1.1 Introduction to Investing

1.1.1 What is investing for?

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1.1.1 30–40 minutes · Read, practise, review

What you will learn

  • Distinguish an asset owner, an asset manager and a recipient of capital.
  • Explain how an investment objective shapes a mandate.
  • Trace the difference between new funding and a secondary-market trade.

1.1 · Introduction to Investing

Introduction to Investing

Crane with mechanical folds and branching possible outcomes.

Introduction to Investing · the work you will do

  1. 1Start with a purpose
  2. 2Identify the claim
  3. 3Trace the risks
  4. 4Explain the choice

Before you begin

A fictional scholarship charity has £100,000. It must pay £20,000 in grants next year and wants to support pupils for decades. Should it invest everything in shares? Before answering, list three things you need to know.

Take an initial view. Try the choices as you work through the explanations, then revisit your first view.

Video coming soon · about 4 minutes

What is investing for?

Use the narration below while the recording is being made, then try the decisions in this lesson.

Read the full narration

Welcome to On Judgement. A fictional scholarship charity has £100,000. It must pay £20,000 in grants next year and wants to support pupils for decades. Should it invest everything in shares? Before answering, list three things you need to know. Take a first view. You can change it when you have considered the evidence.

An objective describes what money needs to do. “Earn the highest return” is incomplete without a time horizon, acceptable risk, cash needs and other constraints. A scholarship charity has commitments to pupils. A pension scheme has retirement purposes. A family may be building savings for a future expense. Similar assets can be used for different purposes, and the same portfolio will not suit every owner. Distinguish willingness to accept losses from capacity to absorb them. Someone may feel comfortable with risk but still need the money next month. Conversely, an institution may have a long horizon while facing near-term payments. Ask about both.

Asset owners hold investment assets for their own purposes or beneficiaries. Asset managers research, select and oversee investments under a mandate. A mandate sets objectives and boundaries: for example the permitted assets, relevant benchmark, risk limits, liquidity needs and reporting requirements. A custodian helps safeguard assets and supports their administration and settlement. A company receiving new funding uses capital within its business. A regulator sets or supervises rules within its remit. These functions can sit in different organisations; a large financial group can perform more than one function through different businesses.

In a primary-market transaction, an issuer sells a new security. A business might issue new shares to finance expansion, or borrow through a bond. In a secondary-market transaction, an existing security changes hands. The buyer receives an investment claim and the seller receives payment. A functioning secondary market can make it easier for investors to enter or leave an investment, although liquidity can deteriorate. Shares provide ownership claims. Bonds provide contractual debt claims. We will distinguish these in the next lesson. For now, the key point is that a security is a claim with particular rights and risks, rather than simply a number on a screen.

An agreed mandate provides a basis for accountability. The manager should explain the approach, relevant risks, costs and results. Client interests and conflicts matter. “Fiduciary responsibility” broadly describes acting for another's benefit under duties arising from the relationship; precise duties depend on the role and legal setting. An investment's social usefulness and its financial attractiveness are separate questions. A project can provide something valuable and still be poorly financed or overpriced. Equally, an investment return does not by itself establish a positive social impact.

Let's work through The grant payment. Suppose all £100,000 is invested in shares. Their value falls 25% before the charity pays £20,000 of grants. What remains? Pause here and try the calculation or reasoning before continuing.

Market value after the fall: £100,000 × 0.75 = £75,000. Cash raised to pay grants: £20,000. Remaining portfolio value: £75,000 − £20,000 = £55,000.

The payment becomes large relative to the smaller portfolio. This does not establish the correct allocation: we still need the charity’s other income, payment schedule, constraints and risk capacity. It shows why purpose and timing matter.

Now try the choices in this lesson. If your answer changes, identify the reason. Trace the difference between new funding and a secondary-market trade. Use the case activities to put the idea into your own words, and return to the evidence when more than one conclusion is defensible.

Start with the purpose

An objective describes what money needs to do. “Earn the highest return” is incomplete without a time horizon, acceptable risk, cash needs and other constraints. A scholarship charity has commitments to pupils. A pension scheme has retirement purposes. A family may be building savings for a future expense. Similar assets can be used for different purposes, and the same portfolio will not suit every owner.

Distinguish willingness to accept losses from capacity to absorb them. Someone may feel comfortable with risk but still need the money next month. Conversely, an institution may have a long horizon while facing near-term payments. Ask about both.

Check your understanding · choose one

The charity hires a team to choose investments. The charity is the…

Correct. It holds the assets for its charitable purpose; the hired team manages them.

Reconsider this choice. It holds the assets for its charitable purpose; the hired team manages them. Try another answer.

Who does what?

Asset owners hold investment assets for their own purposes or beneficiaries. Asset managers research, select and oversee investments under a mandate. A mandate sets objectives and boundaries: for example the permitted assets, relevant benchmark, risk limits, liquidity needs and reporting requirements.

A custodian helps safeguard assets and supports their administration and settlement. A company receiving new funding uses capital within its business. A regulator sets or supervises rules within its remit. These functions can sit in different organisations; a large financial group can perform more than one function through different businesses.

Check your understanding · choose one

Which statement is accurate?

Correct. Professional management does not guarantee returns and owners may manage assets internally.

Reconsider this choice. Professional management does not guarantee returns and owners may manage assets internally. Try another answer.

How capital moves

In a primary-market transaction, an issuer sells a new security. A business might issue new shares to finance expansion, or borrow through a bond. In a secondary-market transaction, an existing security changes hands. The buyer receives an investment claim and the seller receives payment. A functioning secondary market can make it easier for investors to enter or leave an investment, although liquidity can deteriorate.

Shares provide ownership claims. Bonds provide contractual debt claims. We will distinguish these in the next lesson. For now, the key point is that a security is a claim with particular rights and risks, rather than simply a number on a screen.

Check your understanding · choose one

An investor buys an existing share from another investor. Payment normally goes to…

Correct. That is a secondary-market transfer.

Reconsider this choice. That is a secondary-market transfer. Try another answer.

Responsibility and uncertainty

An agreed mandate provides a basis for accountability. The manager should explain the approach, relevant risks, costs and results. Client interests and conflicts matter. “Fiduciary responsibility” broadly describes acting for another's benefit under duties arising from the relationship; precise duties depend on the role and legal setting.

An investment's social usefulness and its financial attractiveness are separate questions. A project can provide something valuable and still be poorly financed or overpriced. Equally, an investment return does not by itself establish a positive social impact.

Check your understanding · choose one

Which question should come before choosing an asset?

Correct. Purpose, timing and constraints shape the decision.

Reconsider this choice. Purpose, timing and constraints shape the decision. Try another answer.

The grant payment

The cash left for the purpose

The cash left for the purposeStarting portfolio100kAfter market fall75kAfter grant payment55k
£ thousands. Uses only the fictional assumptions in this worked example.

Which change is market loss, and which is money used for the charity’s purpose?

Suppose all £100,000 is invested in shares. Their value falls 25% before the charity pays £20,000 of grants. What remains?

  1. Market value after the fall: £100,000 × 0.75 = £75,000.
  2. Cash raised to pay grants: £20,000.
  3. Remaining portfolio value: £75,000 − £20,000 = £55,000.

The payment becomes large relative to the smaller portfolio. This does not establish the correct allocation: we still need the charity’s other income, payment schedule, constraints and risk capacity. It shows why purpose and timing matter.

Put it into practice

1. Match the responsibilities

Choose the matching label for each description. Feedback appears after you select. Revise any match and try again.

Correct. The charity sets the purpose for its own capital.

Review this match. Reconsider the function or claim described, then choose again. You can compare with the model response below.

Correct. The manager selects investments within the agreed mandate.

Review this match. Reconsider the function or claim described, then choose again. You can compare with the model response below.

Correct. The company issues securities to raise capital.

Review this match. Reconsider the function or claim described, then choose again. You can compare with the model response below.

Correct. Safekeeping is the custodian’s role.

Review this match. Reconsider the function or claim described, then choose again. You can compare with the model response below.

Correct. Supervision of authorised activity is a regulatory role.

Review this match. Reconsider the function or claim described, then choose again. You can compare with the model response below.

Compare with a model response

Charity: owner. Bond-selection team: manager. Company raising debt: issuer. Safeguarding organisation: custodian. Supervisory authority: regulator. One group may contain separate businesses doing several of these jobs.

2. Follow the money

Start with a choice · choose one

A fund pays £5,000 for new shares, then sells them for £5,500. Who receives the second payment?

Correct. The second trade transfers an existing claim. The selling fund receives the payment; the company does not receive fresh capital from that trade.

Reconsider this choice. The second trade transfers an existing claim. The selling fund receives the payment; the company does not receive fresh capital from that trade. Try another answer.

A fund buys £5,000 of newly issued company shares. Later, another investor buys those shares from the fund for £5,500. Who receives each payment? What should not be inferred?

Apply the idea: discuss your reasoning, or add a short note where the task asks for one.

Compare with a model response

The first payment goes to the issuer, before relevant transaction costs. The later payment goes to the selling fund. The second buyer does not normally give £5,500 of fresh capital to the company. The price increase alone does not establish why value changed.

3. Draft the mandate questions

Return to the scholarship charity. Write four questions you would ask before discussing investments.

Apply the idea: discuss your reasoning, or add a short note where the task asks for one.

Compare with a model response

Ask when payments fall due, what other income is available, what losses the charity can absorb, and what investment or spending constraints apply. Other strong questions concern governance, time horizon, fees, currency and reporting. No specific allocation is required.

Jargon buster

Asset owner

A person or institution holding investment assets for its purposes or beneficiaries.

Asset manager

An organisation or person making investment decisions under an agreed remit.

Mandate

The agreed objectives and boundaries for managing assets.

Portfolio

A collection of investments considered together.

Liquidity

The ability to obtain cash or trade without unacceptable delay or price impact.

Primary market

Transactions involving newly issued securities.

Secondary market

Trading of securities that already exist.

Knowledge check

Choose on the page. Read the feedback, reconsider mistakes and use Try again to reset a question.

Check your understanding · choose one

After a 25% fall, £100,000 becomes…

Correct. £100,000 × (1 − 0.25) = £75,000, before withdrawals and costs.

Reconsider this choice. £100,000 × (1 − 0.25) = £75,000, before withdrawals and costs. Try another answer.

What to take forward

Identify the owner, the purpose and the timing before discussing assets. A manager works within a mandate; new funding and secondary trading are different transactions.