Look how one's savings (i.e., P10,000) could have changed value over time if placed in a bank time deposit and an equity investment. Bank (Time Deposit) 16,000 14,000 Value of PHP 10,000 12,000 10,000 8,000 6,000 4,000 2,000 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Table 1: Sample Performance of P10,000 in Time Deposit Stocks/Equities (Philippine Stock Exchange Index "PSEI) PSEi 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Table 2: Sample Performance of P10,000 in Stocks/Equities BASIC TERMINOLOGIES It is common misconception that all investments will earn for certain. Each investment type has inherent risks involved, which nevertheless can be mitigated. DEFAULT RISK - is the risk of the counterparty not fulfilling his obligation. 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 P500,000 per depositor from PDIC in case of bank defaults/bankruptcy. 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. Diversification is a risk management technique that combines a wide variety of investments within a portfolio to reduce risk. 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. For the discussion, 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 Table 3: Advantages and Disadvantages of Fixed Income and Equities INVESTMENT TYPE Stocks (Equity) ADVANTAGES Unlimited Upside DISADVANTAGES No guaranteed returns. Riskiest of all assets (can lose even more than 50% of their money in one day) "Type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets earnings." and Bank deposits (Fixed Income) "Money placed into a banking institution for safekeeping." Bonds (Fixed Income) Known income based on outstanding principal and current interest rate. Shorter, if any, holding period vs. bonds Known period payments for a "Debt investments where an investor loans money to an entity. which borrows the funds for a defined period of time at a variable or commonly, fixed interest rate." STOCKS certain period of time. Can't lose money if bond investment is held until maturity. Lower interest income vs. bonds Settlement risk if the bank closes. If now held until maturity and pre-terminated, investor can gain or lose depending on the prevailing interest rates at a time of pre-termination. If interest rates are higher, investors in bonds can lose in the pre-termination 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. Minimum capital amount, depending on the broker, will be required to be deposited to successfully open the account (i.e. PHP5,000 for BPI BANK DEPOSITS 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.lbpiacces.com. etc.) where they can monitor their account, pay bills, transfer funds, etc. via internet. BONDS 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 from. Deposit instruments are provided by banks. The major deposit instruments include the following: 1. SAVINGS ACCOUNT - A typical savings account provides a low fixed rate of return but provides the convenience of availability. The depositor can easily deposit and withdraw from the account at any banking day. 2. CHECKING ACCOUNT - Clearly, the depositor can issue checks from his account to pay for various expenditures instead of delivering bills or coins as payment. Banks charge a certain fee for the printing costs of check booklets. Checks issued are subject to a clearing float (usually 3 days) when deposited by the payee. 3. TIME DEPOSIT ACCOUNT - usually requires a minimum amount of deposit with a fixed term to maturity. This type of account provides a higher fixed rate of return compared to a savings and checking account. The depositor cannot withdraw from his account before the fixed maturity date. ALTERNATIVES TO FIXED INCOME AND EQUITIES Table 4: Advantages and Disadvantages of Alternative Investments INVESTMENT TYPE 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." Unit Investment trust fund (UITF) Similar to a mutual fund but it is managed by banks. ADVANTAGES "Give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not possible) to create with a small amount of capital." Same as mutual funds. Easier access because clients can open an account in nay branch of the bank near them. No entry and management fees. DISADVANTAGES Pay management fees Values can also fluctuate just like the stock market No shareholders rights for investors such as dividends and voting rights. Ways on how to access these investment assets through the following: MUTUAL 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. UITF Same procedures as a mutual fund except that UITF's are accessed. OTHER INVESTMENT ASSETS Table 5: Advantages and Disadvantages of Other Investment Types INVESTMENT TYPE Currencies "Generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy." (i.e., USD, EUR, JPY) Commodities "A basic good used in commerce that is interchangeable with other commodities of the same type." (i.e., gold, nickel, oil) Real Estate "Land and any improvements on it." (ie., land, house and lot, condominiums) . ADVANTAGES Largest market in the world in terms of trading volume, so much liquidity Unlike stocks, commodities, etc., currency asset itself is a medium of exchange which people can use to transact. Natural hedge against inflation Negatively correlated with equities and bonds (may be used for diversification) Hedge against geopolitical risks Generally appreciates over time because land gets scarce Have relatively low correlations with other assets classes (may be used for diversification) Can be source of recurring rental income May also be a hedge against inflation because of inflation- linked rent escalation clauses DISADVANTAGES Volatile and trades 24-hours a day (must be monitored) Generally uses closely margin trading which allows clients to bet more than their capital (may also be an advantage) Same as currencies Impractical to invest directly considering storage, transportation, and insurance. costs involved. Huge capital needed, financing can be difficult Maintenance of the property needed to preserve its value Illiquid of difficult to sell 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) Gives the individual/entity insured the cash/capital to deal with unforeseen adverse financial consequences tax May provide certain tax benefits (i.e., deductibility, provisions) tax-free Insurance premiums may be costly On some of traditional insurance plans, no sickness/death until a certain age may mean not getting any benefits at all (that's why VUL'S are now very prevalent) Some insurance companies can go bankrupt (i.e., College Assurance Plan) if companies fail to factor significantly unforeseen adverse circumstances. You can access these investment assets through the following: FOREX Open a foreign currency/forex account (i.e. oanda, fxcm, cboe, etc.) online. Minimum amount required for forex accounts vary and are usually higher vs. stocks and usually in USD. REAL ESTATE " Open a foreign currency/forex account (i.e. oanda, fxcm, cboe, etc.) online. Minimum amount required for forex accounts vary and are usually higher vs. stocks and usually in USD. Investments may also be monitored online. INSURANCE Contact/visit insurance companies directly (i.e. Sunlife, Prulife, Manulife, etc.). COMMODITIES Choose the commodity, such as Crude Oil Brent, Gold or Natural Gas, that you want to spread bet or trade CFDs on. Decide to buy or sell - Buy (go long) if you think prices will rise, or sell (go short) if you think prices will go down. CHARACTERISTICS OF INVESTMENT SCAMS (Source: financialmentor.com) - - - - - - - - - - - - Unexpected and unsolicited phone calls, emails, letters, or personal visits from strangers who are offering investments. Above market returns Low risk, no risk, or a guarantee Giving custody and possession of invested capital to the investment manager Aggregating assets into a pool with other investors Investing on the spot Special connections, secrets, or inside information not available to the public Invitations to join exclusive investment organizations Opportunities for the "next big thing" or a "once in a lifetime" deal Sophisticated terminologies. Investments offered from overseas. No prospectus/offering memorandum. Investments that cannot be verified Sold by unlicensed/unregistered people. Troubles cashing out of the investment. Salespeople discouraging second opinion. - Salespeople encouraging investing on the basis of trust. Salespeople asking potential clients to put their life savings into a single investment. Salespeople encouraging potential clients to borrow money for it. - Salespeople requesting for the client's bank account details. Here are some tips on how to invest: Get started investing as early as possible. Investing when you're young is one of the best ways to see solid returns on your money. Decide how much to invest. How much you should invest depends on your investment goal and when you need to reach it. Consider your time horizon and the amount you need, then work backwards to break that amount down into monthly or weekly investments. Open an investment account. A common misconception is that you need a lot of money to open an investment account or get started investing. That's simply not true. Many online brokers, which offer both IRAs and regular brokerage investment accounts, require no minimum investment to open an account, and there are plenty of investments available for relatively small amounts Understand your investment options. It's important to understand each instrument and how much risk it carries. Pick an investment strategy. Your investment strategy depends on your saving goals, how much money you need to reach them and your time horizon. (Source: nerdwallet.com/article/investing/how-to-start-investing) C. Making generalization and abstractions about the lesson An investment is an asset or item that is purchased with the hope that it will generate income or appreciate in value at some point in the future. The act of investing has the goal of generating income and increasing value over time. An investment can refer to any mechanism used for generating future income. This includes the purchase of bonds, stocks, or real estate property, among other examples. In general, any action that is taken in the hopes of raising future revenue can also be considered an investment. For example, when choosing to pursue additional education, the goal is often to increase knowledge and improve skills (in the hopes of ultimately producing more income). Because investing is oriented toward the potential for future growth or income, there is always a certain level of risk associated with an investment. An investment may not generate any income, or may actually lose value over time. For example, it's also a possibility that you will invest in a company that ends up going bankrupt or a project that fails to materialize. This is the primary way that saving can be differentiated from investing: saving is accumulating money for future use and entails no risk, whereas investment is the act of leveraging money for a potential future gain and it entails some risk.