Question

QUESTION 6
a. Discuss the virtuous cycle of   investment                                   

b. Why do you think so many pieces of important legislation related to financial markets and institutions were passed during the great depression?           

c. Explain the main characteristics of an investment policy                                   

d. You are the Chief Financial Officer of Gaga Enterprises, an edge fashion design firm. Your firm needs GHS10 million to expand production. How do you think the process of raising this money will vary if you raise it with the help of a financial institution versus raising it directly in the financial market?                                       

e. Explain the main characteristics of institutional and individual investors?    

Answer 1

a) Virtuous cycle means a complex chain of loops that keep compounding to give better returns. Investment is a virtuous cycle as the ebbs and edges get neutralized with time and with the passage of more time, investments compound and keep giving better returns.

b) The Great Depression was caused by panic sell-off of assets and dramatic fluctuations in trade due to major disruptions in demand and supply. Financial markets were reeling from a herd mentality and it was important to control and channelise public sentiment into productive movements so as to bring a speedy recovery. Also, strict laws on investments would make for more cautious transactions and reduce chances of Non Performing Assets.

c) The main characteristics of an investment policy are as follows:

1. Collateral value
2. Diversification of risk
3. Growth of Capital Invested
4. Fully Legal and Lawful

d) Raising capital via a financial institution would require to attach assets and also cause a outflow of cashflows in form of high interest payments which might hurt at the onset of an enterprise. On the other, raising it from financial markets would dilute the owner's share and increase stakeholders in the organisation. However it would also ensure the additions of more rational inputs which could shape up into a logical conclusion and also ensures that no major cashflows occur while the company hasn't broken even.