12

COLAND SYSTEM TECHNOLOGY, INC.

HIGH SCHOOL DEPARTMENT
SINSUAT AVELNUE, COTABATO CITY

Business Finance
Quarter 1– Module 3
Types of Investment
 3 Different Types of Investment

What I Need to Know

Learning Objectives

In this lesson, you will:

1. Identify the types of investments particularly bank deposits, insurance, real
state, mutual funds and stocks and bonds.
2. Indicate the advantages and disadvantages of each type of investment.
3. Explain the risk inherent in each type of investment.

What I Know
Pretest

Multiple choice. Encircle the letter of the best answer.

1. Which of the following investments do not earn interest?

a. Savings account c. Bonds
b. Current account d. Time deposit
2. Which of the following is not an example of a deposit investment?
a. Savings c. Current
b. Mutual funds d. Time deposit
3. The person that manages a person’s mutual fund
a. Creditor c. Broker
b. Bondholder d. Stockholder
4. These payments are needed to maintain an insurance account
a. Interest c. Premium
b. Dividends d. Capital gains
5. What is the income earned on a bond?
a. Interest c. Premium
b. Dividends d. Capital Gains
6. What do you call an owner of a company’s stocks?
a. Stockholder c. Broker
b. Bondholder d. Creditor
7. What is the income earned on a stock?
a. Interest c. Dividend
b. Premium d. Deposit
8. What is the strategy to earn short-term income from stocks?
a. Buy high sell low c. buy high sell high
b. Buy low sell high d. buy low sell low
9. These are tangible assets held as investments
a. Deposits c. Stocks and bonds
b. Funds d. Hard assets
10. What is the income earned on a building?
a. Interest c. Rent
b. Dividend d. Credit

What’s In

The word investment brings forth visions of profit, risk,

speculation, bankruptcy and wealth. The dramatic changes in
securities market, the proliferation of new investment products
resulting from financial engineering, the continuous changes in
the tax rules are examples of additional factors that investors
must consider in developing and implementing strategies.
Likewise, it would be best to remember that the investmenthttps://www.nuwireinvestor.com
medium or vehicle must
ensure that the money will be available when it is needed and the investment money should
grow because a peso’s real value today is greater than a peso’s value tomorrow in a world
of inflation.(Bus. Finance Principles and Application,2017)

What’s New
Warm-up Activity
 What you will do

Activity 1.1: “My weekly budget”

Direction: Answer the following questions and compute your daily expenses for a week.

1. Where does my money came from?

2. Where does my money go?

3. How much do I save?

Allowance Expenses Savings
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Sunday

4. Where do I put my savings?

What Is It
Discussion

Lesson 5: Types of Investment

What is investment?
1. Investment opportunities should be grabbed only when
you have extra resources available for such, but it does not always
mean that it should always be grabbed. If you are only operating
within your means, learn to prioritize; investment can take a back
seat first. After all, these opportunities are not always once in a
lifetime. If you missed one today, you could grab the next one soon
enough. You just need to keep your eyes open. http://gcrcloud.io/
2018/11/14/how-to-
2. Investment should not be your main source of income.accurately-measure-the-
Unless you are a
stockbroker, an insurance salesman. Or an investment banker, you should not heavily rely
roi-of-unified-
communications/
on the income coming from your investment. One good reason is that your investment
generate income and/or cash flows that are largely independent from your main line of
business. Heavy reliance on the inflows coming from these assets would create a ‘feast or
famine’ condition. This means heavily relying on the resources that these assets might
generate, given that they do not produce regular cash flows, might make you very
prosperous one moment and then very unfortunate the next.

3. Investments require additional risk-taking. Investments are quite risky asset, a

person planning to invest must be able to learn how to take risks. It is from these risks that
the investor earns.

Different Types of Investments will be grouped into three (1) fixed income and equities (2)
alternatives to fixed income and equities, (3) other investment assets

1. Fixed income and equities

Investment Type Advantages Disadvantages
Stocks (Equity)
“Type of security that
· Unlimited Upside · No guaranteed returns.
signifies ownership in a · Riskiest of all assets (can
corporation and represents a lose even more than 50% of
claim on part of the their money in one day)
corporation’s assets and
earning”
Bank Deposits
Income) “Money placed into
(Fixed
· Known income based on · Lower interest income vs.
outstanding principal and Bonds
a banking institution for
safekeeping”
current interest rate
· Settlement risk if the bank
- common type of investment · Shorter, if any, holding closes.
- the availability of funds also period vs. bonds
depends on the investment
opened.
Types of Bank Deposit
· Current account/ Checking
account - do not earn
interest.
· Savings account - earns
interest but not that
significant, but the most
common among individuals.
· Time deposit account -
earn the highest interest
rate. It is not always
available for withdrawal. It is
evidenced by a certificate of
deposit which can be bought
or sold by the depositor
themselves.
Bonds (Fixed Income)
“Debt investments where an
· Known periodic payments · If not held until maturity
for a certain period and pre-terminated, investor
investor loans money to an
can gain or lose depending
entity which borrows the
funds for a defined period of
time at a variable or
· Cannot lose money if bond on the prevailing interest
rates at the time of pre-
investment is held until
commonly, fixed interest termination. If interest rates
maturity
rate” are higher, investor in bonds
can lose in the pre-
termination

2. Alternatives to fixed income and equities

Investment Type Advantages Disadvantages
Mutual funds “Give small investors access
“An investment that is made to professionally managed,
· Pay management fees
up of a pool of funds diversified portfolios of · Values can also fluctuate
collected from many equities, bonds and other just like the stock market
investors for the purposes of securities, which would be
investing in stocks, bonds, quite difficult (if not
and similar assets” impossible) to create with
- can be short or long term small amount of capital”
Unit Investment
Fund (UITF)
Trust
· Same as mutual funds. · No shareholder rights for
investors such as dividends
“Similar to a mutual fund but · Easier access because
and voting rights
is managed by banks clients can open an account
in any branch of the bank
near them.
· No entry and management
fees.

Management Fee- the amount clients pay to the professionals who manage their mutual
funds, normally a certain percentage of portfolio value.

Dividends - distribution of the company’s income to its shareholders.

Voting Rights - right to be heard on certain policies that the company wants to implement.

3. Other investment assets

Investment Type Advantages Disadvantages
Currencies
“Generally accepted form of
· Largest market in the world · Volatile and trades 24-
in terms of trading volume, hours a day (must be closely
money, including coins and
so much liquidity monitored)
paper notes, which is issued
by government and ·Unlike stocks, commodities, · Generally, uses margin
circulated within an etc., currency itself is a trading which allows clients
economy” (i.e. USD, EUR, medium of exchange which to be more than their capital
JPY) people can use to transact (may also be an advantage)
Commodities
“A basic good used in
· Natural hedge against · Same as currencies
inflation.
commerce that is
interchangeable with other
commodities of the same
· Negatively correlated with · Impractical to invest
equities and bonds (may be directly considering storage,
type” (i.e. Gold, nickel, oil)
used for diversification) transportation and insurance
· Hedge against geopolitical costs involved

risks
Real Estate
“Land and any improvements
·Generally, appreciates ·Huge capital needed,
overtime because land get financing can be difficult
on it” (i.e. land, house and scarce
lot, condominiums)
· Have relatively low
· Maintenance of the
property needed to preserve
correlations with other asset
classes (may be used for its value
diversification) ·Illiquid or difficult to sell
· Can be a source of
recurring rental income
· May also be a hedge
against inflation-linked rent
escalation clauses
Insurance
“A contract (policy) in which
·Give the insured · Insurance premiums may
individual/entity the be costly
an individual or entity
receives financial protection
cash/capital to deal with · On some of traditional
unforeseen adverse financial insurance plans, no
or reimbursement against
consequences sickness/death until a certain
losses from an insurance
age may mean not getting
company (i.e. Life insurance, · May provide certain tax any benefits at all (that’s why
educational plan, VUL) benefits (i.e. tax deductibility, VUL’s are now very
tax-free provisions) prevalent)
· Some insurance
companies can go bankrupt
(i.e. College Assurance Plan)
if companies fail to factor
significantly adverse
unforeseen circumstances

Liquidity - ability to be converted into cash, the higher the liquidity the better.
Margin Trading - allows clients to trade more than their capital. It can magnify both earnings
and losses.
Inflation - general increase in prices.
Hedge - investment that reduces the risk of adverse price movement in an asset.
Diversification - process of investing in different kinds of assets to lessen exposure in
market/price volatility.
Geopolitical risks -” risks of one country’s foreign policy influencing or upsetting domestic,
political and social policy in another country or region” (source: Columbia Threadneedle
Blog. (2016)
Correlation - how price of an asset moves with respect to another asset (i.e. positive
correlation if both assets move in the same direction, negative correlation if both assets
move in opposite direction)
Escalation Clause - agreement to raise prices in the future depending on certain
circumstances (i.e. increase in inflation leading to higher rental rates).
Insurance Premium - the amount paid on a regular basis to the insurance company in return
for the insurance/protection provided.
VUL - Variable Universal Life Insurance or a life insurance that offers both death benefit and
investment features.

What Have I Learned

Activity 1.2: Matching type

Direction: Match the investment asset in column A with its advantage and
disadvantage in column B by writing the capital letter on the left side of column A.

(A) Investment Asset (B) Advantage/Disadvantage

____ 1. Stocks A. On some of traditional plans, no sickness/death
until a certain age may mean not getting any
benefits at all
____ 2. Bank Deposit B. Shorter, if any, holding period vs. bonds

____ 3. Mutual Funds C. Can be a source of recurring rental income

____ 4. Real Estate D. Riskiest of all assets (can lose as much as

50% of their money in one day)
____ 5. Insurance E. Pay management fees

What’s More
Enrichment

Where to Invest?
→ the amount of cash should be considered. The investor must invest within his
means. Not all his extra resources must be used to buy investment, because there will
always be circumstances in which cash will be needed in case of emergency.
→ the risk inherent in the investment should be considered. Higher risk entails higher
return. Deposits are the least risky investments, but they earn the least, too. Real Estate
investments do earn a lot, but they are so risky that they could even cause a national
economy crash. We must not put all the money in one investment, so as to spread or
diversify risk. The good thing with managing risk or diversifying our investment, is if ever we
are not successful in one of the investment opportunities that we grabbed, we will still have
other investments left which would still help us earn.
→ We should consider our intent. We should ask ourselves if the intent is short term
or long term because that would greatly influence the kind of investment that he needs to
buy. If we would like to earn for a shorter term, maintaining a short-term deposit is enough.
We could also purchase some stocks, and then immediately sell them if the price increases.
Stocks and bonds can also be held as long-term investments. Bonds pay regular interest,
and stocks do earn dividends.
 Assessment
Posttest

True or False
On the space provided, write TRUE if the idea being expressed is correct and FALSE if
otherwise.
________ 1. investments generally earn passive income
________ 2. Time deposit accounts do not earn interest.
________ 3. Banks issue bank statement on savings deposit accounts.
________ 4. Insurance are set up for some specific purpose at some certain time in the
future.
________ 5. Mutual funds generally earn more than savings account.
________ 6. Bonds earn dividends.
________ 7. Dividends are always declared regularly
________ 8. Stocks are generally riskier than bonds.
________ 9. Real Estate investments earn rents
________ 10. Hard assets are tangible assets.

Case Analysis
Elison is nearing his retirement. He was able to save up to a significant amount of
money and is planning to invest it to earn something when he has already retired. After
considering a lot of factors, he came down with two choices; buy stocks or construct a
building to be rented out to others as a dormitory.
Which option would work best for Eison and why?
Reference
Tugas, Dela Cruz, Paril, Tang. Business Finance. Vibal Publishing

Ma. Elenita Balatbat Cabrera BBA, MBA, CPA, CMA. Gilbert Anthony B. Cabrera BBA,
MBA, CPA. Business Finance Principles and Applications 2017 Edition, Published by GIC
Enteprise & Co.,INC,

Business Finance (ebook) Teaching Guide for Senior High School. Published by the
Commission on Higher Education, 2016

Arthur J. Keown, David F. Scott, Jr., John D. Martin, J. William Petty, Basic Financial
Management, Seven Edition, Prentice Hall International Editions

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