INTRODUCTION TO INVESTMENTS
Investment Type Holding Value of % Return
Period PHP10,000
Today
Bank (Time deposit) 10 years PHP14,000 40%
Stocks (Universal Robina Corporation “URC”) 10 years PHP140,500 1,305%
Stocks (DMCI Holdings, Inc. “DMC”) 12 years PHP3,204,878 31,949%
Mutual funds (Philequity PSE Index Fund) 5 years PHP23,426 134%
Mutual funds (Sunlife Prosperity Philippine Equity Fund) 5 years PHP20,805 108%
Item Purchase Price Holding Period Value Today % Return
iPhone 4 32gb PHP29,200 (October 2011) 3.5 years PHP8,900 -70% return
PlayStation 4 PHP22,500 (November 2013) 1.5 years PHP18,000 –20% return
Toyota Vios PHP850,000 (December 2007) 7.5 years PHP300,000 -65% return
How money loses its value in buying material things
INVESTMENTS
• Commitment of money that is expected to generate additional money
• investment is the application of money or other assets in the hope that in the future it would appreciate or
generate more income.
Why do individuals invest?
• To achieve a higher level of consumption in the future by forgoing consumption today
• To improve our welfare in the future
• Investments help us achieve tradeoff between current consumption and future consumption
TYPES OF INVESTMENTS
• Stocks
• Bonds
• Mutual Funds
• Real Estate
• Bank Deposits
• Hard Assets
• Insurance
The different types of investments will be grouped into three:
(1) fixed income and equities,
(2) alternatives to fixed income and equities and
(3) other investment assets
STOCKS
(Fixed income and equities)
Settlement risk – 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.
STOCKS
An investment that represents ownership in a company or corporation
BANK DEPOSITS
(Fixed Income and Equities)
BONDS
(Fixed Income and Equities)
• Same as bank deposits, go to a bank and sign the necessary bond acquisition forms.
• Minimum purchase of bonds is normally higher relative to stocks and bank deposits.
• Clients may also view their bond’s performance online depending from which bank they bought it.
BONDS
• A security representing a loan of money from a lender to a borrower for a set time period, which pays a fixed
rate of interest.
• When you invest in a bond, you effectively lend your money to an organization.
• When a bond is issued, it includes a specified maturity date at which time the principal will be repaid. Bonds
are also issued at a particular interest rate, or what’s known as a coupon. This rate is fixed on most bonds.
• The value of a bond generally moves opposite of the directional change in interest rates. Some bonds are
tied to variable interest rates.
• Bonds differ from one another in the following major ways:
✓ The type of institution to which you’re lending your money: With municipal bonds, you lend your money to
the state or local government or agency; with Treasuries, you lend your money to the federal government;
with
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-is a government corporation that
guarantees the timely payment of principal and interest on mortgage-backed securities (MBSs) issued by
approved Ginnie Mae (GNMAs) (Ginnie Maes), you lend your money to a mortgage holder (and the federal
government backs the bond); with corporate bonds, you lend your money to a corporation.
✓ The credit quality of the borrower to whom you lend your money: This refers to the probability that the
borrower will pay you the interest and return your principal as agreed.
(5 C's of credit)
-Character
-Capacity
-Collateral
-Condition
-Capital
✓ The length of maturity of the bond: Short-term bonds mature within a few years, intermediate bonds
within 3 to 10 years, and long-term bonds within 30 years. Longer-term bonds generally pay higher yields
but fluctuate more with changes in interest rates. Bonds are rated by major credit-rating agencies for their
safety, usually on a scale where
AAA or AA is the highest possible rating and considered the safest
Next in safety are general bonds
A or BBB which are still safe but just a little less so.
BB or lower are junk bonds and are actually not all that junky; they’re just lower in quality and have
a slight (1 or 2 percent) probability of default over long periods of time.
Some bonds are callable, which means that the bond’s issuer can decide to pay you back earlier than the
previously agreed-upon date. This event usually occurs when interest rates fall and the lender wants to
issue new, lower-interest-rate bonds to replace the higher-rate bonds outstanding. To compensate you for
early repayment, the lender typically gives you a small premium over what the bond is currently valued at.
Personal Finance for Dummies
1. AAA
2. A OR BBB
3. BB
MUTUAL FUNDS
(Alternative to Fixed income and equities)
• 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
MUTUAL FUNDS
• An investment that pools money from several investors to buy a particular type of investment, such as
stocks.
• A fund managed by a company that includes a portfolio of stocks or bonds
• Risk varies depending on type of mutual fund
PROS
- Diversified
- You can select different risk levels
CONS
- Return isn’t guaranteed
- Can be subject to expensive management fees
UNIT INVESTMENT TRUST FUND (UITF)
(Alternative to Fixed income and equities)
CURRENCIES
(Other Investment Assets)
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 movements 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: blog.columbiathreadneedleus.com)
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 the 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
COMMODITIES
(Other Investment Assets)
REAL ESTATE
(Other Investment Assets)
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 movements in an asset
Diversification – process of investing in different kinds of assets to lessen exposure in market/price volatility
REAL ESTATE
• An investor buys pieces of property, such as land or a building, in hopes of generating a profit.
• REITs are diversified real estate investment companies that purchase and manage rental real estate for
investors. A typical REIT invests in different types of property, such as shopping centers, apartments, and
other rental buildings. You can invest in REITs either by purchasing them directly on the major stock
exchanges or by investing in a real estate mutual fund that invests in numerous REITs.
• Personal Finance for Dummies
INSURANCE
(Other Investment Assets)
INVESTMENT RISK
• Risk is the chance that an investment’s actual return will be different than expected. Risk includes the
possibility of losing some or all of the original investment
Risk Definition Also Known As Examples
Systematic Uncertainty inherent to Market risk, Changes in interest rates,
the entire market undiversifiable risk recession, wars
Non-systematic Uncertainty that comes Specific risk, Rumors of a potential default,
with the company or diversifiable risk, labor strikes, landslide in a
industry residual risk mining company that disrupted
the operations
RISK VS RETURN
• On average, stocks have a high rate of return
– The increase or decrease in the original purchase price of an investment
• Higher rate of return = greater risk
– Uncertainty about the outcome of an investment
• Stocks provide portfolio diversification
– Money invested in a variety of investment tools
Short-term Investment Strategies
• Buying on margin is where an investor borrows part of the money needed to invest in a stock from a
brokerage firm.
– There is a 50% margin requirement.
– If you want to purchase Php2,000 worth of stock you can borrow up to Php1,000 to make the
purchase.
Long-term Investment Strategies
• Diversification is spreading your assets among different types of investments to reduce risk.
– Don’t put all your eggs in one basket.
• Buy and hold technique is where an investor buys stock and holds on to it for a number of years.
– During that time you are paid dividends and the price of the stock may go up.
