Q&A with CMMB Securities

Q. I’m involved with a charity organisation. When we get funding, all the money is not used immediately, sometimes it sits in our bank account for a couple of months. Is there a way to have the money work for us in that short space of time? 

Patricia, Port-of-Spain

A: There are a number of options available to you such as mutual funds, fixed deposits and epurchase agreements, just to name a few. Each alternative should be evaluated to take into account your liquidity needs, the risk tolerance of the charity fund and the investment horizon.  Safe investments pay less than risky ones and investments that offer high liquidity and low volatility would be ideal for a charity fund. This is because you do not want to take on too much risk and would want to make sure you have access to the funds when you need them.  Repurchase Agreements or Repos are offered by institutions that supply liquidity management services. They involve the sale of securities, on a temporary basis, with the agreement to repurchase after a period of time. Repurchase Agreements provide a means for investing at competitive rates that are somewhat negotiable. 

Another alternative is a money market fund, available through mutual fund companies and brokers. Money Market Funds usually offer competitive rates, which currently range from six percent to seven percent. Money market funds have generally low risks and provide a high level of liquidity since they do not have a set term or penalties for early withdrawal. This means the money can be transferred whenever it is needed at a minimal cost.  A riskier method of investment would be of course to purchase stocks. However, stocks must be selected carefully to ensure a low level of risk. Also, highly liquid stocks should be bought since you would need to be able to sell them quickly.   

Q. What’s the benefit of asking my bank to give me a lower credit limit on my credit cards? 

Marcia, Arima

A: The benefit of such a request would be to encourage disciplined spending. If you are aware that your current income cannot support your spending potential, then the wise thing to do is reduce your spending. One way of ensuring this would be to limit your potential to spend.

Q. The word equity comes up a lot in the business press, but what does it mean in terms of investments?

Kevin, Lopinot

A: Financial instruments can be classified into two categories, fixed income and equities. Fixed income instruments are those which generally offer principal protection (protection of the funds you invest) and a fixed rate of return. Equity investments, such as stocks, do not provide principal protection, but the potential return is much higher than fixed income instruments, albeit more volatile. There is another context in which the word equity is used in the financial arena. Equity in a business refers to the capital which is put up by shareholders to start the business, as opposed to debt, which is the amount borrowed (from a bank for instance) to finance the business.

When investing in the stock market some analysts may refer to the level of equity in the business in comparison to debt. Generally, the higher the level of shareholder capital or equity in a company, the lower is the risk for an investor buying shares in that company, all things remaining constant. The ratio of debt to equity is referred to as the level of “gearing” in the company. So, if your stockbroker says a company has a low level of gearing he or she simply means that there is a higher degree of equity as opposed to loan capital, which reduces the risk of investment.