.00 293.66 240.00

140.00

40.00

Sep 1, 15

Mar 1, 18

Facebook five-year share price We may also be interested in looking ahead. Some companies produce a forecasted earnings per share. For example:

GRT (earnings growth rate): GRT reflects a company’s one- to three-year forecasted earnings growth rate in per cent per year. Facebook has a forecasted earnings growth rate of 16.00%, which VectorVest considers to be very good. Transition Year Finance

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In other words, in this example, VectorVest expects that Facebook will grow its earnings by 16% per year in the next one to three years.

Activity 14.6 Using the VectorVest Free Stock Analysis website, find the earnings growth rate of each of the following: (a) Twitter (f) Bank of Ireland (b) Snapchat (g) Vodafone (c) Disney (h) Apple (d) Aer Lingus (i) Tesla (e) Nintendo (j) Ford Going back to Mike, he may choose to buy a stock with consistently growing earnings that pays out a dividend every year or a company with fast-growing earnings that doesn’t pay a dividend out at all but rather reinvests its earnings every year.

P/E ratio It’s likely that Mike is willing to pay a higher price for a share with faster-growing earnings. We can measure this by examining the P/E ratio. P/E ratio: The share price divided by the earnings per share.

For example, if Share Y’s stock is priced at €80 and its earnings per share is €8, its P/E ratio is 10. In other words, investors are willing to pay 10 times Share Y’s stock’s earnings. In the above example, on 3 February 2020 Facebook had a share price of $204.19 while its expected earnings per share in 2019 was $9.13. Therefore, its P/E ratio is $204.19 ÷ $9.13 = 22.36 times. A high P/E ratio could mean: Investors are excited by the company’s prospects and are willing to pay more for its expected fast-growing earnings. The stock is overvalued, i.e. people have become over-excited about a company’s prospects and have paid too much to own the shares. A low P/E ratio could mean: Investors can buy a stock at a bargain price as the stock is undervalued, i.e. investors aren’t aware of or aren’t choosing to buy the stock for its potential to make more profits. Investors are disappointed or aren’t excited by the company’s prospects and therefore don’t want to buy the stock.

Activity 14.7 Find the P/E ratio from the Google Finance website for each of the following stocks based on your earlier research. Rank the list of these stocks in order from the highest to the lowest to help Mike make his selection. (a) Twitter (c) Disney (e) Nintendo (g) Vodafone (i) Tesla (b) Snapchat (d) Aer Lingus (f) Bank of Ireland (h) Apple (j) Ford

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Career spotlight Alan O’Dea, CFA, Associate Investment Director How did you become interested in finance? Initially my interest was a career in construction and this led me to an undergraduate degree in Quantity Surveying. I was lucky, however, that one of my lecturers was an avid investor and through him I developed a keen interest in financial markets. Eventually, I came to the conclusion that maybe the construction industry wasn’t really for me, so I decided to take my interest in financial markets to the next level and did a postgraduate master’s degree in Financial Economics. This led to my first job in the investment industry.

What do you do today? In my current role at Beechbrook Capital, a European private debt fund manager, we make strategic investments in private companies across a range of industries. My specific role covers both investment analysis and deal execution. Our investment process requires extensive investment due diligence and risk analysis to determine if a company’s valuation meets our criteria. Following a positive investment decision, deal execution is the next critical step and requires collaborating with a range of third-party professionals to ensure a successful transaction completion.

What triggered you to study for the CFA® charter? While in my first job in the investment industry, it soon became clear to me that if I wanted to move forward and develop a career in financial markets, then obtaining a CFA charter would be of huge benefit. Studying for the CFA charter helped me to do my job better. The combination of having the CFA charter and on-the-ground work meant that I developed a solid understanding of what clients wanted, how they were different and how to pick projects for clients based on their needs and wants.

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Chapter 14

How do I know if a business really makes money?

End-of-chapter exercises 1 Define the following terms: (a) Fixed costs (b) Variable costs

Chaptersummary summary Chapter

(e) Earnings per share (f) Earnings growth

2 Differentiate between fixed costs and variable costs, with examples in each case. 3 A group of Transition Year students wants to organise a cake sale. State whether each of these costs is fixed or variable: (a) Renting the booth to sell the cakes (c) Cake tins (b) Ingredients (d) Marketing posters 4 Calculate the profit per person from this study tour based on the following information. Costs (per person)

Amount (€)

Fixed costs

Food

Activities

100

Emergencies + unexpected developments

Wages

Profit Total price

250

5 Calculate the total profit of the above study tour if (a) 25 (b) 50 or (c) 100 people participate. 6 Outline some considerations for the tour organiser if they were to take on 100 participants rather than 25. 7 Find the earnings per share (EPS) on the Nasdaq website for each of the following: (a) General Motors (c) Facebook (e) Heinz (b) Johnson & Johnson (d) Alphabet (f) Procter & Gamble 8 Use VectorVest Stock Analysis Reports to find the earnings growth rate for each of the following: (a) General Motors (c) Facebook (e) Heinz (b) Johnson & Johnson (d) Alphabet (f) Procter & Gamble 9 Calculate the P/E ratio of each stock listed in questions 7 and 8 by dividing the current share price by the earnings per share in your answers from question 7. 10 Rank the list of these stocks in order from the highest to the lowest P/E ratio.

JOURNAL QUESTION

There are two types of company in the stock market. Defensive businesses don’t depend on the economy, for example people have to buy food, medicine and utilities (e.g. heat and light) all the time. Cyclical businesses do depend on the economy – the more money people have, the more they spend on holidays, clothes, cars, etc. If you had €1,000 to invest and could choose only a defensive or a cyclical stock, which would you choose and why?

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Chapter

How do I know which investment performed the best?

Learning objective

• Understand how to conduct research, determine the suitability of a benchmark to a dataset and make conclusions about outperforming investments.

Learning outcomes

• Distinguish between a population and a sample. • Differentiate between primary research and secondary research. • Conduct primary research to determine sample statistics. • Research stocks with certain market capitalisation characteristics. • Identify the correct index to examine as a benchmark. • Evaluate which investment performed better than others when presented with data.

Literacy links

• Population, sample, primary research, secondary research, market capitalisation, stock index (or stock market index), benchmark

Numeracy links • • • • •

Collating data Counting, ranking and making conclusions Quantifying market capitalisation Comparing index performances Examining different datasets over different periods of time

Let’s set the scene Ava works as an analyst in a company in Dublin. Her job is to find the answers to lots of different questions. Sometimes she does this by searching for information on the internet. Other times she goes out on-site to visit the company that she is analysing and with the management. Sometimes she goes to events run by the government, where she gets updates on their plans in relation to the economy, housing or jobs. On some days she works from home or a coffee shop because she needs to go through all the information that she has gathered and put it in a Word document with some graphs and figures before emailing it to her manager.

Ava’s task for today Today, Ava’s job is to research the answers to these five questions. • Has the entire stock market, all over the world, increased or decreased so far this year? • How did the UK stock market perform yesterday? • How did Canadian bonds compare to New Zealand and Hong Kong bonds in the past year? • If I had invested in property or stocks in the past month in the UK, which would have performed better? • Should I have put money into technology or financial stocks last year?

Cross-curricular links

• Business Studies: Finance • Maths: Statistics • Economics: Primary research, trends

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Sampling But first, Ava can’t answer any of these questions unless she has a way to measure things. For example, in the case of the first question, how could she possibly check the price of every single stock in every single market in every single part of the world? Instead, she needs to take a sample. If you had to conduct primary research on a subject, you might need to collect and analyse the data from your own class or year. You might ask the following questions:

Population: A population includes all the elements from a set of data. Sample: A sample consists of one or more observations drawn from the population. Primary research: A method that researchers use to collect data directly rather than depending on data collected from research collected previously. Secondary research: A method used by researchers that involves using data that already exists.

How often do you use the internet? 18 16 14 12 10 8 6 4 2 0

Once per week

More than once per week but less than once per day

More than once per day but less than once per hour

Every hour that I’m awake!

Do you use smart household equipment?

Yes No

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Chapter 15

Population

How do I know which investment performed the best?

Now you have the views of your population. In other words, you know what everybody in your class or your year thinks. However, this is a sample of what all students your age in Ireland think. In other words, a sample set of data is a collection of a small amount of data intended to represent the whole population.

Sampling Inference

Sample

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The Central Statistics Office (CSO) is Ireland’s national statistical office. Its role is to collect, analyse and make available statistics about Ireland’s people, society and economy. The CSO collects big samples of data to produce statistics about people in Ireland. For example, you might gather statistics about the usage of internet and smart household equipment in your class or year, but the CSO gathers this information on a national scale.

Source: Central Statistics Office

Activity 15.1 Collect some data from your class or year about a subject that is relevant to them and where people are likely to have different views. For example: • What social media platforms do they prefer? • What will they do after school (e.g. go to university, get an apprenticeship, start working full time, travel)? • If you gave them €100 right now, what would they spend the money on? Add up the number of responses that you get for each answer, then put your data into a bar chart using Microsoft Excel, Google Charts or some other spreadsheet program. Now that we understand sampling, let’s help Ava with her work today.

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Market capitalisation: The number of shares available multiplied by the share price. It’s often referred to as market cap. (In the bond market, the market capitalisation of a bond is the amount of money borrowed.)

For example, if a company’s share price is €50 and it has 1,000 shares, then we would say the market capitalisation is €50 × 1,000 = €50,000. Some very big companies that you may know of could have millions of shares and their market cap could be worth billions!

Activity 15.2 Find out the market cap of each of the following companies: (e) Nissan (a) IAG (f) HelloFresh (b) Bank of Ireland (g) Pfizer (c) Scottish & Southern Energy (h) Eli Lilly (d) Netflix To help Ava answer her questions, let’s take a sample of the entire population of all stocks. This is called an index.

How do I know which investment performed the best?

To answer this question, the first thing we need is a sample of stocks from all over the world. We can’t measure every single stock, so instead, let’s look for a sample. One way of doing this is picking a certain amount of the largest stocks in the world. We measure the size of a company in terms of its market capitalisation.

Chapter 15

Has the entire stock market, all over the world, increased or decreased so far this year?

Stock index (or stock market index): A way to measure a section of the stock market.

For example, in order to investigate the question ‘Has the entire stock market, all over the world, increased or decreased this year?’, we could look at the biggest companies in the world in terms of market cap. The Global S&P 100 is an index that contains the list of the largest 100 stocks in the world. At the time of writing, these are the top 10 largest companies in the world listed on the stock market: 6 Procter & Gamble 1 Apple 7 Nestlé 2 Microsoft 8 JP Morgan Chase 3 Amazon 9 Samsung 4 Alphabet 10 Roche 5 Johnson & Johnson

Activity 15.3 Research the top 10 stocks (in terms of market cap) on the stock market today. Now that we have found our index, it’s very simple to answer Ava’s question. 1 Search online for Yahoo! Finance. 2 In the search bar, look for ‘S&P Global 100’. 3 At the top of the graph that comes up, click ‘YTD’, which will bring up the graph and details for ‘year to date’. 4 On the table to the left, you will see ‘YTD Daily Total Return’, which is the return since the beginning of the year.

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By looking at the index, Ava now has an idea how the general stock market has performed. Therefore, if she wanted to compare how a specific stock (e.g. Intel or Bank of America) or a person managing investments has performed, she would compare them against this index. As a result, this index could serve as a benchmark as it gives Ava a useful reference point. Benchmark: A standard or point of reference to compare against.

However, it is also important to pick the correct benchmark. For example, if you wanted to compare how a specific stock or a person managing investments has performed in Hong Kong or Japan, you would choose the Hong Kong or Japanese index rather than an American index. To determine the suitability of an index, therefore, the characteristics of what you’re comparing must be similar. For example, a large company in America would be compared against a group (or index) of large companies in America, whereas an investment manager who picks large stocks in Japan would be compared against an index of large stocks in Japan. You have now answered Ava’s first question! Let’s move on to her second.

How did the UK stock market perform yesterday? The key thing that we need to do now is find a suitable index to act as a benchmark. What sample could we use that is representative of the population of UK stocks? In the case of the United Kingdom, we could look for the FTSE 100. This is a list of the largest 100 stocks in the UK market in terms of market cap.

Activity 15.4 Research the top 10 stocks, in terms of market cap, on the UK stock market today. Now that we have found our index, it’s very simple to answer Ava’s second question. 1 Search online for the FTSE 100 index from the London Stock Exchange website. 2 On the graph that comes up, choose ‘Today’ from the dropdown menu on the far right side of the page, which will bring up the graph and details for today. 3 Hover your mouse over or click the graph at the most left-hand point to get the price that the index recorded at the earliest part of the day. 4 Hover your mouse over or click the graph at the most right-hand point to get the price that the index recorded at the latest part of the day. 5 Calculate the percentage change between the closing price and the opening price. For example: Closing price = Opening price

7,407.12 7,441.29

– 1 = –0.004%

You’ve now answered Ava’s second question!

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Location

Name of index

Number of stocks in the index

France Germany Europe US Japan Australia Ireland Hong Kong Canada Greece

How did Canadian bonds compare to New Zealand and Hong Kong bonds in the past year?

Chapter 15

Copy this table into your copybook, then research a suitable index for each of the following stock markets and document how many stocks are in that index.

How do I know which investment performed the best?

Activity 15.5

Activity 15.6 From the information below, answer Ava’s third question: how did Canadian bonds compare to New Zealand and Hong Kong bonds in the past year? (In other words, rank them in order of one-year annual performance.) S&P Canada Sovereign Bond Index

S&P New Zealand Sovereign Bond Index

S&P Hong Kong Sovereign Bond Index

Description

This index is designed to measure the performance of the Canadian government bond market.

This index is designed to measure the performance of bonds issued by the government for the domestic New Zealand market.

This index is designed to measure the performance of local currency sovereign bonds from Hong Kong.

1-year annual returns

5.37%

5.85%

2.61%

Now search online for today’s data and examine Ava’s question again using that information.

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If I had invested in property or stocks in the past month in the UK, which would have performed better? Activity 15.7 From the information in the graph, answer Ava’s fourth question: if I had invested in property or stocks in the past month in the UK, which would have performed better? As of August 2020, the average house price in the UK was £239,196. Property prices rose by 0.7% compared to the previous month and rose by 2.5% compared to the previous year. In contrast, we can see from the graph that the FTSE 100 reached around 6,000 points in August 2020. This was actually lower than the month before and much lower than the year before. In this case, the property market performed much better over the timeframe that Ava is considering. Now search online for today’s data and examine Ava’s question using that information. Source: London Stock Exchange

FTSE 100

7,000.00 6,000.00 5,000.00

Sep’19

Oct’19

Nov’19

Dec’19

Jan’20

Feb’20

Mar’20

Apr’20

May’20

Jun’20

Jul’20

Aug’20

4,000.00 Dec’20

Should I have put money into technology or financial stocks last year? Activity 15.8 Using the information below, help Ava to answer the questions on the next page. MSCI World Information Technology Index Number of constituents

136

Float adjusted market cap (USD billions)

Index weight (%)

Apple

1,398.73

17.48

Microsoft Corp.

1,234.79

15.43

Visa A

343.62

4.29

MasterCard A

285.23

3.56

Intel Corp.

283.21

3.54

Cisco Systems

196.79

2.46

Adobe

170.46

2.13

Salesforce.com

151.89

1.90

Nvidia

136.79

1.71

Accenture A

130.75

1.63

Total

4,332.24

54.13

168 Market cap (USD millions)

Index

8,003,743.74

Largest

1,398,731.40

Smallest

2,399.28

Average

47,641.33

Median

14,373.66

Source: MSCI

Top 10 constituents, January 2020

Source: MSCI Money Matters

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249

Country

Market cap (USD millions) Index

6,818,183.90

Largest

423,219.11

Smallest

1,784.16

Average

27,382.26

Median

13,377.87

Source: MSCI

Index Float adjusted weight (%) market cap (USD billions)

JP Morgan Chase & Co.

423.22

6.21

Berkshire Hathaway B

295.57

4.34

Bank of America Corp.

290.31

4.26

Wells Fargo & Co.

196.48

2.88

Citigroup

168.10

2.47

HSBC Holdings (GB)

146.86

2.15

AIA Group

121.04

1.78

Royal Bank of Canada

113.39

1.66

Allianz

101.53

1.49

Commonwealth Bank of Australia

101.04

1.48

1,957.54

28.71

Total

Source: MSCI (a) What are the largest three stocks in terms of market cap in both indexes? (b) How many constituents are in the financials index? (c) What is the market cap of the largest stock in the information technology index? (d) What is the market cap of the smallest stock in the financials index? (e) What is the total market cap of the top 10 constituents of the financials index? (f) What is the total market cap of the top 10 constituents of the information technology index?

How do I know which investment performed the best?

Number of constituents

Top 10 constituents

Chapter 15

MSCI World Financials Index

After all this work today, Ava is delighted with your help. Thank you so much!

MARKET CAPITALISATION

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Career spotlight Shane Cahill, CFA, Chief Operations Officer – Investments How did you start off in finance? I completed an undergraduate degree in Actuarial and Financial Studies in University College Dublin.

What is your job today? I am Head of Indexed Fund Management, which means that I lead a team of people who develop funds that track indices such as the ISEQ and S&P 500.

What do you do in a normal day? My work is quite varied as I have lots of conversations with the teams that report to me as well as being a member of several committees that run our business. These teams create and execute orders worth millions of euros, buying and selling investment funds, stocks and currencies every day.

What do people in your job need to be good at? The people in our team need to be very good with numbers, understand the financial markets very well and be able to manage risk. Also, we can have a heavy workload sometimes, so we really need to have excellent organisational skills.

How has the CFA® charter helped you? The CFA Program gave me a solid grounding in understanding financial markets. This gives me great help when I’m trying to understand the risks that our products are exposed to.

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(b) Benchmarks

2 Distinguish between a population and a sample. 3 Differentiate between primary research and secondary research. 4 Conduct secondary research about sport in Ireland today by finding find three statistics from the ‘Sports and Physical Exercise’ data on the CSO website (search for ‘QNHS Module on Sports and Physical Exercise’). 5 Design a primary research survey with 10 questions asking people about their views on teenagers holding part-time jobs. (Example: Should teenagers be allowed to work in a part-time job during the school year?) 6 Copy this table into your copybook and find the market cap of each of these companies. (Note: Remember to put in the currencies.) Stock

Market cap

Stock

Ryanair

Apple

Bank of Scotland

Samsung

Snapchat

Malta Airlines

Dollar General

Siemens

Market cap

How do I know which investment performed the best?

1 Define the following terms: (a) Market capitalisation

Chaptersummary summary Chapter

Chapter 15

End-of-chapter exercises

7 Fill in the table by identifying which index relates to which country. Next, research the percentage that each of the indexes have changed this year to date. Index

Country

S&P 500

United States

Year to date percentage change

Nikkei FTSE 100 Hang Seng Dow Jones CAC 40 DAX ASX TSX BEL 20

JOURNAL QUESTION

If there are 50,000 people in Ireland who are the very same age as you and the government wanted to understand how people your age felt about reducing the voting age to 16, how many people would you suggest it should survey to get an accurate reflection? Why did you pick that number?

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Chapter

How do I find a fund that is suitable for me?

Learning objective

• Understand how an exchange-traded fund (ETF) works, how to match an ETF to a customer’s wishes and how to research an ETF for useful data.

Learning outcomes

• Distinguish between active investing and passive investing. • List the characteristics of ETFs. • Match a suitable product to a customer’s investing wishes. • Obtain a list of ETF data that would allow the investor to decide what to invest in.

Literacy links

• Passive investing, active investing, exchange-traded fund (ETF), investmentgrade bond

Numeracy links

• Evaluating and comparing data • Interpreting statistics

Cross-curricular links

• Maths: Statistics • Economics: National income, industry trends • Geography: Economies in different countries

Money Matters BOOK.indb 140

Let’s set the scene Kayrn works as a financial advisor at a company. Her manager always sends certain clients to her.

Kayrn’s clients Kayrn’s clients all have these characteristics: They want to invest in something that has lots of stocks or bonds or other instruments in it. (Like Paul with REITs in Chapter 9, Kayrn’s clients want some diversification.) They don’t want to buy individual stocks or bonds. Therefore, what they’re looking for is a fund. They simply want to get the average market return by tracking a benchmark (described in Chapter 15), which is called passive investing. They don’t want to pay a fund manager to pick certain stocks or bonds for them, which is called active investing. Passive investing: Holding a portfolio that is the same as an index. Active investing: Holding a portfolio that is different from the index.

They want to put as much of their money as possible into the actual investment. They want to pay as little as possible in fees. They always want access to their money. They don’t want to have any ‘lock-in’ periods where they can’t access their money for a number of days, weeks, months or years. In other words, they want their money to be liquid (i.e. they can get their money easily at any time). They want to be able to check the value of their investment at any time on their own. They want to be able to search online for the price of their fund and get an accurate price right away.

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Here is a flavour of what Kayrn’s clients want to invest in: A selection of stocks or bonds from all over the world: They don’t want to have to make any other decisions – just an average of what’s going on across the globe. A selection of stocks or bonds in a certain part of the world: For example, they might want to buy stocks in the eurozone, bonds in the emerging markets, stocks in Australia, bonds in China, etc. A selection of stocks in a certain sector: For example, they might want to buy stocks only in the technology, finance, pharmaceutical or tech/communication sector. A selection of stocks or bonds that give high income: For example, they want a selection of stocks with high dividends or stocks with high income. A theme of some sort: For example, they may want to track stocks that are dedicated to clean energy or e-commerce.

ETF factsheet Let’s meet some of Kayrn’s clients and find out more about how she helps them. Kayrn starts every meeting by showing an example of an ETF ‘factsheet’ so that her client can understand what they’re investing in. She explains how to find all the information they might look for, including the following: What the fund does When the fund started The currency you have to invest in if you invest in the fund Number of holdings (e.g. stocks or bonds) in the fund Whether or not there is a dividend, and if so, what the yield is The return they would have made each year The top five places that the fund has invested in AGGG _ iShares The top three holdings that the fund has invested in Core Global The top four sectors that the fund has invested in Aggregate Fund The fees to invest in the fund How much money is in the fund On the following pages, we will go through a full factsheet on a global fund (AGGG) to answer each of these questions.

Chapter 16

Exchange-traded fund (ETF): A pool of money that’s invested mainly to track a benchmark on an exchange. It is liquid, has its price available on a stock exchange all day and is low cost.

How do I find a fund that is suitable for me?

Kayrn specialises in exchange-traded funds (ETFs). While Kayrn’s clients all want a similar sort of instrument (i.e. an exchange-traded fund), they all have very different wants and needs.

What the fund does In this case, the fund tracks an index of global investment-grade bonds.

Remember! An index is a list of stocks or bonds designed to be a sample of the total population of stocks or bonds. They’re often based on market cap (the bigger the company, the bigger the market cap).

Investment-grade bond: A bond that has a low risk of not paying back the interest and principal.

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When the fund started This is the date that the fund began.

The currency you have to invest in if you invest in the fund If investors want to invest in this fund, they will need to either use dollars or convert their currency into dollars. This also means that they’re taking an exchange rate risk (as we discussed in Chapter 5). For example, if they have euros, they will need to transfer them into dollars to invest in the fund. Therefore, when you buy some units of a fund in dollars, you need to buy the dollars first and then the units of the fund. If the value of the dollar increases over the time that they invest, they will get more money when they change the money back into euros. However, the opposite can also happen.

Number of holdings (e.g. stocks or bonds) in the fund There are 5,000 holdings (or 5,000 individual bonds) in this fund. If Kayrn’s clients invest in this fund, they will have invested in all 5,000 stocks as a result.

Whether or not there is a dividend, and if so, what the yield is If an ETF holds stocks or bonds, then it’s likely to receive either dividends or coupons. The ETF then chooses whether or not it will give this income out to investors or reinvest it back into the fund. In this case, the ETF distributes the income that it receives. (You can see that beside the wording ‘Use of income’.) Also, since the fund gives out a semi-annual distribution, we know that it gives investors a payment two times per year. Finally, we can see that it gives out 1.65% of the amount of money in the fund every year. Therefore, if somebody invests $100 in the fund, they can expect to get around $1.65 back in income. Naturally, they would hope that the share price of the fund would go up. Remember that this investment is in dollars. Therefore, the value of the euro may change against the dollar and thus the $1.65 might be worth a different amount at different times of the year.

The fund launch date is 21 November 2020.

The currency of the fund is USD.

The number of holdings or stocks in the fund is 5,000. The distribution type is semi-annual. The use of income is distributing. The distribution yield is 1.65%.

The return they would have made in the last year Annualised performance (% USD) 1 year Fund

6.39

Benchmark

6.58

In the past year, this fund has returned 6.39%. In other words, if you had invested $100 in this fund last year, it would be worth $106.39 now. It’s important to look for the ‘fund’ return rather than the benchmark. Remember that a benchmark is just a list that the fund uses to guide what it buys and sells. In other words, the passive fund tracks the benchmark. You can’t buy shares in a benchmark. You can only invest in a fund.

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The top five places that the fund has invested in

Top holdings (%) Acorn Ltd

2.02

Beech Ltd

0.98

Oak Ltd

0.91

Canada

3.22

Spain

2.50

Supranational

1.93

Other

How do I find a fund that is suitable for me?

The top three holdings that the fund has invested in

40.04

14.01 0

10 15 20 25 30 35 40 45

If we add up the top three holdings, we can see that 2.02% + 0.98% + 0.91% = 3.91%. Therefore, we know that the fund hasn’t put a lot of money into one particular share or bond, so the investor can be reassured that their money is spread over a variety of stocks or bonds. Remember that an index can often be market cap weighted. This means that the bigger the market cap, the more money is invested in it from the fund. As a result, if one company is much bigger than the others, it can get much more money from the fund than the other companies. That’s why it’s worthwhile to run this test.

Chapter 16

In this case, 40% of the money would go to bonds in the US, 15.59% would go to Japanese bonds, Geographic breakdown (%) 5.58% would go to French bonds, 5% would go to United States the UK and 4.71% would go to Germany. We can also see where the rest of the money would go. Japan 15.59 The reason an investor might look for this France 5.58 information is to make sure their money is spread around the world so that it’s not all in one place. United Kingdom 5.00 They may be worried about problems (e.g. war, corruption or political instability) in certain areas Germany 4.71 or they may be excited about a country’s prospects China 3.75 (e.g. due to a good economy, a place that is developing a lot of interesting research or another Italy 3.68 reason they like it).

The top four sectors that the fund has invested in This is a list of industries that the stocks are in. The numbers in the fund weight column in the table below refer to how much of the fund is invested in that industry through the stocks. Sector

Fund weight (%)

Information technology

33.30

Communication

14.84

Healthcare

13.07

Consumer discretionary

12.65

Financials

8.30

Consumer staples

7.55

Industrials

5.12

Energy

2.21

Utilities

1.46

Real estate

0.67

Other

0.43

Materials

0.39

The fees to invest in the fund The total expense ratio of this ETF is 0.10%. This means that investors would pay $0.10 per $100 invested in the fund every year as a fee.

How much money is in the fund? The fund has $3.3 billion invested in it.

The total expense ratio is 0.10%.

The net assets of the fund is $3,341,777,392.

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Matching an ETF to a scenario Now that Kayrn has gone through an example, she talks to the client about what in particular they’re looking for. Here is what they say: We are a married couple who would like to put our money in the US market. We have no idea what stock to pick or what dividend yield to look for. All we want to do is track the overall US stock market. We want to keep our costs low, invest in something that has hundreds of stocks from all over the stock market and where we can look up the value of our investments at any time. Finally, we want to be able to withdraw our money whenever we want.

Kayrn suggests the S&P 500 ETF for the couple, as it’s the most well-known benchmark for the American market. She follows up by giving all the details to the client that were accurate at the time of the meeting.

CSPX iShares Core S&P 500 UCITS ETF USD (Acc) The fund seeks to track the performance of an index composed of 500 large-cap US companies. Top holdings (%)

Key facts Asset class

Equity

Apple Inc.

6.39

Fund base currency

USD

Microsoft Corp.

5.73

Share class currency

USD

Amazon.com Inc.

4.89

Fund launch date

18 May 2010

Facebook Class A Inc.

2.25

Total expense ratio

0.07%

Alphabet Inc. Class A

1.65

Distribution type

None

Alphabet Inc. Class C

1.60

UK distributor/Reporting status

No/Yes

Johnson & Johnson

1.42

Use of income

Accumulating

1.40

Net assets of fund

USD 37,607,889,492

Berkshire Hathaway Inc. Class B

Number of holdings

506

Procter & Gamble

1.20

Visa Inc. Class A

1.18 27.71

Annualised performance (% USD)

144

1 year

3 years

5 years

10 years

Since inception

Fund

11.57

11.62

11.09

13.36

12.98

Benchmark

11.29

11.35

10.80

13.13

12.70

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Geographic breakdown (%)

Fund weight (%)

Information technology

27.42

Healthcare

14.55

Consumer discretionary

11.16

Communication

10.87

Financials

9.87

Industrials

7.88

Consumer staples

7.03

Utilities

3.12

Real estate

2.79

Materials

2.55

Energy

2.53

Other

0.22

99.78

10 0

0.22 United States

Other

What the fund does: The fund seeks to track the performance of an index composed of 500 large cap US companies. In other words, the fund tracks the biggest 500 companies in America. When the fund started: 18 May 2010. The currency you have to invest in if you invest in the fund: US dollars. Number of holdings (e.g. stocks or bonds) in the fund: 506. Whether or not there is a dividend, and if so, what the yield Remember! is: No. The fund is ‘accumulating’ and thus is reinvesting all the This fund trades in dollars, income back into the fund rather than giving it to investors. so the returns are in dollar The return they would have made each year: terms. In euro they could be • 11.57% over the past year higher, lower or the same • 11.62% on average every year over the past three years based on the exchange rate. • 11.09% on average every year over the past five years. The top five places that the fund has invested in: The fund is invested completely in the US. The top three holdings that the fund has invested in: The fund has put 6.39% of its money into Apple, 5.73% into Microsoft and 4.89% into Amazon. Therefore, 6.39% + 5.73% + 4.89% = 17.01% of the fund’s money is invested in these three companies. The top four sectors that the fund has invested in: Each company belongs to a sector (which is like an industry). For example, a bank is part of the financial sector, while a social media company is part of the communication sector. The top four sectors represented by the companies in this fund are information technology, healthcare, consumer discretionary and communication. It’s clear that this couple’s money would be invested in a lot of different sectors. (Note: ‘Consumer discretionary’ relates to customers buying goods that they want (e.g. holidays, cars) as opposed to consumer staples, which are goods that they need (e.g. food, electricity).) The fees to invest in the fund: The total expense ratio in this ETF is 0.07%. This means that investors would pay 7 cents per $100 invested in the fund every year as a fee. How much money is in the fund: $37.6 billion is invested in the fund. Transition Year Finance

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How do I find a fund that is suitable for me?

Source: iShares

100

Chapter 16

Sector breakdown

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Activity 16.1 Now Kayrn tuns to you to help with her next four clients. They have all thought generally about what they want to invest in and she will pick the ETF for them. However, she asks you to find the following details that she gives to clients from the factsheets presented on pages 146–151. (a) What the fund does (b) When the fund started (c) The currency you have to invest in if you invest in the fund (d) Number of holdings (e.g. stocks or bonds) in the fund (e) Whether or not there is a dividend, and if so, what the yield is (f) The return they would have made each year (g) The top five places that the fund has invested in (h) The top three holdings that the fund has invested in (i) The top four sectors that the fund has invested in (j) The fees to invest in the fund (k) How much money is in the fund

Client 1 My partner and I have just inherited some money and we would like to invest it in the emerging markets. We don’t know which country and we certainly don’t know which companies to look at. We would prefer to put the money into an ETF that invests in companies of all sizes. Also, we would like to invest in companies that give a dividend, as income is important to us.

Kayrn suggests a general emerging markets ETF for the couple. It invests across the emerging markets and in small, medium and large companies. She needs you to find out the details from the following factsheet.

EIMU iShares Core MSCI EM IMI UCITS ETF USD (Dist) KEY BENEFITS 1 Exposure to over 2,800 large-, mid- and small-cap emerging markets companies 2 Entire market exposure means not missing out on potential growth surprises from often overlooked small companies 3 Use at the core of a portfolio to seek long-term growth

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Key facts Asset class

Equity

Alibaba Group Holding ADR

6.69

Fund inception date

5 March 2018

Tencent Holdings Ltd

5.61

Fund base currency

USD

Taiwan Semiconductor Manufacturing

5.07

Share class currency

USD

Samsung Electronics Ltd

3.29

Total expense ratio

0.18%

Meituan Dianping

1.25

Distribution type

Semi-annual

Naspers Limited N Ltd

1.17

Use of income

Distributing

Reliance Industries Ltd

1.10

Net assets of fund

USD 14,593,757,685

China Construction Bank Corp. H

1.00

Number of holdings

2,657

Ping An Insurance (Group) Co. of CH

0.89

Distribution yield

2.35%

JD.COM ADR Representing Inc.

0.77 26.84

Annualised performance (% USD) 3 years

5 years

10 years

Since inception

Fund

5.82

N/A

–2.04

Benchmark

5.97

N/A

–2.05

Sector breakdown

Fund weight (%)

Information technology

18.27

Financials

17.26

Consumer discretionary

17.26

Communication

12.03

Materials

7.26

Consumer staples

6.17

Industrials

5.25

Energy

5.22

Healthcare

5.01

Real estate

2.89

Utilities

2.35

Other

1.04

Source: iShares

Chapter 16

1 year

How do I find a fund that is suitable for me?

Top holdings (%)

Geographic breakdown (%) 37.82

13.92

12.05 10

9.67

8.35 5.41

3.62

2.77 2.30

2.14 1.93

Chi

na Tai wa Kor n ea (So uth ) Ind ia Bra zil Sou t hA Ru ssia f ric a nF e de rat ion Sau di A rab ia Tha ilan d Ma las ysi a Oth er

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Client 2 I’ve been saving a small amount of money every year and now I want to put some of that into the stock market, but I want to invest in companies that are doing good in the world. I don’t have enough to buy individual stocks, so I want to buy a fund. I don’t know anything about countries or sectors or anything like that, but I would like to keep it simple by buying the really big global companies that are listed in America. If possible, I would like an income too.

Kayrn suggests a general socially responsible investing ETF for this client, as it seeks out the companies that are environmentally sustainable, are managed well (i.e. have good governance) and treat society well. She needs you to figure out the details from the supplied factsheet.

SRIL iShares MSCI USA SRI UCITS ETF USD (Dist) KEY BENEFITS 1 Gain access to US markets through companies with outstanding environmental, social and governance (ESG) ratings and minimal controversies 2 Screens out exposure to companies involved in industries such as controversial weapons, nuclear weapons, tobacco, civilian firearms, conventional weapons, alcohol, gambling, adult entertainment, nuclear power and genetically modified organisms 3 Has enhanced environmental credentials with further screens on companies involved in thermal coal, oil sands, oil and gas, power generation and thermal coal/oil sands reserves industries Key facts

Top holdings (%)

Asset class

Equity

Procter & Gamble

4.62

Fund inception date

6 December 2018

Nvidia Corp.

4.60

Fund base currency

USD

Microsoft Corp.

4.43

Share class currency

USD

Home Depot Inc.

4.42

Fund launch date

11 July 2016

Walt Disney

3.74

Total expense ratio

0.20%

Tesla Inc.

3.74

Distribution type

Semi-annual

PepsiCo Inc.

3.39

Use of income

Distributing

Salesforce.com Inc.

2.91

Net assets of fund

USD 3,413,432,381

Amigen Inc.

2.56

Number of holdings

131

Accenture PLC Class A

2.53

Distribution yield

1.13%

36.94

Annualised performance (% USD)

148

1 year

3 years

5 years

10 years

Since inception

Fund

16.60

N/A

20.12

Benchmark

16.57

N/A

20.11

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100

Healthcare

18.84

Consumer discretionary

16.13

Information technology

14.47

Financials

12.57

Consumer staples

11.83

Industrials

11.27

Real estate

5.35

Communication

4.85

Materials

3.68

Energy

0.78

Other

0.22

Source: iShares

99.78

90 80 70

0.22 United States

Other

Client 3 I have several stocks and bonds. I have about 10% of my money left to invest and I think the eurozone countries have good prospects. I don’t know whether to invest in Ireland, France, Spain or anywhere else.

How do I find a fund that is suitable for me?

Fund weight (%)

Chapter 16

Sector breakdown

I also don’t know which sectors to choose, but I do want the highest dividend-yielding stocks, as generating an income is critical for me.

Kayrn suggests a euro dividend ETF for this client, as it invests in companies in the eurozone that have the highest dividend yields. She needs you to figure out the details from the supplied factsheet.

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IDVY iShares Euro Dividend UCITS ETF EUR (Dist) KEY BENEFITS 1 Exposure to diversified eurozone companies with the highest dividend yields 2 Direct investment into 30 listed securities from the eurozone 3 Regional exposure with a focus on income Top holdings (%)

Key facts Asset class

Equity

Intesa Sanpaolo

5.64

Fund base currency

EUR

Société Générale SA

5.12

Share class currency

EUR

EDP Energias de Portugal SA

4.92

Fund launch date

28 October 2005

BNP Paribas SA

4.16

Total expense ratio

0.40%

Proximus NV

4.06

Distribution type

Quarterly

Klépierre REIT SA

3.95

Use of income

Distributing

Crédit Agricole SA

3.93

Net assets of fund

EUR 936,308,533

Deutsche Post AG

3.66

Number of holdings

Sampo

3.09

Distribution yield

5.02%

Axa SA

3.03 42.96

Annualised performance (% USD) 1 year

3 years

5 years

10 years

Since inception

Fund

11.88

5.05

5.58

6.59

3.95

Benchmark

10.94

4.31

4.89

5.87

3.22

Sector breakdown

Geographic breakdown (%) 35.20

Financials

44.68

France

Utilities

11.81

Germany

Industrials

11.08

Italy

12.58

Real estate

7.55

Finland

12.51

Consumer staples

7.36

Communication

6.83

Consumer discretionary

5.01

Materials

2.55

Energy Other

Source: iShares

150

Fund weight (%)

18.40

7.79

Netherlands Portugal

4.92

Belgium

4.06

2.47

Spain

2.89

0.65

Other

0.66 0

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Client 4 I have a couple of bonds and stocks. I have a big interest in technology and am always buying the latest tech toy. Personally, I think there is great potential in this sector for a long time to come. I’m not an analyst of any

Kayrn suggests a US technology ETF for this client, as it has money invested in a lot of technology stocks in the US, including the biggest tech companies in the world. She needs you to figure out the details from the supplied factsheet.

IYW iShares US Technology ETF KEY BENEFITS 1 Exposure to US electronics, computer software and hardware, and information technology companies 2 Targeted access to domestic technology stocks 3 Use to express a sector view Key facts

Performance

Fund launch date

15 May 2000

1 year

3 year

5 year

10 year

Share class currency

USD

Market price 46.78%

25.68%

18.54%

16.08%

Expense ratio

0.42%

Benchmark

26.28%

19.08%

16.52%

Distribution yield (over the past 12 months)

0.65%

Number of holdings

156

Net assets

$4,819,001,202

47.61%

Chapter 16

to put a small amount of my money into this sector as a whole.

How do I find a fund that is suitable for me?

sort. I don’t know how to read a company’s accounts or figure anything out about dividends, etc. I just want

Top sectors (%)

Top holdings (%)

Software and services

38.37

Tech hardware and equipment

24.67

Semiconductors and semiconductor equipment

19.37

Apple Inc.

17.70

Media and entertainment

15.59

Microsoft Corp.

17.36

Healthcare equipment and services

0.66

Alphabet Inc. Class A

5.06

Retailing

0.61

Alphabet Inc. Class C

5.04

Telecommunications

0.44

Facebook Class A Inc.

4.38

Consumer durables

0.22

Intel Corporation Group

4.11

Other

0.08

Cisco Systems Inc.

3.21

Adobe Inc.

2.52

Source: iShares

Salesforce.com Inc.

2.28

Nvidia Corp.

2.27 63.93

Afterwards, Kayrn thanks you for your help today and goes home happy that you’ve both helped a lot of people to figure out how to match their investing hopes and dreams with solutions. Transition Year Finance

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Career spotlight Niall McDonnell, CFA, Senior Investment Manager How did you start off in finance? It was in the National College of Ireland while studying for an undergraduate degree in Business and Languages that I developed a keen interest in financial markets. I wrote my dissertation on European equity markets, then after college sought out a career in financial services.

What is your job today? Today I am a Senior Investment Manager. Large investors put money into a fund and then I have to find the individual managers who will manage certain portions of that money so that we can deliver on what the customer needs. Some clients want income each year, while other clients want to grow the value of their investment.

What do you like about the finance industry? The variety. I relish the challenge and energy of investment management that make every day different.

What do you actually do in a normal day? The morning starts with a review of what happened yesterday in the markets and overnight in Asia. I then review the portfolios I manage to check if there is any money coming in or out that I need and if I need to place trades. Following that I may have calls with clients and investment managers and then try to read research reports on the markets. I also have to travel overseas for meetings, so I get to see different cities around the world. No two days are the same, it varies a lot.

Who are your clients? A lot of our clients are pension schemes aiming to provide an income for people in retirement. So essentially somebody in my position is helping people provide for their future. It’s a very worthwhile and meaningful profession by any standards.

How has the CFA® charter helped you? The CFA charter not only enhanced my overall knowledge and skills, but you can apply what you learn in the real world.

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End-of-chapter exercises

Chaptersummary summary Chapter

1 Define exchange-traded funds.

4 Find the current factsheets for each of the following ETFs and answer the questions that follow. 1 iShares Euro Dividend UCITS ETF | IDVY 2 iShares MSCI Eurozone ETF | EZU 3 iShares Core FTSE 100 UCITS ETF | ISF 4 SPDR Select Sector Fund – Energy (XLE) 5 SOCL Social Media ETF – Global X ETFs Question list: (a) What the fund does (b) When the fund started (c) The currency you have to invest in if you invest in the fund (d) Number of holdings (e.g. stocks or bonds) in the fund (e) Whether or not there is a dividend, and if so, what the yield is (f) The return they would have made each year (g) The top five places that the fund has invested in (h) The top three holdings that the fund has invested in (i) The top four sectors that the fund has invested in (j) The fees to invest in the fund (k) How much money is in the fund

Chapter 16

3 List the characteristics of exchange-traded funds (ETFs).

How do I find a fund that is suitable for me?

2 Distinguish between active investing and passive investing.

5 Identify an ETF suitable for each of the following investor’s needs: (a) Wants to invest in the healthcare sector in the US (b) Wants to invest in a broad index in France (c) Wants to invest in the Asia-Pacific region, excluding Japan (d) Wants to invest in a global index

JOURNAL QUESTION

What country or industry would you like to invest in and why?

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Chapter

How can I help climate change and social issues as an investor?

Learning objective

Numeracy links

• Understand what sustainability means in different parts of today’s society and how to empower an investor to make a difference.

• Evaluating metrics to make decisions • Calculating lifetime impact • Interpreting statistics

Learning outcomes

Cross-curricular links

• Develop an understanding of the Sustainable Development Goals and corporate social responsibility. • Understand the impact of shopping locally. • Gain insights into how companies treat their staff. • Understand the rationale behind the B Corp designation. • Critique practices that are going on in the school for environmental and social impact improvements. • Explain environmental, social and governance (ESG) factors. • Identify the advantages and disadvantages of socially responsible investing. • Analyse through a Venn diagram which characteristics are common to and separate from traditional investing and socially responsible investing. • Calculate the lifetime impact of small, consistent actions. • Compare different exchange-traded funds to achieve financial and sustainable objectives.

• Business Studies: Business and the economy, ethical, social and environmental responsibility • Accounting: Bottom line • Economics: Sustainable Development Goals, multiplier effect, monopolistic competition

Let’s set the scene Raphael has recently begun to really think about the impact of his decisions. As he looks around his kitchen, he thinks about the consequences of where he spends his money. Who is affected by his buying decisions? How do his actions affect the environment? What conditions do the people who produce what he buys work under? Raphael is questioning the sustainability of the goods and services that he buys. Sustainability: The ability to be maintained at a certain rate or level. It is the avoidance of the depletion of resources in order to maintain balance.

Activity 17.1

Literacy links

• Sustainability, triple bottom line, corporate social responsibility (CSR), socially responsible investing, ESG factors, lifetime impact

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(a) Write a definition of sustainability. (b) Write a sentence using the word sustainability. (c) List other key words associated with sustainability. (d) Draw an image to illustrate sustainability.

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Activity 17.2 Conduct a survey in your class by asking each of your classmates to vote on the top three SDGs that they think the government should prioritise. They need to read through the list and assign the numbers 1, 2 and 3 next to their choices. Afterwards, add up the votes and put the data into a line graph. • Goal 1: End poverty in all its forms all over the world. • Goal 2: End hunger, achieve food security and improved nutrition and promote agriculture that allows the land to continually produce. • Goal 3: Ensure healthy lives and promote wellbeing for everybody at every stage throughout their lives. • Goal 4: Ensure inclusive and equitable quality education and promote learning opportunities for everybody at every stage throughout their lives. • Goal 5: Achieve gender equality and empower women and girls all over the world. • Goal 6: Ensure that water and sanitation are both available and managed sustainably for everybody all over the world. • Goal 7: Ensure that everybody has access to affordable, reliable, sustainable and modern energy. • Goal 8: Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for everybody. • Goal 9: Build infrastructure that can handle the needs of the population, promote inclusive and sustainable development of industry and give people the environment and tools to innovate (i.e. find better ways of doing things). • Goal 10: Reduce inequality between people who live in a country as well as between people who live in different countries. • Goal 11: Make cities and human settlements inclusive, safe, able to handle challenges and sustainable. • Goal 12: Ensure that we both produce and consume in a sustainable way. • Goal 13: Take urgent action to combat both climate change as well as its knock-on effects. • Goal 14: Protect the oceans, seas and marine resources and develop their opportunities for sustainable development. • Goal 15: Protect, restore and promote sustainable use of the ecosystems on different types of land (e.g. rainforests, deserts, etc.). • Goal 16: Promote peace and inclusivity in societies for sustainable development. • Goal 17: Strengthen the means of implementation and give new life to the Global Partnership for Sustainable Development.

How can I help climate change and social issues as an investor?

These issues aren’t just for Raphael, but for everybody. Similarly, sustainability doesn’t just refer to the environment, but to many aspects of our lives. On 1 January 2016, the United Nations’ 17 Sustainable Development Goals (SDGs) of the 2030 Agenda for Sustainable Development officially came into force.

Chapter 17

The Sustainable Development Goals

Raphael wonders how these goals would matter to somebody like him. He then discovers Ireland’s Sustainable Development Goals data hub (irelandsdg.geohive.ie). On this website, he finds reports and other information about what is going on around the country to support the SDGs.

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Activity 17.3 In groups, research the targets (both globally and nationally), the story maps and other resources on the Ireland’s Hub for Sustainable Development Goals website relating to one SDG. Your group also needs to consider what is happening to promote this SDG and some suggestions for what should happen. Each group needs to choose a different goal and then present their findings to the class.

CASE STUDY: An Post – SDG Champion 2019–2020 Through our contribution to the Foundation for the Global Compact, An Post has to supported the creation of the 17 United Nations Sustainable Development Goals staff ent, transform our world. An Post is working with the postal industry, governm and suppliers to take big steps within the SDGs most relevant to our business.

CASE STUDY

As Raphael looks around the site, he also discovers that there are SDG Champions. These organisations raise awareness of the SDGs and show through their own actions that everybody in society can contribute towards the SDGs.

Actions being taken by An Post include: g Fleet: An Post already has the largest electric vehicle fleet in the country, providin Dublin’s between zero-emission mail and parcel deliveries in the city centre area , canals. Electric vehicles are now appearing on the streets of Cork, Galway, Limerick year, next s deliverie ission zero-em e Waterford and Kilkenny, where we’ll complet while extending them to larger towns countrywide. The EV fleet will exceed 750 by 2022. An Post purchases only green electricity for use in our business and this electricity has been certified as having zero carbon emissions. Through our purchase of green electricity, our electrical vehicle fleet will not contribute any CO2 to the environment.

Properties: An Post has replaced all HCFC gassed refrigeration units and all external s’ lighting with LED lighting. Through our purchase of green electricity, our building use of electricity will not contribute any CO2 to the environment. year Waste management: An Post has achieved its target of zero waste to landfill a ahead of schedule. Infrastructure and network: An Post is investing in its Retail and Mails & Parcels networks, rightsizing, digitalising and upgrading to ensure a truly sustainable for future with the right infrastructure in the right place and great, modern services customers, communities, staff and postmasters.

Source: An Post Sustainable Development Goals Brochure

Shopping local Raphael has often heard people talking about shopping local for the sustainability of the local economy. This might mean buying meat from the local butcher, vegetables from a farmers’ market, books from a local bookshop, getting signs designed and printed by a local business, going to a small garden centre for plants and so on. As he walks around his kitchen, he wonders if it really makes all that much of a difference. After all, if he spends €80 per week on his food shopping, that’s hardly going to make a difference to the whole town … or does it?

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How can I help climate change and social issues as an investor?

Raphael: Hello! I was wondering what difference it really makes if somebody buys in a local shop or buys from a chain store online. I realise that if nobody ever buys in your shop that you would have to shut down, but if somebody decides to buy a picture frame online for €15 and get it delivered to their house as opposed to popping into your shop, does it really matter? Gift shop owner: Yes! Every purchase like this matters. And not just for me, but for the whole community. First, €100 spent in the local economy is actually worth €500 according to a piece I read recently in the Irish Times. All those small purchases add up and after a while, when you get enough sales, you can afford to offer somebody local a job. They will then have more money to spend at the local butcher, grocery shop, cafés and so on. It also means they can generate more business and create jobs too. As a result, people don’t have to travel so far in the mornings to go to jobs, as they have employment here in the local area. As more people have reason to be in the town, more services open and this adds energy to the area. Builders then need to build houses, as people want to move here. (Raphael realises that if this money isn’t spent locally, not only is the €100 gone in the first place, but all the other follow-on spends are lost too. These things really matter.) Raphael: While this is all lovely, is it all about money? Gift shop owner: It’s not, actually. It’s also about the environment. If you order your picture frame online, it may have to be flown over from a warehouse in China. If you order your grocery shopping from a big company, they may have to transport it out from a city. Remember what I said about the distances that people have to travel to get to work? Think about the impact of that on the environment. Raphael: So why don’t more people do it? Gift shop owner: I often wonder that myself! To be honest, a lot of people don’t think about the impact of their actions. They may not be aware of the statistics around shopping local. For example, studies have shown that local businesses donate to community causes at more than twice the rate of chains. This is an example of corporate social responsibility, or CSR. CSR is when companies act in the interests of society all around them. Finally, people aren’t often aware that they give us a huge amount of market research too. If somebody comes into my store and they buy a lampshade, a tea towel and a picture frame, then I know that this is a potential gift hamper that I could put together for somebody who wants to buy a housewarming gift. I watch our customers’ actions all the time and I base my decisions on that market research. Raphael: Do you understand why some people may not shop locally? Gift shop owner: Of course I do! The main reason is convenience. A lot of people want to be able to buy whatever they want, whenever they want and using whatever device they want. We got the Trading Online Voucher (TOV) from the Local Enterprise Office last year to set up an e-commerce website. This is an online shop and now you can ‘click and collect’. You can choose anything that we have available in the physical shop, pay for it and we will have it ready for you within 15 minutes. If you want it delivered, we charge a small extra fee. My job now is to ensure that all our customers and potential customers are aware of this service, for example through our social media channels. You can’t just expect people to know that we offer this now. We have to tell everybody and remind them again and again.

Chapter 17

His cousin owns a small gift shop, so he gives him a call. Here is how the conversation goes.

Activity 17.4 Make a list of local businesses and visit a few of them. Ask them the same questions that Raphael asked the gift shop owner. Compare their answers. Transition Year Finance

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How companies impact the environment Raphael walks into his shed and looks around. There is a lawnmower, a bin full of recycling, some tools, lots of things that he will probably never use again and space for his car. He wonders if the companies producing these goods are considerate of the environment. Go Carbon Neutral is an Irish project where anybody can pay for their carbon footprint to be offset. You just download the app, tap in your details to identify how much carbon you use and then pay for it to be offset by Go Carbon Neutral, which will plant the right number of trees to compensate.

CASE STUDY • Ford owns one of the largest green roofs in the world, which spans 454,000 square

feet (or 10.4 acres). Rather than conventional tar and metal roofs, the sedum plants and grow in a four-layer vegetated mat rather than in loose soil. The plants collect filter storm water run-off. • Disney has a zero-waste policy, meaning that there is nothing that would end up in ental landfill. The company has a policy that it wants to have a net positive environm of result a as better be to ent impact. (In other words, Disney wants the environm Disney rather than be harmed by it.) • Nike has strongly encouraged 650 of its suppliers in 52 countries to develop and implement written

CASE STUDY

Raphael has heard of companies cutting down trees and damaging the environment, polluting the air with toxins, dumping awful things into rivers and many other things. Does any company do any good?!

environmental policies.

• eBay has made it possible for people to exchange or

reuse goods instead of throwing them away, which not only increases the lifespan of these products but also keeps them out of landfills. • Facebook is taking action to reduce its greenhouse gas emissions to zero by 2030.

Activity 17.5 Copy this table into your copybook. Research how some companies treat the environment, then fill in the table.

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Companies that treat the environment well

Companies that treat the environment badly

Company

Positive environmental impacts

Negative environmental impacts

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• Netflix has specific policies for parents. For example, if you’re a mother or father

to a newborn baby, you can take a fully paid year of maternity or paternity leave. leave Parents then have the choice to return part time or full time after their year of and they can take extra time off whenever they need it.

• Google offers medical and massage services, gyms and fitness classes. • Virgin covers all employees with health plans for themselves, spouse or partner and children. They also offer dental and vision plans if their staff want them. • PWC offers a varied social life to their employees, time off to study for exams, an annual flu vaccination, eyesight tests, a subsidised restaurant, funding for their education after university and the workday finishes at 3 p.m. on Fridays in July and August.

How can I help climate change and social issues as an investor?

CASE STUDY

Raphael also wonders if the people who work in the companies that he buys his goods and services from are treated well. He knows that some people have endured working in sweatshops, been underpaid for the work they do or have been in situations that were dangerous for both their physical and mental health. Are there any companies that treat their staff well?

Chapter 17

How companies treat their staff

• Workday offers help with childcare. If a staff member or a spouse is at work or in full-time study, Workday subsidises their childcare expenses.

Activity 17.6 Copy this table into your copybook. Research how some companies treat their staff, then fill out the table. Companies that treat their staff well

Companies that could improve how they treat their staff

Company

Positive practice

Practice that should be improved

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B Corp As Raphael walks back into his house, he reflects on all that he Raphael, if you’re interested in has learned. He wonders if only charities truly do good things how companies interact with for everybody because they don’t look for profit. If companies communities, you should look are focused on making profits, can they also be focused on up the B Corp website. Ben & making a difference to people’s lives too? Jerry’s does it! 19.30 At that moment, his cousin who owns the gift shop sends him a text message. Raphael checks out the B Corp website and sees that it’s a qualification that companies can apply for. If a business wants to make a profit and is kind to the environment and treats its staff well, it can apply for the B Corp badge. Here is an excerpt from B Corp’s website:

Society’s most challenging problems cannot be solved by government and non-profits alone. The B Corp community works toward reduced inequality, lower levels of poverty, a healthier environment, stronger communities and the creation of more high-quality jobs with dignity and purpose. By harnessing the power of business, B Corps use profits and growth as a means to a greater end: positive impact for their employees, communities and the environment. B Corps form a community of leaders and drive a global movement of people using business as a force for good.

Activity 17.7 Read the Ben & Jerry’s case study on the B Corp website. Find out what it does as a company to deserve the B Corp badge. Then look up another company on the B Corp website and make a list of good practices that companies with the B Corp designation carry out.

Triple bottom line Raphael has heard of the triple bottom line and searches online to find out what it means. He finds this image that explains the idea. Triple bottom line: When companies try to make a profit, help their employees to have a good experience at work and have a positive impact on the environment – in other words, the triple bottom line is profit, people, planet.

Activity 17.8 Discuss the triple bottom line Venn diagram and how you feel companies treat each circle.

Activity 17.9 Watch the 2:30-minute video on the Ethical Silk Company’s ‘About Us’ page on its website and outline how this entrepreneur is pursuing the triple bottom line.

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PEOPLE

Social variables dealing with community, education, equity, social resources, health, wellbeing and quality of life BEARABLE

PLANET

EQUITABLE

SUSTAINABLE

Environmental variables relating to natural VIABLE resources, water and air quality, energy conservation and land use

PROFIT

Economic variables dealing with the bottom line and cash flow

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After all this, Raphael is really surprised that all this good work is going on all around the world. From businesses donating money to charity and taking care of their staff’s health to working on interesting environmental projects, it’s all very encouraging. He wonders whether companies engage with schools, and if they do, how they could engage in such a way that it would be helpful to students and their wider community. After all, the people in schools today will be the employees of companies tomorrow. He comes across two helpful websites: CSR Central collects stories of corporate social responsibility communications from Irish companies on their website. The Business in the Community Ireland website has a lot of information on the ways in which businesses can and do help different people right across the community. They have a whole section on ‘Business Action on Education’ and how schools can work with companies in the area.

Activity 17.10 Read some of the stories on the CSR Central website. In groups, think of some things that you or your classmates have done that have been helpful to other people, the environment or your school. Put together a short video with pictures, text and voice using iMovie or Animoto (or similar). Your teacher might even share it on the school’s social media channels!

Activity 17.11 Go to the Business in the Community Ireland website, then go to the Business Action Programmes dropdown menu on the top right-hand side of the page. Under Business Action on Education, choose ‘Are you a school?’. Read this page, including the details on how the programmes work from a school’s perspective, then consider what ideas you and your classmates could put into practice with companies in the local area.

How can I help climate change and social issues as an investor?

Corporate social responsibility (CSR): When companies take responsibility for their impact on society.

Chapter 17

Corporate social responsibility (CSR)

CSR activities that schools could try Introduce ‘walking buses’ or ‘cycling buses’ to areas where it’s possible to walk or cycle to school. This is a form of transport for students who, typically chaperoned by two adults (a ‘driver’ leads and a ‘conductor’ follows), either walk or cycle to school along a set route. This enables all participants to enjoy the fresh air, exercise and company on the way to school but also cuts the financial and environmental cost of travel. Encourage staff in the office to think more environmentally, for example minimise printing, turn off the monitors when they’re not being used, use energy-efficient lighting, check the energy consumption of electrical appliances using an energy monitor, etc. Analyse what’s on sale at your school. Are the products sourced locally and ethically? Are there more local or more ethical alternatives available? Also, since vegetarian meals have a lower carbon footprint, consider a school-wide meat-free day in the interests of environmental sustainability. Review the recycling practices within the school. Are recycling bins available in the areas where students gather? Are students aware of what goes into which bins? Are you aware of what happens after your recycling is picked up? Check out the statistics from the article ‘One Day: How Ireland Cleans Up – In Numbers’ on the RTÉ News website (e.g. in one day we throw away €3 million worth of food) and discuss your thoughts on the subject. Transition Year Finance

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Dedicate some space on the school grounds to grow vegetables, set up a beehive for honeycomb or grow seeds or herbs in pots. This will educate students about ecosystems, give another perspective on space and create a place in the school that will have a positive environmental effect. Run an upcycling sale. Invite students to donate their used items and then spend time updating these items with a new lick of paint, some tailored sewing or with accessories. Look at Pinterest and Instagram for inspiration. Sell the items at a special sale in your school and invest the money into other sustainability ideas.

Activity 17.12 Brainstorm which of the sustainability ideas above could work in your school. Put a plan in place, including the costs. Decide what you can implement and how you can measure the impact afterwards. For example, what measurable change to the school was recorded? How much money was raised or saved? How did people’s understanding of sustainability change over that time?

Socially responsible investing and ESG factors Raphael walks into the room he calls his home office. This is where he keeps his laptop, books and anything that he is working on. Raphael doesn’t run a business and he isn’t a teacher. However, he had been thinking recently about starting to invest and he has an idea that he wants to check out. If he were to buy shares in companies that care about the triple bottom line, could he still make money and would it make a difference to the world? Raphael discovers that this is called socially responsible investing. He then finds out that he isn’t alone: According to MSCI, 76% of wealthy Socially responsible investing: An investment that is millennial (born between 1981 and 1996) and Generation Z (born between considered socially responsible due to the nature of the business the company conducts. 1996 and 2012) investors have reviewed their investments for their ESG factors: ESG stands for environmental, social and impact on ESG factors. governance. Environmental refers to how the company According to a report from the affects the environment. Social refers to how the company Harvard Kennedy School of impacts on society. Governance is how well a company Government, millennial investors is run, including that people from different backgrounds are twice as likely as others to invest make decisions together (i.e. a diverse range of opinions in companies that incorporate is represented). ESG practises.

Activity 17.13 Find eight of the latest statistics around socially responsible investing and design them as an infographic on a mini flipchart. Hang them on the wall so that everybody can learn from each other.

How investments can create change Raphael wonders how investments could create change. There are two ways in which this happens. Avoid stocks that have a negative effect on people, society and/or the environment: If Raphael doesn’t buy the stocks of companies that pollute the environment, mistreat their employees or cause problems for society, it could have a small ripple effect. However, if millions of people did the same thing, the share price could fall, the company may need to seek finance in other places or they may find it difficult to continue in business. Invest in stocks that have a positive ESG effect: If Raphael goes out of his way to buy the stocks of companies that are good for the environment, treat their staff well and have a positive effect on their local communities, it could have a small ripple effect. However, if millions of people did the same thing, the share price might rise, the company would find a steady stream of finance from other places and it could thrive in business.

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Environmental factors

Social factors

Governance factors

• Climate change • Greenhouse gas emissions • Resource depletion (including water) • Waste and pollution • Deforestation

• Working conditions (including slavery and child labour) • Local communities (including indigenous communities) • Conflict • Health and safety • Employee relations and diversity

• Executive pay • Bribery and corruption • Political lobbying and donations • Board diversity and structure • Tax strategy

Source: UN Principles for Responsible Investment Raphael wonders how he could start. Should he start checking the individual carbon footprint of companies using interactive tools?

Activity 17.14 Use an online carbon footprint calculator to calculate the impact of your household on the environment.

Chapter 17

Alternatively, he could read about the sustainability projects of listed companies. For example, he finds these highlights from the company that owns Aer Lingus, the International Airlines Group: • 6% flight CO2 intensity improvement over five years • 7% less CO2 from electricity use 2018 vs. 2017 • 3.9% productivity increase vs. 2017 with average manpower equivalent 64,734.

How can I help climate change and social issues as an investor?

The United Nations Principles for Responsible Investment include the following ESG factors that could determine socially responsible investing.

Activity 17.15 Research and summarise the sustainability initiatives of five listed companies in any part of the world. Present your findings to the class. Raphael realises that he could invest in a fund of stocks that fulfil the criteria that he is looking for, i.e. avoiding the stock of companies that do harm and pursuing the stock of companies that do good. Also, somebody else could run the analysis on these stocks to see if the companies have a positive or negative impact; he could invest in a group of stocks at the same time; and a fund manager would run the whole thing on a day-to-day basis for a fee. Raphael thinks this is an interesting idea, so he looks into it further and sees that there are four different types of fund: Socially responsible investing funds: These funds actively avoid stocks that they consider harmful (e.g. companies that use fossil fuels in massive quantities or offer gambling services to customers) while seeking out stocks whose focus is to implement positive change (e.g. green energy companies, charities or businesses that improve the health of world). The purpose of these funds is to use your investments to create positive change or to penalise companies that are affecting the world negatively. ESG (environmental, social and governance) funds: These funds find traditional stocks that aim to offer solid financial returns. However, rather than select stocks based on their market capitalisation (market cap), companies are chosen based on their ESG ratings. The purpose of these funds is not just to generate a return for the investor, but to align the investment goal with environmental, social and governance goals too.

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Impact funds: These funds find projects that will help the environment, reduce inequality between richer and poorer people, reduce crime rates, increase the life expectancy of people in the developing world, etc. The purpose of these funds is to invest money in ideas that can help the world to solve our biggest problems. Faith funds: These funds invest their assets ethically according to their religious beliefs. The purpose of these funds is to use money in line with the guidelines of their religion. Raphael needs to think. What are the main advantages of socially responsible investing? Are there disadvantages to this type of approach?

Advantages of socially responsible investing Raphael doesn’t need to manage the portfolio himself. There is a fund manager in place to screen positive and negative factors. They can use a benchmark to decide what stocks are selected and what aren’t (if it’s a passive fund) or else the fund manager can make the decisions themselves (if it’s an active fund). He won’t be buying just one stock, but rather several of them, so if one or two fall, this might be balanced by others rising. This is the benefit of diversification, just like Paul in Chapter 9 with his REITs and Kayrn’s clients in Chpater 16. Raphael can simply research the fund that best suits what he needs and invest his money in it. The fund manager and the stocks themselves will do the rest. Raphael can benefit from investing in these companies if they generate earnings, as they may distribute some of that profit through dividends or else their share price may go up. After all, if companies treat their staff well, they’re likely to be a productive, happy workforce. If they’re good to their communities, they’re likely to be rewarded with lots of customers. If they’re run well, they’re likely to have fewer problems and be better able to take advantage of OPTIMAL SPACE FOR SUSTAINABLE INVESTORS Companies considered for investment business opportunities. As a result, it makes sense (and cents!) that Raphael’s investment could make money and make a difference. Environmental Raphael can put his money where he feels he is rewarding the good that he wants HIGH ESG STRONG to see more of in the world. For example, SUSTAINABILITY INVESTMENT SCORES POTENTIAL if he is passionate about better access to Social energy, improved education for people in the developing world or ensuring that everybody has access to safe working conditions, Raphael can invest his money Governance to help make this happen.

Disadvantages of socially responsible investing The fund manager will decide what stocks to pick. As an investor you can’t change that, so the only way to disagree with the fund manager is to move your money somewhere else. For example, many people argue that companies that make and sell cigarettes must be excluded from socially responsible investing funds. They may treat their staff well, do a lot of good in the community and be extremely profitable (which is likely to push up the share price), but it’s impossible to disagree with the fact that cigarettes dry up a smoker’s skin, dramatically increase the chance of developing lung cancer and are highly addictive. If Raphael disagrees or would like the returns on offer by a tobacco company of this nature, he simply can’t influence the fund manager’s decision. Further, the fund manager’s job is to find stocks that offer strong investment potential as well as high ESG sustainability factors. It’s not just about the profit and Raphael needs to be aware of that. If a company has been poor in ESG but is making significant efforts to improve, then it may still be excluded from these funds if its rating is still below average. Therefore, investors may miss out on these investment opportunities.

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Many studies have shown that ESG funds have performed just as well as traditional funds. Search online for newspaper articles that discuss this subject, summarise their points of view and present your findings to the class. A business that has high ESG scores may not have told the truth or may be lacking in other areas, or the fund may be asking the wrong questions. For example, a company may say that it is doing great things for the environment, but may not be treating its staff very well. You may open the newspaper one day to find that an accident that was very harmful to the environment has been caused by their actions. Similarly, an ESG fund may decide to make investments in stocks with good policies instead of good behaviours. In other words, they could invest in what companies say they’re going to do rather than what they’re actually doing. If a company is pretending to be better than it is, it’s called ‘greenwashing’. As Raphael gets closer to deciding, he needs to clarify his thoughts.

Activity 17.17 Socially responsible investing

Traditional investing

Chapter 17

Copy this Venn diagram into your copybook. What characteristics of investing are common to both socially responsible investing and traditional investing? What characteristics exist only for socially responsible investing? What characteristics exist only for traditional investing?

How can I help climate change and social issues as an investor?

Activity 17.16

Small actions can create big change Raphael decides that it’s worth it to invest in a socially responsible investing fund that also has the capacity to make money for him. However, he starts to feel that he can’t make any difference because he is just one person with a small amount of savings. He then wonders what the lifetime impact of small actions would be. Lifetime impact: The overall effect over the long term.

Activity 17.18 Calculate the lifetime impact for Raphael of any of these changes. (a) If you turn off the tap while you brush your teeth, you can save up to 200 gallons of water per month, according to North Carolina State University. (Tip: Convert gallons into litres, multiply the amount by 12 to get the yearly saving and then multiply by 60 because Raphael may have another 60 years to live.) (b) On average, people who complete an undergraduate degree earn €106,000 more in their lifetime than those who finish their education after the Leaving Cert, according to Indecon. (Imagine the total effect of this if one more student from every single one of the 730 secondary schools in Ireland completed a degree every year. How much would this work out as if this happened every year for 10 years?) (c) The average fully grown tree will absorb as much as 48 pounds of carbon pollution every year. By the time it is 40 years old, the tree will have absorbed 1 ton of carbon dioxide, according to the TenTree website. Further, research by Imperial College London and the International Carbon Reduction and Offset Alliance (ICROA) found that for every ton of carbon offset, $664 of benefits are delivered to communities, infrastructure and biodiversity. Calculate the environmental and economic impact of planting 1,000 trees in every county across the island of Ireland. (Each year, one tree will soak up 2,300 gallons of stormwater run-off. That’s about as much water as you’ll drink in 12 years!) Transition Year Finance

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Finally, Raphael settles into researching a socially responsible investing ETF. He calls his friend Kayrn (from Chapter 16) and asks her what she looks for when selecting an ETF. She sends him an email with the short list below. He then compares his ETF to the main S&P 500 – that is, the overall benchmark for the entire US market – and Kayrn has told him that this data is from today, so it could change even by the time he is reading it.

KLD 400 ETF

S&P 500 ETF

What the fund does

Tracks companies that have positive ESG factors

Tracks the largest 500 companies in the US

When the fund started

November 2006

May 2000

Number of holdings (e.g. stocks or bonds) in the fund

402

505

Whether or not there is a dividend, and if so, what the yield is

1.44%

1.77%

Annualised return for the past three years

15.11%

15.17%

The top five stock holdings

Microsoft, Facebook, Alphabet, Visa, Procter & Gamble

Apple, Microsoft, Amazon, Facebook, Berkshire Hathaway

The fees to invest in the fund

0.25%

0.04%

How much money is in the fund

$1.8 billion

$208 billion

Activity 17.19 The final thing that Raphael wants to do is to compare four different ETFs in a similar way to the table above and he asks you for your help. Here is what you need to do: • Find the most up-to-date factsheet for the KLD Social Impact 400 ETF, e.g. from the iShares website. • Find the most up-to-date factsheet for the IVV Core S&P 500 ETF. • Find an ETF in Europe that offers investors like Raphael an opportunity to invest in a socially responsible way, then download its factsheet. • Find an ETF that tracks the European market in a very broad way (like how the S&P 500 tracks the US market), then download its factsheet. • Draw a table in the same way that Raphael did for the KLD vs. S&P analysis, but now put in five columns: the first is for the same bold headings as in the table above and the remaining four columns are for the data from each of the ETFs above. • Fill in the table with the appropriate information. Best of luck with your investments to help the world with sustainability, Raphael!

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Career spotlight Eoin Diffley, CFA, Index Fund Manager How did you get into the industry? When I was in secondary school my favourite subjects were economics, accounting and business. After the Leaving Cert I attended UCD and graduated with a Bachelor of Commerce in 2006. I then joined KPMG and trained as a chartered accountant. I had a strong interest in the financial markets and decided to undertake the CFA Program to improve my knowledge and increase my chances of getting a front office role.

What job did you have while studying for the CFA® exams? After KPMG, I travelled to Sydney and got a job in the investment house AMP Capital. I originally worked in infrastructure finance but then moved internally to a fast-paced front office role in the Debt Advisory team, which raised debt in the capital markets for AMP Funds and external companies.

How has the CFA Program helped you? Without doubt, the CFA charter has helped me to not only increase my knowledge of finance, but it has also been instrumental in my career development. When I returned to Dublin from Australia, I applied for a role in the Indexation team in Irish Life Investment Managers. The Indexation team has many CFA charterholders and I believe having the CFA charter helped me greatly in obtaining the role.

What do you do in your daily job now? As part of my current role, I manage several equity investment funds for pension funds and institutional clients. Over the past four years I have specialised in ESG and sustainable investing. ESG investing considers environmental, social and governance factors in the investment process. ESG investing allocates more money to companies that score better on ESG characteristics. It is a fast-paced role with a lot of responsibility, but it is very enjoyable and we have a great team ethos.

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How can I help climate change and social issues as an investor? Chapter 17

End-of-chapter exercises

Chaptersummary summary Chapter

1 Define sustainability. 2 Design visual clues (e.g. icons, emojis, etc.) for the following terms. Here is an example for ‘triple bottom line’ to help you get started: • Sustainability • Sustainable Development Goals • Corporate social responsibility • Socially responsible investing • ESG factors • Lifetime impact 3 Read one of the Champion case studies for the Irish efforts towards achieving the Sustainable Development Goals from Ireland’s Sustainable Development Goals data hub (irelandsdg.geohive.ie). Put together a cloze test (i.e. a piece of text with blank spaces where words need to be filled in) based on your chosen case study and swap it with another classmate who has chosen a different case study. See who can solve it correctly first. 4 State and explain the advantages and disadvantages of shopping local. 5 Research three companies that have received the B Corp badge and summarise their journey to achieving it. 6 Find three different companies on the CSR Central website and identify what CSR practices they have put in place in their companies to be helpful towards society. 7 Outline the advantages and disadvantages of socially responsible investing. 8 Find an ETF in Australia that offers investors like Raphael an opportunity to invest in a socially responsible way, then download its factsheet. • Draw a table in the same way as Raphael did for the KLD vs. S&P analysis on page 166, but now put in only two columns: the first is for the bold headings and the other is for the data from your chosen ETF. • Fill in the table with the appropriate information.

JOURNAL QUESTION

If you were to lend money to government (i.e. buy a bond) or invest in a company (i.e. buy a stock), would you check out its ESG rating before doing so? Why or why not?

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Chapter

What is my investing personality?

Learning objective

• Understand that investors have different needs and wants and that they can be matched effectively to investment products that are readily available.

Let’s set the scene You’ve met several characters throughout this book. Remember John and Irene who wanted to start renting a house together? Noel the entrepreneur? Paul who wanted to buy a property? Maria who wanted to go on holiday?

Learning outcomes

• Identify that different segments of the market have different needs and wants. • Contrast investing outcomes based on risk and return. • Suggest different investment products for customers based on their needs or wants to relate to certainty and amount of return. • Suggest different investment products for customers based on their needs or wants to relate to liquidity. • Suggest different investment products for customers based on their needs or wants to relate to income. • Understand the risk/reward consequences of action.

Literacy links

• Yield to maturity, liquidity, income yield

Numeracy links

Investing needs and wants Each of these people has a specific set of needs and wants. Every time they buy something, it is to satisfy a need or want. John and Irene need to have a place to stay, but they want to live together and within a reasonable distance of their workplaces. Noel wanted to bring his company public. Maria wanted to visit her friend in Bristol and export some of her nappy cakes. This very same idea of needs and wants applies to saving and investing. Chloe wanted to put her money in a low-risk environment. She wanted to be certain of the outcome, i.e. how much she would get and by when. Paul wanted to be able to invest in property in small amounts, with other people, in such a way that he could get his money back quickly and could check the value of his money at any time.

• Calculating returns and yields

Cross-curricular links

• • • •

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Think about what might be different between Paul and Chloe’s needs and wants. Paul

Chloe

Wants to buy a property

Wants to buy a bond

Is comfortable with a lot of risk

Wants very little risk

Wants to invest with other people

Wants to invest on her own

Wants income from rent

Wants income from the government

Wants income that may always change (but he knows that the income could rise, stay the same, fall or disappear)

Wants income that’s fixed

Wants to make a return but doesn’t need to know exactly how much when he buys the investment in the first place

Wants to make a return but needs to know exactly how much when she buys the investment in the first place

Activity 18.1 In your copybook, add a few more differences that you think are missing from the table. Let’s consider how we can figure out the different things that people want in an investment.

Need/want #1: Certainty and amount of return When some people put money into a saving or investment, they want to know exactly what the outcome will be. They want to know how much they’re going to get back, at what date, and they want to be certain this will happen. These savers or investors don’t want to take a lot of risk. On the other hand, some people are willing to risk not knowing if they will get their money back, how much money they will get back or when they will get it back. These people are taking a higher risk in the expectation that they will get a higher return.

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What is my investing personality?

McDonald’s, they would have made the following profit:

Individual share profit: Share price (May 2020) – Share price (February 2011) = $184.41 – $72.99 = $111.42 Total profit: 100 shares multiplied by the individual share profit = 100 × $111.42 = $11,142.10 Return on investment per year: Return on investment: Profit per share Initial share price

$111.42 $72.99

Return on investment = 153%

Number of years invested = 17% per year

153% 9

CASE STUDY: Government bonds with In 2011, Investor B bought some Irish government bonds that expired in 2020 the , a coupon of 5%. The price of the bond was €87, but if they hold it to maturity the government will give them back €100 (assuming no default). They also know that . maturity government will give them €5 every year that they hold it until They also looked up the official document published by the National Treasury Management Agency and saw that they would be repaid ‘at par’, or in full, by the government on 18 October 2020.

! CAUTION!

Nine years after Investor B invested in this bond, the government paid Investor B €100 for every 5% Irish government 2020 bond that they owned. Therefore, the government didn’t default. Here is

Some governments can default on their promise to repay their debt to bondholders.

the return that Investor B made:

1. Income yield: €5 €87

× 100 =

5.75% every year that they held the bond

2. Capital gain: €100 – €87 = €13

CASE STUDY

Note: This doesn’t even include dividends!

Chapter 18

$72.99 Investor A buys some shares of McDonald’s on 14 March 2011. The investor spent have on every share that they bought. From that moment onwards, Investor A does not know won’t They future. the in any certainty whatsoever of what the share price will be ld’s case, what it will be in the next hour or what it will be in six months’ time. In McDona nine years later, on 18 May 2020, the share price was higher, at $184.41. because If Investor A had sold their shares at that point, they would have made money of shares of taking that risk. Specifically, if Investor A had originally bought 100

CASE STUDY

CASE STUDY: Shares

3. Capital gain as a percentage: €13 €87

= 14.9%

4. Capital gain as a percentage per year: 14.9% 9 years

= 1.66%

Total return (also called yield to maturity): 5. Income yield + Capital gain as percentage per year = Total annualised return 5.75% + 1.66% = 7.41%

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numbers is due to rounding.)

Remember! Investor B bought this bond in 2011 and the maturity date was in 2020. Therefore, they held the investment for nine years.

CASE STUDY

However, Investor B knew what the total return would be all along because when they did their research back in 2011, the 7.41% return was stated upfront. This number is called the yield to maturity. (The difference between the two

Remember! The prices and returns from bonds can change all the time. Yield to maturity: Annual return that a bond investor makes through coupons and gains. da Investor A took more risk than Investor B. In this case, it paid off. Investor A generate their all lose could much higher return than Investor B. Investor A took the risk that they money and that they didn’t know how much money they would get back in the future. but if Of course, taking a higher risk doesn’t guarantee that there will be a higher return, that taking for B Investor Investor A didn’t believe they would get a higher return than extra risk, then they wouldn’t have done so.

Activity 18.2 (a) Find out what the share price of McDonald’s was on 5 March 2003, 8 April 2008, 16 July 2012 and 8 March 2020. (b) Calculate the annual share price gain or loss, as a percentage, if an investor bought 100 shares of McDonald’s on 5 March 2003 and held them until each of the dates mentioned in part (a). (c) An investor sends you an email asking what the price of McDonald’s shares will be in exactly one year’s time. Write a response to that email.

Activity 18.3 (a) Calculate the yield to maturity on five Irish government bonds today. (b) An investor sends you an email asking exactly how much they will get back from their investment at maturity. Write a response to that email.

Need/want #2: Liquidity When some people put money into a saving or investment, they want to know exactly when, and how often, they can take their money out. For example, if you put some money into a current account, you know that you can take it out any time that you like. All you need to do is go to the bank during opening hours or use your ATM card at a bank machine. Therefore, you can take money out immediately. In other words, you have immediate liquidity. Liquidity: Refers to how quickly you can turn your asset into immediately accessible cash.

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Activity 18.4

CASE STUDY: Exchange-traded fund phone Investor D wants to put some money into an exchange-traded fund (ETF). They to in like would they if their stockbroker and ask how quickly they can sell their shares ETF the future. They mention that they don’t know when they would like to sell their sell. to shares or how many of them they would like they The stockbroker asks them to log in to their account and click on the area where the of can create an online trade. The stockbroker tells them to put in the symbol

CASE STUDY

Examine three different State Savings products and compare them in terms of their liquidity.

What is my investing personality?

can liquidate their investment within seven days.

Chapter 18

the Investor C wants to save some money with a State Savings product. They visit Year 5 the into further website and look at the various products on offer. They look Of Savings Certificates, as they are willing to put away their money for five years. they quickly how know to wants C Investor e! course, a lot can happen in that timefram they details, the can get access to their cash if they need it. As Investor C reads through seven notice the words ‘access to your initial investment and any interest earning with days’ notice’. they This means that at any given time, they can get their money as well as any interest they have already earned back, but they must give seven days’ notice. In other words,

CASE STUDY

CASE STUDY: State Savings

ETF, change the action from ‘Buy’ to ‘Sell’, type in how many shares they want to sell and change the ‘Limit’ to ‘Market’. Investor D follows all these instructions. The stockbroker then says, ‘As soon as you click “Verify”, our computer system will find you a buyer for those shares. It can happen as quickly as you can snap your fingers if there are a lot of buyers for your stock that day. Therefore, most of the time when it comes to shares or ETFs, you can have immediate liquidity and then it will take a few days for us to get the money sent back to your current account.’

Activity 18.5 Based on the conversation that the stockbroker just had with Investor D, how quickly could Investor A, who owns McDonald’s shares, get their money back?

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Need/want #3: Income

Remember! In the case of a bond, we call the income a coupon. In the case of a stock, we call the income a dividend. In the case of a savings account, we call the income interest. In the case of a property, we call the income rent. Income yield: Income received as a percentage of the investment made.

CASE STUDY: Income yield have Investor E loves the idea of certainty. They like knowing exactly what they will E Investor e, Therefor and when and with a very high chance that it will be paid out. find wants to buy government bonds and visits the Irish Stock Exchange website to the out pick can they that knowing like also the information they’re looking for. They income with that same certainty. ent For example, Investor E knows that they will receive €1 per year from the governm 2030 if until 2026 if they buy the BV8C941 bond; that they will get €2.40 per year until . BFZRQ24 buy they if 2031 until they buy BJ38CR4; and that they will get €1.35 per year

Code

Name

Details

Price

B6X95T9

IRISH GOVERNMENT BONDS

3.40% Treasury Bond 2024

116.096

B4TV0D4

IRISH GOVERNMENT BONDS

5.40% Treasury Bond 2025

129.968

BV8C941

IRISH GOVERNMENT BONDS

1.00% Treasury Bond 2026

108.698

B8J2NN6

IRISH GOVERNMENT BONDS

5.72% Amortising Bond 2027 (issued 2013)

132.840

B7XWNN5

IRISH GOVERNMENT BONDS

5.72% Amortising Bond 20 July 2027

130.099

BDHDPR4

IRISH GOVERNMENT BONDS

0.9% Treasury Bond 2028

109.711

BH3SQ89

IRISH GOVERNMENT BONDS

1.1% Treasury Bond 2029

112.104

BJ38CR4

IRISH GOVERNMENT BONDS

2.4% Treasury Bond 2030

126.321

BFZRQ24

IRISH GOVERNMENT BONDS

1.35% Treasury Bond 2031

116.340

B7Z55X6

IRISH GOVERNMENT BONDS

5.82% Amortising Bond 20 March 2032

137.511

CASE STUDY

When people put some money into a saving or investment, they must decide whether they want to put it away for the full length of the term and only get the return for taking their risk at the very end or if they want to get a little bit of income regularly along the way. Some people don’t want any income at all. They want to buy shares in a company that invests all its profits back into the business rather than paying out a dividend. Some people do want a dividend, but they don’t need it to be fixed – they’re happy to buy a share that pays out a dividend without being sure what that dividend is going to be. Other people want to know how much of a coupon or interest they’re going to receive, on what date and with a high degree of certainty that it will happen that way.

Source: Irish Stock Exchange

€1 or However, they also know that it’s not as simple as thinking that they will make to look they as that is this for reason €2.40 or €1.35 for every €100 they put in. The €100. isn’t bond the right-hand side of their screen, they can see that the price of the Therefore, they need to calculate the income yield.

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100 1.00 = 0.92% × 1 108.698 d as: In the case of the 2030 Irish government bond yield, the income yield is calculate

100 2.4 = 1.90% × 1 126.321 Note: If they bought that bond for €126.32, then they will get back only €100 from the government at the end of the investment. Therefore, while they do get the income, they will lose some of the money that they invested in the first place.

Activity 18.6 (a) Calculate the income yield of each Irish government bond in the table on the previous page. (b) Visit the Irish Stock Exchange website and find the list of Irish government bonds and their prices. Calculate their income yields and compare them to your work from part (a). (c) Put the income yields on a bar chart with the yield on the y-axis and the date of maturity on the x-axis.

Transition Year Finance

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What is my investing personality?

Investor E works out that in the case of the 2026 Irish government bond, the income yield is:

Chapter 18

100 Income × 1 Price of the investment that generates that yield

CASE STUDY

Income yield =

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Investor F wants to buy some shares in a company that gives a dividend to their shareholders. They’re not concerned about how much it’s going to be, but they do want to know that: • The company has a history of paying out a dividend.

CASE STUDY

CASE STUDY: Dividend

• It has been growing in recent years. • It is above the rate of interest in the bank. They’re aware that the bank is offering savers 1% now, so they want a dividend that is going to be more than that, i.e. the dividend yield needs to be above 1%.

They do some research online using the Nasdaq website and find that Intel is currently offering a 2.24% dividend. This passes one of their tests – the yield is greater than more what they would get in the bank, as the Intel dividend yield is 2.24%, which is than the 1% offered to savers in the bank. As they scroll through the information, they also see that Intel has been paying investors a dividend for a number of years now, so this passes another one of their

tests – that the company has a history of paying out a dividend. d Finally, they see that Intel increased its dividend in 2020 (at $0.33 per share) compare to 2019 (at $0.315), so this passes all three of their tests.

However, Investor F becomes worried that Intel may not be able to continue paying the key out or growing its dividend. What would they do then? After all, the dividend is reason that they’re buying the share. Investor F rings their friend Anne, who has the Chartered Financial Analyst payqualification, to ask her about this. Anne asks Investor F to look at the dividend that profit of $100 every for out ratio. In Intel’s case, this is 11.82%, which means that s Intel makes, it pays out $11.82 to its shareholders in the form of dividends. It reinvest out all the rest back into the company. Therefore, Anne says, the company is paying to able being of a relatively small proportion of its profits, so it has a good chance continue doing this over the years. what will Anne cautions Investor F on two things. The first is that you can never be sure must be es compani in invest who happen in the future when it comes to stocks. People , aware that things can go very, very well and they can make a lot of money. However they can also go very badly and they can lose a lot of money. The information that the Investor F found only relates to the past, so they must make their decision about future knowing that it won’t just be history playing out in the very same way again. Anne also says that it’s a good idea to investigate other things about Intel. If the of dividend is good but the share price falls, Investor F could end up not making much s prospect a return. It’s important to buy a share for the dividend as well as its growth in other ways. all. They Investor F also wants to buy shares in a company that doesn’t pay any dividend at back right makes it want to buy stock in a business that reinvests every single cent that . into the company. They search online and find that Snapchat doesn’t pay any dividend a Now they must look at other details about the company. If the company isn’t paying ahead. years the in profit a dividend, it’s important to check out its ability to make

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Activity 18.7 (a) Examine the current dividend yield, the amounts that the company paid out in dividends over the past five years and the payout ratio of McDonald’s for Investor A. (b) Compare all three results of the results for McDonald’s in part (a) with Intel in a table so that Investor A and Investor F can make decisions with all the information available.

We discussed earnings per share in Chapter 14.

Activity 18.8 In the table below, circle your own investment preferences in terms of certainty of outcome, liquidity and income. Uncertain

Completely certain

Liquidity

Always

Some

None

Income

High

Low

None

Chapter 18

Certainty

What is my investing personality?

Remember!

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Career spotlight Professor Mark Mulcahy, PhD, CFA, Head of Department of Accounting and Finance What did you do before you started studying for the CFA® exams? After graduating from University College Cork with both a bachelor’s degree and a master’s, I initially moved to San Francisco, where I had several temporary jobs with banks and professional services companies. I then got a job researching stocks in the technology and healthcare industries and learned about the CFA Program.

What happened after you passed? The CFA charter is recognised among those in the finance industry as a very difficult one to achieve and where you really must know your material to pass. Given that many of my clients had passed or were attempting to pass the same exams, this really meant something. Many of the jobs I was interested in in San Francisco specified that the CFA charter was preferred/required, even in the late 1990s.

How did you move from this into a job in university? I eventually moved back to Ireland to a job with a large investment firm before moving into the academic world of a university. Now my job involves lecturing and developing new content for a variety of finance courses for people studying bachelor’s degrees, master’s and PhDs and for companies that need to train their staff. Since a lot of what you need to study for the CFA exams is useful for studying for university exams, having the charter and real-world experience has helped me enormously.

How have you benefited from being part of CFA Society Ireland? I have been involved with CFA Society Ireland ever since I returned from San Francisco. The people I have been involved with since then are very approachable and very enthusiastic about bringing more and more people into the financial community in Ireland. The local society is a great way to meet and network with some of the best and brightest minds in finance in Ireland. I attend as many events as my timetable permits throughout the year, but that is a little more difficult being based in Cork!

What advice would you give to young people getting started studying for the exams? Studying for a CFA charter should not be underestimated. The exams are difficult to pass and are worthy of being treated with respect. If you don’t study, then no matter what your background is, you won’t pass. That said, having the CFA charter is an international passport to a career in financial services that is well worth the effort.

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End-of-chapter exercises

Chaptersummary summary Chapter

Equity investors

2 Imagine that you bought the following stocks at these prices. Calculate the difference between the value of these shares based on these figures and today’s live prices. (a) 100 shares of Coca-Cola at $45 (b) 1,000 shares of Intel at $45 (c) 30 shares of Berkshire Hathaway (A Class) at $150,000 3 Research the income yield to maturity on five US Treasury bonds today. 4 Examine three different savings products at any bank in Ireland and compare them in terms of their liquidity.

Chapter 18

Bond investors

What is my investing personality?

1 Draw this Venn diagram into your copybook and fill it in to compare and contrast what bond investors and equity investors seek.

5 Copy this table into your copybook and fill in the blank cells. Dividend per share

Share price

€4

€56.34 €10

€4.56

5% 2.34%

€100 €56 €7.42

Dividend yield

0.67% 1%

€102

€5.67

4.5%

€9

3.8%

€1.23

€90.07 €10.90

1.7%

JOURNAL QUESTION

What have you learned about your investing personality or attitudes about money during this chapter?

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Glossary

Active investing: Holding a portfolio that is different from the index. Annual dividend growth rate: The increase in a stock’s dividend compared to the year before. It is expressed as a percentage. Annual equivalent rate (AER): The rate of interest you would make per year. Annual percentage rate (APR): The interest rate charged on purchases. Specifically, it is an annualised rate that considers all the costs involved with your credit card, including interest, stamp duty and any other regular charges that may apply. Benchmark: A standard or point of reference to compare against. Bootstrapping: Using profits generated through sales to reinvest in the business. Budget: An estimate of income and expenditure for a set period. Capital gain: Profit made by selling an investment (i.e. a share) at a higher price than you bought it for.

Credit card: A small plastic card issued by a financial services institution that allows the holder to purchase goods or services on credit. Debit card: A card that enables the holder to transfer money electronically from the balance in their bank account when making a purchase. Debt: Borrowing money from a bank or other financial institution and paying it back with interest over time. Deficit: When money outflows exceed money inflows. Demand: The desire of customers for a product or service. Deposit: A sum payable as a first instalment on the purchase of an asset. Deposit account: The saver may be locking up their money for some months or years. Deposit Interest Retention Tax (DIRT): A tax that’s applied to interest payments received by the saver.

Capital Gains Tax (CGT): A levy charged on the positive difference between the sale price of an asset and its original purchase price.

Deprivation: When a person or family doesn’t have enough money to buy the goods and services that other people in the same society currently have access to.

Corporate social responsibility (CSR): When companies take responsibility for their impact on society.

Diversification: The practice of spreading your investments around so that your risk of relying on only one type of asset is limited.

Cost-based pricing: Add up all the costs of everything you would need to price a product, then add on some profit afterwards.

Dividend: A sum of money that a company regularly pays out of its profits to its shareholders.

Coupon: A payment made by the government to the people (called bondholders) who own the bond.

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Dividend cover: The ratio of a company’s earnings per share to its dividend per share.

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Dividend yield: The ratio of a company’s annual dividend compared to its share price. It is expressed as a percentage.

Fixed cost: This cost stays the same independent of the amount of goods produced or the usage of the service.

Earnings growth: The change of earnings per share over a period of time in terms of a percentage.

Earnings per share (EPS): This is calculated as a company’s profit divided by the outstanding shares of its common stock – in other words, the company’s profit for the year divided by the number of shares that all shareholders hold. Entrepreneur: A person who takes the risk to set up a business or businesses in the hope of making a profit. ESG factors: ESG stands for environmental, social and governance. Environmental refers to how the company affects the environment. Social refers to how the company impacts on society. Governance is how well a company is run, including that people from different backgrounds make decisions together (i.e. a diverse range of opinions is represented). Euro cost averaging: The process of investing regular amounts rather putting one lump sum into an investment all at one time. Exchange-traded fund (ETF): A pool of money that’s invested mainly to track a benchmark on an exchange. It is liquid, has its price available on a stock exchange all day and is low cost.

Foreign exchange: A system for buying and selling the currencies of other countries. Government bond: When a person or business lends money to the government in exchange for a return. Grant funding: Applying for government money from state agencies, including Enterprise Ireland and the Local Enterprise Office. Gross income: The amount of money that is paid (e.g. from an employer) before any taxes are paid. Import: When money is spent buying goods and services from another country. Income: Money received, especially on a regular basis, for work done or by investing. Income yield: Income received as a percentage of the investment made. Inflation: A general increase in prices.

Expenditure: An amount of money spent.

Investing: Putting some money at risk in order to make a return.

Exports: Sales of goods and services to other countries.

Investment-grade bond: A bond that has a low risk of not paying back the interest and principal.

Fintech: Fintech is a combination of the words financial and technology. It describes the use of technology to deliver financial services and products to consumers.

Lifetime impact: The overall effect over the long term.

Fixed: Any cash outflow that remains constant regardless of the level of activity.

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Liquidity: Refers to how quickly you can turn your asset into immediately accessible cash. Loan-to-income (LTI) ratio: This ratio is what banks and other lenders use to express the ratio of a loan to the income earned by the person or people who are applying for the loan.

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Loan-to-value (LTV) ratio: This ratio is what banks and other lenders use to express the ratio of a loan to the value of an asset purchased. Lump sum: Depositing a once-off fixed amount into a bank account. Market capitalisation: The number of shares available multiplied by the share price. It’s often referred to as market cap. (In the bond market, the market capitalisation of a bond is the amount of money borrowed.) Market maker: Connects the stockbrokers together who represent buyers and sellers. Their job is to provide prices for stocks and to process transactions of money in exchange for stocks between those buyers and sellers. Marketing: The action or business of promoting and selling products and services. Minimum repayment: The smallest amount of money that you are required to pay to your credit card provider each month. Money: A medium of exchange in the form of coins and banknotes; a store of wealth/savings. Mortgage: A loan to buy a house. It is an amount that a bank loans to a person or group of people and is repaid back over the life of the loan with interest. Mortgage Arrears Resolution Process (MARP): A system that sets out rules of how the lender must deal with borrowers if they have difficulty paying their mortgage. Mutual fund: A structure whereby several investors contribute money to invest in one or many asset classes. A money manager manages the fund for a fee. Needs: Goods and services that are essential or very important, such as food and shelter. Net income: The amount of money received after all income taxes are paid (i.e. gross income from an employer less all income taxes).

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Occupational pension: A pension provided by an employer. Passive investing: Holding a portfolio that is the same as an index. Pay Related Social Insurance (PRSI): The main source of funding for social welfare payments, which is collected from employees through tax based on the amount of their pay. P/E ratio: The share price divided by the earnings per share. Pension: A regular payment made during a person’s retirement from an investment fund that they and/or their employer has contributed to during their working life. Personal Retirement Savings Account (PRSA): A pension designed for self-employed people, unemployed people, homemakers, carers and any employee who doesn’t contribute to an occupational pension scheme. Population: A population includes all the elements from a set of data. Portfolio: A collection of stocks, bonds or other asset classes. Primary research: A method that researchers use to collect data directly rather than depending on data collected from research previously carried out. Private equity: Selling part of a business for money privately to another individual or legal organisation, whereby they would be entitled to a proportion of the business’s future profits. Shares that are transferred between a private company and shareholders. Profit: The money left over after taking costs away from income. A financial gain, i.e. the difference between sales and costs. Public equity: Selling part of a business for money publicly to other people and legal organisations, whereby they would be entitled to a proportion of the business’s future profits. Shares in a company that is listed on a stock exchange.

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Real estate investment trust (REIT): A fund of property that lists and trades on a stock exchange.

Surplus: When money inflows exceed money outflows.

Repayment period: The time between the first payment on a form of borrowing and when it is completely paid off.

Sustainability: The ability to be maintained at a certain rate or level. It is the avoidance of the depletion of resources in order to maintain balance.

Return: In its simplest terms, a return (also known as a financial return) is the money made or lost on an investment over some period of time.

Target market: A particular group of consumers that a product or service is aimed at.

Risk: The possibility of losing money with an investment.

Tax relief: The cancellation of a proportion of income tax normally due on earned income.

Sample: A sample consists of one or more observations drawn from the population.

Triple bottom line: When companies try to make a profit, help their employees to have a good experience at work and have a positive impact on the environment – in other words, the triple bottom line is profit, people, planet.

Saving: Taking little risk to make a small return. Secondary research: A method used by researchers that involves using data that already exists. Share: An investment representing partial ownership of a company. Shareholder: A person or other legal entity that owns shares in a company. Socially responsible investing: An investment that is considered socially responsible due to the nature of the business the company conducts.

Variable cost: This cost varies with the amount of goods produced or the usage of the service. Variable rate mortgage: You will have to repay your mortgage at whatever interest rate the bank requires at the time. If the interest rate rises, you will have to pay more; if the interest rate falls, you will be asked to pay less. You take the risk of not knowing what will happen next month or next year. Variable: Any cash outflow that changes in proportion to usage.

Stamp duty: A tax on certain instruments (written documents).

Volatility: The potential for the value of an asset to change quickly and unpredictably.

Stock exchange: A market in which shares are bought and sold.

Wants: Goods and services that we want to have but aren’t vital, such as holidays and music concert tickets.

Stock index (or stock market index): A way to measure a section of the stock market. Stockbroker: A business that buys and sells securities on a stock exchange on behalf of clients.

Yield to maturity: Annual return that a bond investor makes through coupons and gains.

Store card: A credit card given out by a retail store (rather than a bank or financial institution).

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Photo credits Shutterstock: p2 Marcel Derweduwen, Antonio Guillem; p3 Vitalliy, ESB Professional; p5 Milles Studio, Tyler Olson; p6 VectorMine; p7 Novikov Aleksey, Cozine; p9 Kaesler Media; p10 tostphoto, M. Rohana; p11 Ribkhan; p13 bleakstar; p14 ImageFlow; p19 Marian Weyo, Syda Productions; p21 iCreative3D; p25 Minerva Studio; p27 Palto; p28 Marian Weyo; p29 Mega Pixel, graphixmania, zentilia, New Africa; p30 LoopAll; p31 fizkes; p32 Vitalii Vodolazskyi; p34 Jag_cz; p36 S.Borisov, Ubermensch Matt; p37 Lucia Pitter; p38 Kluva; p39 Life In Pixels; p42 Billion Photos; p44 nevodka, illpaxphotomatic; p45 MSSA; p47 WindAwake; p48 MRAORAOR; p49 ktsdesign; p50 Rawpixel.com; p52 Nickolay Khoroshkov, ABO PHOTOGRAPHY; p57 winnond; p58 Yulia Grigoryeva; p59 bleakstar; p61 rawmn, Rido; p63 Sarahbean; p65 Monster Ztudio; p66 Jirsak; p68 zieusin; p69 Yeti studio; p70 BaanTaksinStudio; p72 Grand Warszawski, EtiAmmos; p73 garagestock; p75 buffaloboy; p76 EtiAmmos; p78 Myimagine, ViDI Studio; p80 soul_studio; p82 SurfsUp; p83 David Leshem; p85 ESB Professional; p87 LiliGraphie, Cookie Studio; p88 Cookie Studio, Matthias Pahl, MF production; p90 LookerStudio; p92 Sabelskaya; p93 ProStockStudio; p95 KenDrysdale; p96 Constantin Stanciu; p100 Marian Weyo; p102 eurobanks; p103 Black Salmon; p104 aklionka, Rawpixel.com; p105 Constantin Stanciu; p106 Inspiring; p107 Natee K Jindakum; p109 Roman Samborskyi; p110 Good_Stock; p113 Powerful Design, Monster Ztudio; p115 Sudowoodo; p118 VicW, Dream Master; p121 EQRoy; p122 Olivier Le Moal; p123 Hristo Anestev, wowomnom; p126 Becris; p127 Vincent MacNamara; p129 Number1411, seyomedo; p130 ClassyPictures, Alexey Boldin; p134 Immersion Imagery; p137 OpturaDesign; p138 ImageFlow; p140 Mathias Richter; p141 Good_Stock; pp141-143 Pixel Embargo; p149 fizkes; p152 Freedomz; p154 WIJI; p156 Azindianlany; p157 Monkey Business Images; p158 Nina Fedorova; p159 Pressmaster; p161 Vaclav Volrab; p163 Cherries; p166 pogonici; p167 Dapitart; p168 bsd; p169 MrPrize, Gustavo Frazao; p170 mushan; p172 GrandeDuc; p173 emojoez; p175 Zerbor; p176 eamesBot; p177 Romolo Tavani. iStock: Cover photos: yacobchuk, FG Trade, urbazon, GrapeImages, franz12, fizkes, MStudioImages, Eva-Katalin, GaudiLab. CFA Society Ireland: p8, p17, p25, p34, p42, p50, p59, p70, p76, p85, p97, p107, p116, p127, p138, p152, p167, p178. Central Statistics Office: p132. Enterprise Ireland: p40. Getty Images: p39. Student Enterprise Programme: p41. United Nations Sustainable Development Goals: p155 (www.un.org/sustainabledevelopment; the content of this publication has not been approved by the United Nations and does not reflect the views of the United Nations or its officials or Member States).

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