MONEY AND THE RETURN IT EARNS
Fundamental to all financial markets is the idea of earning a return on money. Money has to work for its owner. Here are some of the ways it can do so:
1. You deposit $1,000 with a bank, which pays you, say, 10 % (per cent) a year interest. In other words, your $1,000 of capital earns you $100 a year, which is the return on your money. When you want your $1,000 back you get $1,000 plus any accumulated interest, not more or less. Provided your bank does not go bust, your $1,000 of capital is not at risk, except from inflation, which may reduce its purchasing power each year.
2. You buy gold bullion to a value of $1,000 because you think the price of gold will rise. If the price of gold has risen by 20 % after a year, you can sell your gold for $1,200. You have made a profit or a capital gain, of $200 on your capital outlay of $1,000. In other words you have a return of 20 % on your money. If the price of gold fails to move, you've earned nothing because commodities like gold do not pay interest.
3. You use your $1,000 to buy securities that are traded on a stock market. Usually these will be government bonds (known as gilt-edged securities or gilts in the UK) or ordinary shares in a company. The former always provide an income; the latter normally do. Traditional gilt-edged securities pay a fixed rate of interest. Ordinary shares in companies normally pay a dividend from the profits the company earns. If the company's profits rise, the dividend is likely to be increased; but there is no guarantee that there will be a dividend at all. If the company makes losses, it may have to cease paying a dividend.
But when you buy securities that are traded on a stock market, the return on your $1,000 is not limited to the interest or dividends you receive. The prices of these securities will also rise and fall, and your original $1,000 investment accordingly becomes worth more or less. So you are taking the risk of capital gains or capital losses.
Suppose you buy $1,000 worth of ordinary shares, which pay you a dividend of $40 a year. You are getting a return or dividend yield of 4 % a year on your investment ($40 as a percentage of $1,000). If after a year the market value of your $1,000 of shares has risen to $1,100, you can sell 'them for a capital gain of $100 (or a 10 % profit on your original outlay). Thus your overall return over a year consists of the $40 income and the $100 capital gain: a total of $140 or a 14 % overall return on your original $1,000 investment.
Investors are generally prepared to accept much lower initial yields on shares than on fixed-interest stocks because they expect the income to rise in the future. Most investors in ordinary shares are seeking capital gains at least as much as income. Note that if you are buying a security, you are taking the risk the price may fall whether it is a government bond or a share. But with the government bond the income is at least guaranteed by the government. With the share there is a second layer of risk, the company may not earn sufficient profits to pay a dividend.
To summarize: money can be deposited to produce an income; it can be used to buy commodities or goods, which are expected to rise in value; or it can be invested in stock market securities, which normally produce an income but show capital gains or losses as well. Of course, there are many variations on each of these items.
Упражнение 1. Дайте русские эквиваленты:
the idea of earning a return on money; your $1,000 of capital earns you $100 a year; a profit or a capital gain of $200 on your capital outlay of $1,000; commodities like gold do not pay interest; securities that are traded on a stock market; your overall return over a year; most investors in ordinary shares are seeking capital gains at least as much as income; there is a second layer of risk; the company may not earn sufficient profits to pay a dividend; so you are taking the risk of capital gains and capital losses.
Упражнение 2. Заполните пропуски подходящими словами и выражениями из текста.
1. Fundamental to all financial markets is the idea of … .
2. Your $1,000 of … earns you $100 a year, which is … on your money.
3. When you want your $1,000 back you get … .
4. Provided your bank does not …, your $1,000 of capital is … .
5. You may buy …, but if the price of gold fails to move, you've earned … because commodities like gold … .
6. Of all … traded on a stock market … always provide an income, … normally do, arid traditional … pay … .
7. Ordinary shares in companies normally pay … the company … .
8. When you buy securities that are traded on …, the return is not limited to … or … you receive.
9. If the market value of your shares has risen, your … over a year consists of … and … .
10. Investors are generally prepared to accept on shares than on … stocks because they expect the income … .
11. Most investors in ordinary shares are seeking … at least as much as ….
12. With the government bond the income is at least … .
13. If the company does not …, it may … to pay … .
Упражнение 3. Подберите из текста соответствующие английские эквиваленты:
процент годовых; накопленные проценты; при условии, что ...; обанкротиться; сокращать покупательную способность денег; рисковать; золотой слиток; ценные бумаги; государственные облигации; акции; фиксированная процентная ставка; прекратить выплату дивидендов; начальный доход по акциям; приносить доход (проценты)
(2 варианта); доходы на капитал (доходы от прироста капитала); потеря капитала.
Упражнение 4. Найдите в тексте объяснения следующих терминов:
a capital gain; a capital loss; a return; an overall return; a dividend yield; a fixed rate of interest.
Упражнение 5. Ответьте на вопросы.
1. What are the ways of earning a return on money?
2. What are gilt-edged securities? Who issues them? Why are they considered to be of the highest class?
3. In what cases does the investor take the risk of capital gains? Capital losses?
4. Which way of earning a return do you consider the safest and most profitable while other things being equal?
1. Reports in the press tend to say «the market did this» or «the market expected good news on the economic front», as if the market were a single living entity with a single conscious mind. This is not, of course, the case. To understand reports of market behaviour you have to bear in mind the way the market works.
2. A market is simply a mechanism, which allows individuals or organizations to trade with each other. Markets bring together buyers and sellers of goods and services. In some cases, such as a local fruit stall, buyers and sellers meet physically. In other cases, such as the stock market, business can be transacted over the telephone, almost by remote control. There's no need to go into these details. Instead, we use a general definition of markets.
3. A market is a shorthand expression for the process by which households' decisions about consumption of alternative goods, firms' decisions about what and how to produce, and workers' decisions about how much and for whom to work are all reconciled by adjustment of prices.
4. Prices of goods and of resources, such as labour, machinery and land, adjust to ensure that scarce resources are used to produce those goods and services that society demands.
5. Much of economics is devoted to the study of how markets and prices enable society to solve the problems of what, how and for whom to produce. Suppose you buy a hamburger for your lunch. What does this have to do with markets and prices? You chose the cafe because it was fast, convenient and cheap. Given your desire to eat, and your limited resources, the low hamburger price told you that this was a good way to satisfy your appetite. You probably prefer steak but that is more expensive. The price of steak is high enough to ensure that society answers the «for whom» question about lunchtime steaks in favour of someone else.
6. Now think about the seller's viewpoint. The cafe owner is in business because, given the price of hamburger meat, the rent and the wages that must be paid, it is still possible to sell hamburgers at a profit. If rents were higher, it might be more profitable to sell hamburgers in a cheaper area or to switch to luxury lunches for rich executives on expense accounts. The student behind the counter is working there because it is a suitable part-time job, which pays a bit of money. If the wage were much lower it would hardly be worth working at all. Conversely, the job is unskilled and there are plenty of students looking for such work, so owners of cafes do not have to offer very high wages.
7. Prices are guiding your decision to buy a hamburger, the owner's decision to sell hamburgers, and the student's decision to take the job. Society is allocating resources - meat, buildings, and labour into hamburger production through the price system. If nobody liked hamburgers, the owner could not sell enough at a price that covered the cost of running the cafe and society would devote no resources to hamburger production. People's desire to eat hamburgers guides resources into hamburger production. However, if cattle contracted a disease, thereby reducing the economy's ability to produce meat products, competition to purchase more scarce supplies of beef would bid up the price of beef, hamburger producers would be forced to raise prices, and consumers would buy more cheese sandwiches for lunch. Adjustments in prices would encourage society to reallocate resources to reflect the increased scarcity of cattle.
8. There were several markets involved in your purchase of a hamburger. You and the cafe owner were part of the market for lunches. The student behind the counter was a part of the local labour market. The cafe owner was a part of the local wholesale meat market and the local market for rented buildings. These descriptions of markets are not very precise. Were you the part of the market for lunches, the market for prepared food or the market for sandwiches to which you would have turned if hamburgers had been more expensive? That is why we have adopted a very general definition of markets, which emphasizes that they are arrangements through, which prices influence the allocation of scarce resources.
Упражнение 1. Дайте русские эквиваленты следующим словосочетаниям:
a single living entity with a single conscious mind; a shorthand expression; to be reconciled by adjustment of smth; a suitable part-time job; to offer high wages; to guide smb's decision; to cover the cost of smth.
Упражнение 2. Вставьте вместо пропусков подходящие слова (из пятого абзаца).
1. I quite like lamb but really I … beef.
2. He was a very keen student. He … most of the time to his studies.
3. I don't like the canteen, but it's more … than going out to a cafe.
4. I'm not in … of long and expensive lunches.
5. Please … that your essays reach me on time.
6. A good degree should … you to get a job.