Investment

Types of investment

The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.

Business Management


The investment decision (also known as capital budgeting) is one of the fundamental decisions of business management: managers determine the assets that the business enterprise obtains. These assets may be physical (such as buildings or machinery), intangible (such as patents, software, goodwill), or financial (see below). The manager must assess whether the net present value of the investment to the enterprise is positive; the net present value is calculated using the enterprise's marginal cost of capital.

Economics

In economics, investment is the production per unit time of goods which are not consumed but are to be used for future production. Examples include tangibles (such as building a railroad or factory) and intangibles (such as a year of schooling or on-the-job training). In measures of national income and output, gross investment I is also a component of Gross domestic product (GDP), given in the formula GDP = C + I + G + NX. I is divided into non-residential investment (such as factories) and residential investment (new houses). "Net" investment deducts depreciation from gross investment. It is the value of the net increase in the capital stock per year.

Investment, as production over a period of time ("per year"), is not capital. The time dimension of investment makes it a flow. By contrast, capital is a stock, that is, an accumulation measurable at a point in time (say December 31st).

Investment is often modelled as a function of income and interest rates, given by the relation I = f(Y, r). An increase in income encourages higher investment, whereas a higher interest rate may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than loaning them out for interest.

Finance

In finance, investment is buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold, real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price.

Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies). These financial assets are then expected to provide income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses.

Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments.

Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.

Personal finance

Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any asset where there is an element of capital risk is deemed an investment. Saving within personal finance refers to money put aside, normally on a regular basis. This distinction is important, as investment risk can cause a capital loss when an investment is realized, unlike saving(s) where the more limited risk is cash devaluing due to inflation.

In many instances the terms saving and investment are used interchangeably, which confuses this distinction. For example many deposit accounts are labeled as investment accounts by banks for marketing purposes. Whether an asset is a saving(s) or an investment depends on where the money is invested: if it is cash then it is savings, if its value can fluctuate then it is investment.

Real estate

In real estate, investment is money used to purchase property for the sole purpose of holding or leasing for income and where there is an element of capital risk. Unlike other economic or financial investment, real estate is purchased. The seller is also called a Vendor and normally the purchaser is called a Buyer.

Residential Real Estate

The most common form of real estate investment as it includes the property purchased as peoples houses. In many cases the Buyer does not have the full purchase price for a property and must engage a lender such as a Bank, Finance company or Private Lender. Different countries have their individual normal lending levels, but usually they will fall into the range of 70-90% of the purchase price. Against other types of real estate, residential real estate is the least risky.

Commercial Real Estate

Commercial real estate is the owning of a building small or large where a company rents from you so that it can conduct its business. Due to the higher risk of Commercial real estate, lending rates of banks and other lenders are lower and often fall in the range of 50-70%.

Loans

So if you decided to invest you need capital. So here is the information about loans.

The Loan Process

Borrowers visit a payday lending store and secure a small cash loan, usually in the range of $100 to $500 with payment in full due at the borrower's next paycheck (usually a two week term). Finance charges on payday loans are typically in the range of $15 to $30 per $100 borrowed, which translates to rates ranging from 390 percent to 780 percent when expressed as an annual percentage rate (APR). The borrower writes a post-dated check to the lender in the full amount of the loan plus interest and fees. On the maturity date, the borrower is expected to return to the store to repay the loan in person. If the borrower doesn't repay the loan in person, the lender may process the check traditionally or through electronic withdrawal from the borrower's checking account.

If the account is short on funds to cover the check, the borrower may now face a bounced check fee from their bank in addition to the costs of the loan, and the loan may incur additional fees and/or an increased interest rate as a result of the failure to pay.

Payday lenders generally do little due diligence to assess a borrower's ability to repay a loan, but many do require the borrower to bring one or more recent pay stubs to prove that they have a steady source of income.

Most payday borrowers are not able to repay their loans loan in full at their first paycheck, and will renew (or "flip") the loan, which is the practice of renewing a loan at maturity by paying additional fees without any principal reduction.

Payday lenders typically operate small stores or franchises, but large financial service providers also offer variations on the payday advance. See below: "Variations on Payday Lending".

Example

For example, a borrower seeking a payday loan may write a post-dated personal check for $460 to borrow $400 for up to 14 days. The payday lender agrees to hold the check until the borrower's next payday. At that time, the borrower has the option to redeem the check by paying $460 in cash, or renew the loan (a.k.a. "flip the loan") by paying off the $460 and then immediately taking an additional loan of $400, in effect extending the loan for another two weeks. If the borrower does not refinance the loan, the lender may deposit the check. In this example, the cost of the initial loan is a $60 finance charge, or 390% percent APR. If the borrower chooses to renew the loan three times, the finance charge would climb to $240 to borrow $400.

Swiss Banks

Overview

1 Swiss franc

Switzerland is an economically advanced and prosperous nation, with a gross domestic product (GDP) larger than that of some larger western European nations. In addition, the value of the Swiss franc (CHF) has been relatively stable compared to that of other currencies.^[2] In 2003, the financial sector comprised an estimated 14% of Switzerland's GDP and employed approximately 180,000 people (110,000 of whom work in the banking sector); this represents about 5.6% of the total Swiss workforce.^[3]

Swiss neutrality and national sovereignty, long recognized by foreign nations, have fostered a stable environment in which the banking sector was able to develop and thrive. Even though it is near Europe's geographical center, Switzerland maintained neutrality through both World Wars; is not a member of the European Union or the European Economic Area; and was not even a member of the United Nations until 2002.^[4][5]

Currently an estimated one-third of all funds held outside their country of origin (sometimes called "offshore" funds) are kept in Switzerland. In 2001 Swiss banks managed US$ 2.6 trillion. The next year it only handled US$ 2.2 trillion, US$ 400 billion less than before. This has been attributed to both a bear market and possibly to stricter regulations on Swiss banking.^[6]

The Bank of International Settlements, an organization that facilitates cooperation among the world's central banks, is headquartered in the city of Basel. Founded in 1930, the BIS chose to locate in Switzerland because of the country's neutrality, which was important to an organization founded by countries that had been on both sides of World War I.^[7]

Foreign banks operating in Switzerland manage 870 billion Swiss francs worth of assets (as of May 2006).^[8]

Law and regulation

The Federal Banking Commission, an independent agency of the Swiss government within the Federal Department of Finance, supervises most banking-related activities as well as securities markets and investment funds.^[9] Regulatory authority is derived from several statutes.

The office of the Swiss Banking Ombudsman, founded in 1993, is sponsored by the Swiss Banking Ombudsman Foundation, which was established by the Swiss Bankers Association. The ombudsman's services, which are offered free of charge, include mediation and assistance to persons searching for dormant assets. The ombudsman handles about 1,500 complaints raised against banks yearly.^[10]

Statutes

Banking law of 1934

The Swiss Parliament passed the Banking Law of 1934, which codified the rules of secrecy and criminalizes violation of it. The secrecy provisions were not included in the first draft of the law, which mainly concerned administrative matters such as bank supervision. The provisions, found in Article 47(b), were added before passage of the bill due to Nazi authorities' attempts to investigate the assets of Jews and "enemies of the state" held in Switzerland.^[11]

Recent statutes

A new banking law entered into force on 1 January 1995. The law permits foreign banks to open subsidiaries, branches, or representative offices in Switzerland without approval by the FBC. This opportunity is based upon reciprocity, and requires a prior agreement between Switzerland and foreign governments. The new law also requires banks to announce any acquisition or sale of its shares by a major shareholder (minimum 10% of capital or voting rights) to the FBC (shareholders engaging in such activity must notify the bank). The bank can also hold major shareholders of a bank liable for improper conduct. To enforce compliance with these shareholder requirements, the FBC is authorized to block their voting rights if they fail to comply. In addition, the FBC can now provide information to foreign law enforcement authorities in cases covered by mutual legal assistance agreements.^[12]

Electronic payments

Swiss banks, as well as the post office (which handles some financial transactions) use an electronic payments system known as Swiss Interbank Clearing (SIC). The system is supervised by the Swiss National Bank and is operated via a joint venture.^[13] SIC handled over 250 million transactions in 2005, with a turnover value of 41 trillion Swiss francs.^[14]

Major banks

As of 2006, there are 408 authorized banks and securities dealers,^[15] ranging from the "Two Big Banks" down to small banks serving the needs of a single community or a few special clients.

UBS

UBS AG and Credit Suisse are respectively the largest and second largest Swiss banks and account for over 50% of all deposits in Switzerland; each has extensive branch networks throughout the country and most international centres.

Due to their size and complexity, UBS and Credit Suisse are subject to an extra degree of supervision from the Federal Banking Commission.^[16]

UBS

Main article: UBS AG

UBS came into existence in June of 1998, when Union Bank of Switzerland, founded in 1862, and Swiss Bank Corporation, founded in 1872, merged. Headquartered in Zürich and Basel, it is Switzerland's largest bank. It maintains seven main offices around the world (four in the United States and one each in London, Tokyo, and Hong Kong) and branches on all five continents.^[17]

As of 2005, UBS had a net profit of US$7.2 billion, a market capitalization of over $100 billion, and 69,569 employees.^[18]

UBS has used the slogan "You & Us" in their marketing communication. The slogan aims to highlight the firm's client-based approach. Source: UBS branding

Credit Suisse

Main article: Credit Suisse

Credit Suisse is the second-largest Swiss bank. Based in Zürich, it was founded in 1856; its market capitalization (as of 2005) is $61.7 billion, and the company has about 63,000 employees. The Credit Suisse Group includes private banking, investment banking, asset management and insurance divisions. It acquired The First Boston Corporation in 1988 and merged with the Winterthur insurance company in 1997; the latter was sold to AXA in 2006.^[19]

Central Bank

Main article: Swiss National Bank

Swiss National Bank headquarters in Berne

The Swiss National Bank serves as the country's central bank. Founded by the Federal Act on the Swiss National Bank (16 January 1906), it began conducting business on 20 June 1907. Its shares are publicly traded, and are held by the cantons, cantonal banks, and individual investors; the federal government does not hold any shares.^[20] Although a central bank often has regulatory authority over the country's banking system, the CNB does not; regulation is solely the role of the Federal Banking Commission.^[21]

Cantonal banks

There are, as of 2006, 24 cantonal banks; these banks are state-guaranteed semi-governmental organizations controlled by one of Switzerland's 26 cantons that engage in all banking businesses.^[22] The largest cantonal bank, the Zürich Cantonal Bank, had a 2005 net income of CHF 810 million.^[23]

Private banks

• Bank Sarasin

Banking privacy

See also: Bank secrecy

Swiss bank secrecy protects private banking information; the protections afforded under Swiss law are similar to confidentiality protections between doctors and patients or lawyers and their clients. The Swiss government views the right to privacy as a fundamental principle that should be protected by all democratic countries. While secrecy is protected, in practice all bank accounts are linked to an identified individual, and a prosecutor or judge may issue a "lifting order" in order to grant law enforcement access to information relevant to a criminal investigation.^[24]

Taxation

Swiss law distinguishes between tax evasion and tax fraud. If any holdings are not declared to the taxation authorities, a natural or legal person commits tax evasion. Tax evasion is not considered an offence, but only a misdemeanour. It is assumed that failed declaration of one's assets is not sufficient evidence for criminal intent, as the chance of unintentional failure is too high. However, tax fraud is considered a criminal offence under Swiss law and prosecuted according to the Swiss Penal Code. A forged tax declaration, like the statement of significantly below-market valuation of real estate or the counterfeiting of bank statements, is such a criminal offence of tax fraud.

European Union

Pressure on Switzerland has been applied by several states and international organizations attempting to alter the Swiss privacy regime. The European Union, whose member countries geographically surround Switzerland, has complained about member states' nationals using Swiss banks to avoid taxation in their home countries. The EU has long sought a harmonized tax regime among its member states, although many Swiss banking officials (and, according to some polls, the public) are resisting any such changes.^[25]

Since July 1, 2005, Switzerland has charged a withholding tax on all interest earned in the personal Swiss accounts of European Union residents.^[26]

In 2001 and 2002, an amnesty was offered by the government of Italy in which taxes and penalties on repatriated funds were limited on funds repatriated from Switzerland; 30 to 35 billion euro worth of deposits were returned to Italy.^[27] In 2003, a similar amnesty was approved by the government of Germany.^[28]

United States

In January of 2003, the United States Department of the Treasury announced a new information-sharing agreement under the already extant U.S.-Swiss Income Tax Convention; the agreement is intended to facilitate more effective tax information exchange between the two countries. Said a Treasury official, "This Mutual Agreement should improve our access to needed information" under the terms of the tax treaty.^[29]

Money laundering

There are several measures in place to counter money laundering. The Money Laundering Act sets forth requirements of account holders' identification, and requires reporting of any suspicious transactions to the Money Laundering Reporting Office.^[30]

According to the CIA World Factbook, Switzerland is "a major international financial center vulnerable to the layering and integration stages of money laundering; despite significant legislation and reporting requirements, secrecy rules persist and nonresidents are permitted to conduct business through offshore entities and various intermediaries..."^[31] However, Switzerland's cooperation in transnational financial issues has been praised by several major U.S. officials. A Federal Bureau of Investigation anti-terrorism official noted that Switzerland was one of several countries to participate in joint task forces targeting financing of Al-Qaeda terrorist cells; a former Assistant Secretary of the Treasury praised Swiss cooperation and the country's assistance in the finding and freezing of terrorist and Iraqi assets.^[32]

Numbered bank accounts

Some bank accounts are afforded an extra degree of privacy. Information concerning such accounts, known as numbered accounts, is restricted to senior bank officers, rather than being accessible to all the employees of a bank. However, the information required to open such an account is no different from that of an ordinary account; completely anonymous accounts are prohibited by law. Should a criminal investigation take place, law enforcement has access to information related to a numbered account in the same way it has access to information about any other account.^[33]

Swiss banks and the Holocaust

Several inquiries have been made into the conduct of Swiss banks during the National Socialist (Nazi) regime in Germany (1933–1945), especially regarding funds deposited by or stolen from victims of the Holocaust.

In October of 1996, as inquiries into the banks' activities during the Holocaust were ongoing, Swiss ambassador to the United States Carlo Jagmetti admitted that some banks prevented Holocaust survivors from accessing their funds, although he disputed the amounts claimed in lawsuits by survivors. Among those leading inquiries into the banks' conduct during the war was Alfonse D'Amato, a United States Senator from New York.^[34] United Bank of Switzerland security guard Christoph Meili became a prominent whistleblower when he prevented the destruction of Holocaust-era records and brought attention to their existence. Due to his actions, Meili lost his job and received death threats; he became the first Swiss citizen ever granted political asylum in the United States. After settling in southern California, he was honored by the Los Angeles Jewish community.^[35] Meili was supported financially by several Jewish organizations, and was offered a full scholarship at Chapman University in California.^[36][37] In 1998, an international panel of historians released a study that claimed a significant amount of gold had been stolen from Holocaust victims, as well as the treasuries of conquered countries, and deposited in the Swiss National Bank. The panel found that, despite evidence of theft and wrongful acquisition of the gold, the SNB continued to accept the deposits.^[38] In 2000, a United States District Court judge approved a US$1.85 billion settlement between several Swiss banks and Holocaust victims. An estimated 50,000 accounts in Switzerland were opened by victims during the Nazi regime; some banks refused to make payments to victims' families because of the lack of death certificates.^[39] However, an article published on October 13, 2001 in The Times of London claimed that the tribunal entrusted with tracing Holocaust era accounts found that only 200 of the 5,570 abandoned foreign accounts in question, containing about 12 million dollars, could be traced back to Holocaust survivors; most of the abandoned accounts were owned by wealthy gentiles, and half the accounts contained less than 1,000 francs.

Swiss Banks to return Abacha Funds to Nigeria

The Swiss foreign ministry says it has done all it can to ensure that funds stolen by the late Nigerian dictator Sani Abacha were used properly in his homeland.

The authorities were responding to allegations that $200 million (SFr240 million) of $700 million handed back by the Swiss Banks to Nigeria had been misappropriated.[1]

International competition

See also: Offshore bank

With recent changes in the Swiss bank secrecy regime, other states, such as Panama and Singapore, have attracted depositors seeking privacy and protection. Having taken steps to make its banks more attractive, Singapore strengthened penalties for violators of bank secrecy (and now imposes steeper fines and longer jail sentences for offenders), and modified its laws on trusts and inheritance. Singapore is also now the location of Credit Suisse's international banking headquarters.^[40]

Panama on the other hand, is Latin America's largest banking centre, where major international banks are located. Often criticized for alleged non-compliance of banking regulations aimed to deter money laundering, in reality the Panamanian Banking Centre is far more strict than several States of the United States and other banking centres of the Caribbean.