The FYI on banking

BEING ARMED with the right information is the first step in surviving challenging economic times.

In this second instalment of Something Out of Nothing, Chris Walker, general manager at Capital and Credit Securities Limited, sets the record straight on some banking terms, so people can understand what their options are and make the best decisions about their next financial move. The questions were submitted by Gleaner readers.

What are repos?

Repo is really short for repurchase agreement. A repo essentially exists where you have a borrower who will agree to sell a security to a lender at a predetermined price, agreeing at the same time to buy back the security at a future date.

What transpires is this: You have funds that you place with a financial institution; that financial institution will technically sell you the security, which is actually the guarantee for your investment; and at maturity, they will agree to buy back that security, paying you interest on maturity as your earnings on the arrangement.

What is a CD and what happens when it is rolled over?

A CD is a fixed-deposit arrangement with a commercial bank whereby an individual will agree with the bank to invest for, maybe, a 30-, 60- or 90-day period at an agreed rate. It is guaranteed by the bank. Upon rollover, you get some options. You can actually combine the interest and principal and reinvest for a new period; or you could take your interest and reinvest the principal only; or you could ask to be paid out, thus closing the CD.

What about savings and investments – is there a difference?

Yes, there is a difference. Savings is when you put away money for the short term; so you should not be saying you are saving to buy a car or a house. That is actually the wrong way to think of savings. Savings are monies that will be affected by inflation and generally when you save, you are doing so in low-yielding accounts. Investing, on the other hand, is for profit. Saving represents the short term, while investing is a long-term commitment.

Can you explain what the banks mean when they talk about risk appetite?

Risk appetite represents a person’s tolerance to take on a challenge or face risk. A person whose risk appetite is low should not be looking at investing in volatile stocks; he or she should probably be looking at a repo or a CD. This is in contrast to someone with an aggressive appetite.

There is the risk-reward relationship – the higher the risk, typically you would expect a greater reward. But if you flip that over, the higher the reward is the greater the risk you will have to face.

Stacy-Ann Smith, Gleaner Writer

For real people

From now until the end of the year, Chris Walker and the rest of the Capital & Credit team of experts will be at your service. Every month, they will answer your money questions and tell you how you can Make Something Out of Nothing.

Send your money questions to editors@gleanerjm.com and look out for the answers online, in print and on air.

Tune in to Real Business on Power 106FM every fourth Tuesday at 9:35 a.m.

Listen to the latest broadcast here …

Real money, in real time, for real people!