Plenty of information is available about investing. Some of this is from the people who offer the investment (the issuers), some comes from independent people.

Information from the issuer

Investment statement
The first place to
go for information about an investment is the investment statement.
This has key information to help non-expert investors decide whether or
not to invest.

It is prepared by the issuer and must be given to you before you pay any money. You should read it.

Every investment statement is set out the same way, with 11
questions. This makes it easier to compare one investment with another.
The answers will help you decide whether an investment is right for you.

The questions are:

• What sort of investment is this?
• Who is involved in providing it to me?
• How much do I pay?
• What are the charges?
• What returns will I get?
• What are my risks?
• Can the investment be altered?
• How do I cash in my investment?
• Who do I contact with inquiries about my investment?
• Is there anyone I can complain to if I have a problem with the investment?
• What other information is available about this investment?

Read more about what the issuer should explain in the answers to these questions.

The answers to the questions should tell you the most important things about the investment.

Read the investment statement before you commit to an investment. If
you don't you may not be aware of important factors that could strongly
affect your decision on whether or not to invest.

If you can't understand the investment statement an investment adviser may be able to help you.

 

Prospectus

The prospectus has detailed information, including financial and legal information, about the investment.

It also has information that is not in the investment statement, for example:

• what the people behind the investment stand to gain from it, and any conflicts of interest they may have;
• important
  commitments the company may have (e.g. long term leases on buildings,
  key contracts, and any court proceedings it is involved in);
• the company's most recent financial information, and in some cases, financial information for the previous five years;
• the key points in any trust deed or participation deed. These deeds are important legal documents. They cover things like how the trustee or statutory supervisor
  can protect investors, any financial limits imposed on the trust, and
  whether other people could be ahead of you in the line up of creditors
  - meaning they'd be paid out before you, should the company go bust.

Registered banks do not have to have a prospectus because they must
have a general disclosure statement and issue regular key information
summaries.

If a financial adviser recommends the investment they should have
read the prospectus. Ask them to explain the most important points.

You can ask the issuer (the person or company offering the
investment) to send you a prospectus free of charge. They must send it
within 5 days of receiving your request. The prospectus must be
registered with the Companies Office, where the public can view it.
Prospectuses can be viewed at www.companies.govt.nz.

Annual financial statements

All issuers must prepare and register annual audited financial
statements. You will most likely receive these with the annual report.

Annual reports of listed companies also have information on how the
company is doing and the environment it is operating in, details of the
directors, and how the entity is governed and managed.

As shareholder you are entitled to these reports. Often you can view them on company websites.

Reading these reports gives you the chance to see how the company is
doing and whether you want to continue your investment with them.

Information from other sources

Credit ratings

A credit rating is a useful indicator to help you assess the risks of a particular investment, especially fixed interest
securities. The generally accepted ratings are issued by international
credit rating agencies. The best known of these are Fitch, Moody's and
Standard & Poors (S&P).

Ratings use letters and numbers to indicate risk. The ratings scale
is not simple like A, B, C ratings in a school report. In particular,
the risk of an investment increases rapidly as the rating goes down.
Risk also increases as the investment time increases.

A good credit rating doesn't mean the investment is risk-free. It
simply means the agency has given current opinion of the relative
future credit worthiness of the issuer and its ability to meet its
obligations.

A credit rating is an agency's assessment of a company's probability
of default and/or the likelihood that investors will lose money if the
company defaults.

How ratings reflect risk can be seen in the tables of past failure
rates of companies with various ratings. For example, a company with a
BB rating by Fitch would have had a 1.24% chance of failing within one
year or a 5.78% chance of failing in the next 3 years.

Ratings by three international ratings agencies that are active in New Zealand are set out below.

Fitch

Global Corporate Finance Average Cumulative Default Rates: 1990 - 2006 (%)

 
Year 1
Year 2
Year 3
Year 4
Year 5

AAA
0.00
0.00
0.00
0.00
0.00

AA
0.00
0.00
0.00
0.03
0.06

A
0.03
0.16
0.32
0.48
0.73

BBB
0.26
0.87
1.61
2.53
3.47

BB
1.24
3.64
5.78
7.82
9.84

B
1.47
3.66
6.16
8.59
11.16

CCC to C
22.93
30.72
35.64
41.63
43.41

 

 

Moody's

Average Cumulative Credit Loss Rates by Letter Rating, 1982-2006* (%)

Rating
Year 1
Year 2
Year 3
Year 4
Year 5

Aaa
0.000
0.000
0.000
0.001
0.034

Aa
0.000
0.008
0.033
0.050
0.106

A
0.012
0.047
0.121
0.197
0.264

Baa
0.107
0.302
0.534
0.870
1.166

Ba
0.744
2.081
3.691
4.960
6.371

B
3.317
7.328
10.829
13.630
15.737

Caa-C
13.216
20.889
25.825
28.622
34.602

* Data in percent based on issuer-weighted average default rate and
on issuer-weighted average senior unsecured bond recovery rates.

 

 

Standard & Poor's

Cumulative Average Default Rates (1981-2006) (%)

Rating
Year 1
Year 2
Year 3
Year 4
Year 5

AAA
0.00
0.00
0.09
0.19
0.29

AA
0.01
0.05
0.10
0.20
0.32

A
0.06
0.17
0.31
0.47
0.68

BBB
0.24
0.71
1.23
1.92
2.61

BB
1.07
3.14
5.61
7.97
10.10

B
4.99
10.92
15.90
19.76
22.55

CCC/C
26.29
34.73
39.96
43.19
46.22

Source: Standard & Poor's Global Fixed Income Research and Standard & Poor's CreditPro©

Other rating systems

Ratings and rankings are also issued by some investment advisers and
financial planners. They can be a useful guide, but should be treated
with caution because it's often unclear whether those involved have
access to the information that's needed to do a rating properly, or the
ability to analyse it.

No credit rating?

Just because there's no credit rating doesn't necessarily mean you
should avoid the investment. However, you should take extra care to
assess the risk when there is no credit rating. You could ask an
investment adviser why there is no credit rating.

Investment Advisers

You may be happy to make your own decisions about investing, or you
may prefer to get help. Many people - investment advisers, financial
planners, asset managers and some lawyers and accountants - give
investment advice. Read more about what you should expect from an investment adviser.

Commentators and analysts

Various financial institutions,
stockbrokers and investment advisers provide commentary and analysis on
the investment markets. When you deal with any of these agencies you
can be put on mailing lists or email groups to receive regular
information about their views of the markets. Many investment advisers
send clients regular newsletters with market information and
recommendations.

Financial media

Specialist financial newspapers in New Zealand include the weekly
Independent Financial Review and National Business Review. Daily
newspapers and the Sunday papers have business sections. There are also
magazines which specialise in business and investment. For example:

Consumer often has surveys and articles on financial planning and wise investing, eg. "Finance company blues" Consumer, 14-17, October 2007

The Headliner - Published by MG Publications (Mercantile Gazette Marketing Limited), Christchurch.

New Zealand Investor - Published by Equity Investment Advisers & Sharebrokers Limited, Newmarket, Auckland.

New Zealand ASSET - Published by Tarawera Publishing Limited, Rotorua.

New Zealand Investment Yearbook - Investment Research Group Limited, Auckland.

Internet

The internet has vast numbers of sites about investing. It is always
wise to check who is the owner or author of the site. If there are no
names or proper contact details treat the site with caution.

It is very unwise to send money to anyone known to you only via the
internet or telephone. Do not give personal information over the
internet. Many scams are run by telephone and emails. See www.sharescams.org.nz and www.scamwatch.co.nz.

Some websites about investing are:

http://www.sorted.org.nz

http://www.seccom.govt.nz/invest/

http://www.nzx.com/education

http://www.consumer.org.nz

Books on investing

Your public library will have many books about investment, including books written specifically for New Zealanders.

This article was provided by the Securities Commission.