Miriam College High School

Business Finance
Lesson Outline: Introduction to Investments
Second Semester S.Y. 2022-2023

OBJECTIVES:

❏ compare and contrast the different types of investments

❏ indicate the advantages and disadvantages of each type
❏ explain the risks inherent in each type of investment

★ INVESTMENT

When people start buying for personal consumption or income generation and depositing money in a savings
account for future use, it is already investing. Likewise, when you place money in income-generating securities
such as stocks, bonds, mutual funds, or other similar securities, you are investing.

Investment is a means of keeping funds for the purpose of generating additional income or increasing the
asset's value. If an individual keeps his money in a low-income generating investment account such as a
savings account, it is considered investing because of the interest earned. If an individual purchased a parcel
of land at a price of Php 100,000 and it went up to Php 250,000 in several years, it becomes an investment
because the value appreciated by Php 150,000.

Investment, as defined by Herbert Mayo in his book, Investment (2014), refers to the purchase of plant,
equipment, or inventory. Mayo also defined investment in layman's terms as "an acquisition of an asset such
as a stock or a bond."

Investing has different forms and purposes. According to Aswath Damodaran in his book, Investment
Management (1998): "We all make investments whenever we decide to forego current consumption or
pleasure in order to enjoy more consumption in the future." He also mentioned that investment is not smooth
and not a graceful progression to wealth. As individuals make an investment, they may find that it is a bumpy
road that requires persistence and constancy of purpose.

Investing has risks to consider. Investment does not always lead to revenues or gains; it may also result in a
huge amount of losses if not done with proper market timing. It also needs constant timing and acceptance of
risk.

Investing today is different from investing in the past. Before, investing is simpler. Investments are run by
information. Vast information readily available in the hands of the investors already gives them a great
advantage as to where and when to buy or sell their financial securities. The investment environment today is
considerably very dynamic. With the amount of information coming from different sources, the investors have
many available financial securities to choose from.

★ TYPES OF INVESTMENT

An investor may choose from many investment vehicles. In fact, many financial institutions look for investors to
avail their products and services. The institution that succeeds in getting the funds is the one that individuals
think offers the best package or benefit. The investment made may be a boon or bane to the investor. An
investment may incur losses or earn returns from a small amount to as much as you can imagine. The
investments made by individuals depend on their capacity, objectives, and investment personality.
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The 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

❖ Fixed Income and Equities

Equity income refers to making of income by the trading of shares and securities on stock exchanges
which involves high risk on return with regards to fluctuation in prices whereas Fixed income refers to
income earned on securities that give fixed earning like interest and also they are less risky.

❏ Bank Deposits (Fixed Income) - Money placed into a banking institution for safekeeping. The
most common type of investment vehicle. It offers a fixed interest rate on your principal amount.
With guaranteed fixed returns and flexible maturity periods, bank deposit is the most
sought-after investment avenue. Different banks offer bank deposit investments with different
maturities. In case of emergencies, an investor can also withdraw his/her money before the
maturity ends, by paying a small amount of penalty. This penalty amount also differs from bank
to bank.

Access this investment through the following:

● Go to a bank (BDO, BPI, Metrobank, etc.) and open a bank account (savings, time
deposit, etc.) by signing the necessary account opening forms.
● Minimum amounts will also be required depending on which bank and the type of bank
deposit they want to open.
● Some banks also now offer online access to their client’s bank accounts (i.e.
www.bpiexpressonline.com, www.bdo.com.ph, www.lbpiaccess.com, etc.) where they
can monitor their account, pay bills, transfer funds, etc. via the internet.

❏ Stocks (Equity) - Type of security that signifies ownership in a corporation and represents a
claim on part of the corporation’s assets and earnings. Stocks, also known as shares or
equities, maybe the most well-known and simple type of investment. When you buy stock,
you’re buying an ownership stake in a publicly-traded company. Many of the biggest companies
like Apple and Facebook — are publicly traded, meaning you can buy stock in them. When you
buy a stock, you’re hoping that the price will go up so you can then sell it for a profit. The risk, of
course, is that the price of the stock could go down, in which case you’d lose money.

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 Access this investment through the following:
● Go to a stock brokerage firm (i.e. COL Financial, AB Capital Securities, etc.) or a bank
with a stock brokerage arm (i.e. BPI Trade, First Metro Securities, etc.) and open a stock
market account by signing the necessary account opening forms.
● The minimum capital amount, depending on the broker, will be required to be deposited
to successfully open the account (i.e. PHP5,000 for BPI Trade, PHP10,000 for AB
Capital Securities, etc.).
● Most of these stock brokerage firms now provide online access to their client’s stocks
account (i.e. www.colfinancial.com, www.bpitrade.com, www.abcapitalsecurities.com.ph,
etc.).

❏ Bonds (Fixed Income) - Debt investments where an investor loans money to an entity that
borrows the funds for a defined period of time at a variable or commonly, fixed interest rate.
When you buy a bond, you’re essentially lending money to an entity. Generally, this is a
business or a government entity. While the money is being lent, the lender gets interest
payments. After the bond matures — that is, you’ve held it for the contractually determined
amount of time — you get your principal back. The rate of return for bonds is typically much
lower than it is for stocks, but bonds also tend to be lower risk. There is some risk involved, of
course. The company you buy a bond from could fold or the government could default.

Access this investment through the following:

● Same as bank deposits, go to a bank and sign the necessary bond acquisition forms.
● The minimum purchase of bonds is normally higher relative to stocks and bank deposits.
● Clients may also view their bond’s performance online depending on which bank they
bought it from.

❖ Alternatives to Fixed Income and Equities

An alternative investment is a financial asset that does not fall into one of the conventional investment
categories. Conventional categories include stocks, bonds, and cash. Most alternative investment
assets are held by institutional investors or accredited, high-net-worth individuals because of their
complex nature, lack of regulation, and degree of risk.

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❏ Mutual Funds - An investment that is made up of a pool of funds collected from many investors
for the purpose of investing in stocks, bonds, and similar assets. A mutual fund is a pool of
many investors’ money that is invested broadly in a number of companies. Mutual funds can be
actively managed or passively managed. An actively managed fund has a fund manager who
picks securities in which to put investors’ money. Fund managers often try to beat a designated
market index by choosing investments that will outperform such an index. A passively managed
fund, also known as an index fund, simply tracks a major stock market index. Mutual funds can
invest in a broad array of securities: equities, bonds, commodities, currencies, and derivatives.

Mutual funds carry many of the same risks as stocks and bonds, depending on what they are
invested in. The risk is often lesser, though, because the investments are inherently diversified.
It is an apt investment option for those investors who don’t have the required financial
knowledge and sufficient time to study the market. Investors can leverage the knowledge of
professional and experienced fund managers to earn significant returns from mutual fund
investment.

Access this investment through the following:

● Go to an insurance company or a financial institution that offers mutual funds (i.e.
Philequity, Sunlife, Manulife, etc.) and sign the necessary account opening forms.
● As with stocks, minimum amounts will be required to successfully open the account.
● Some of these financial institutions also provide online access to monitor their mutual
fund performance.

❏ Unit Investment Trust Fund - Similar to a mutual fund but is managed by banks. A UITF is a
curated investment fund managed by experts to ensure high yield and quality returns. It’s the
perfect investment option if you don’t have the time or knowledge for actual stock trading
because it lets experts manage your investments through securities, bonds, equities, and other
best-in-class instruments.

Access this investment through the following:

● Same procedures as a mutual fund except that UITF’s are accessed through banks.

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❖ Other Investment Assets

All those financial instruments that don’t feature under fixed income and equities investment
instruments come under other investments assets. Gold and Real Estate are the most common and
profitable other investment asset vehicles.

❏ Currencies - generally accepted form of money, including coins and paper notes, which are
issued by a government and circulated within an economy (i.e. USD, EUR, JPY).

Access this investment through the following:

● Open a foreign currency/forex account (i.e. oanda, fxcm, cboe, etc.) online.
● The minimum amount required for forex accounts varies and is usually higher vs. stocks
and usually in USD.
● Investments may also be monitored online.

❏ Commodities - a basic good used in commerce that is interchangeable with other commodities
of the same type (i.e. gold, nickel, oil). Commodities are physical products that you can invest in.
They are common in futures markets where producers and commercial buyers – in other words,
professionals – seek to hedge their financial stake in the commodities. Retail investors should
make sure they thoroughly understand futures before investing in them. Partly, that’s because
commodities investing runs the risk that the price of a commodity will move sharply and abruptly
in either direction due to sudden events. For instance, political actions can greatly change the
value of something like oil, while the weather can impact the value of agricultural products.

Access this investment through the following:

● Own the physical commodity itself
● Buy through a mutual fund
● Open a commodity account online
● Investments may also be monitored online.

❏ Real Estate - Land and any improvements on it (i.e. land, house and lot, condominiums). Real
Estate Investment refers to any investment made in physical properties such as land, buildings,
shops, etc. It involves the purchase, ownership, and management of the real estate property. An
individual can earn from real estate in two ways. One way is to buy a property and then sell it at
a higher price after few years. Another way to generate income on your real estate is to put it up
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 on rent. An investor should carefully analyze some key factors such as the size and locality of
the investment property as these factors play a significant role in the price appreciation of real
estate.

Access this investment through the following:

● Contact/visit real estate companies directly (i.e. Ayala Land, Megaworld, SM Prime,
etc.).
● Contact real estate brokers.

❏ Insurance - a contract (policy) in which an individual or entity receives financial protection or

reimbursement against losses from an insurance company (i.e. life insurance, educational
plans, VUL).

Access this investment through the following:

● Contact/visit insurance companies directly (i.e. Sunlife, Prulife, Manulife, etc.).
● Contact insurance agents.

★ RISK

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There are a lot of types of investment to choose from. Some are perfect for beginners, while others require
more experience. Each type of investment offers a different level of risk and reward. Investors should consider
each type of investment before determining an asset allocation that aligns with their goals.

It is a common misconception that all of these investments will earn for certain. Each investment type has
inherent risks involved, which nevertheless can be mitigated. Some individuals will choose bank time deposits
and others will prefer stocks. Actually, there is no right or wrong answer because the choice of an investor
depends not just on returns but also on his/her risk appetite. Stocks are volatile and you can lose significantly
from your investments especially if your investment timeframe is short but if the stock investments of a good
company are invested over a much longer period of time, stock investments can be financially rewarding.

Risk is the chance that an investment’s actual return will be different than expected. Investments follow a
high-risk, high-return principle.

Settlement Risk is a risk that the bank may not be able to give back their deposit. Philippine banks are
normally insured by the Philippine Deposit Insurance Corporation (PDIC). Depositors may recover up to
PHP500,000 per depositor from PDIC in case of bank default/bankruptcy.

Diversification is a risk management technique that combines a wide variety of investments within a portfolio
to reduce risk.

To minimize investment risk, an investor has to have a diversified portfolio. The composition of the portfolio
depends on the risk appetite of the investor. A more conservative investor (i.e. investor who has less appetite
for risk) may have a portfolio that is more skewed to fixed income instruments like time deposits. On the other
hand, an investor who has a higher appetite for risk (i.e. an investor who is more willing to take a risk) may
have a portfolio that is more skewed to equity investments.

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