Quarter 2

Learning Activity Sheets 8, Quarter 2

For Business Finance Grade 12

BUSINESS FINANCE

LAS_8
Comparing and Contrasting the Different Types of Investments

I. Learning Competency with Code

• Compare and contrast the different types of investment. (ABM_BF12-
IVm-n23)

II. Activity Proper

ACTIVITY 1: Comparing and Contrasting the Different Types of Investments

Investments bring forth vision of profit, risk, speculation, bankruptcy, and

wealth.

Merriam Webster Dictionary defines investment as the outlay of money

usually for income or profit: the sum invested or the property purchased.

Saving money is an important part of every financial plan. A financial plan

that covers every aspect of your finances: savings and investing, paying down debt,
insurances, taxes, retirement and estate planning. Putting money aside each
month will help you prepare for emergencies, stay out of debt and reach your
financial goals.

In business, the term investment takes forth visions of profit, risk,

speculation, bankruptcy and wealth. An investment is an asset or item acquired
with the idea that will provide income in the future or later will be sold at a higher
price for a profit.

When an individual purchase goods as an investment, the intent is not to

consume the good but rather to use it in the future to create wealth. An investment
always concerns the outlay of some asset today—time, money, or effort—in hopes of
a greater payoff in the future than what was originally put in.

Likewise, it would be best to remember that the investment must be available

when it is needed. 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. You work hard
for your money and your money should work hard for you.

FIVE MOST COMMON REASONS WHY PEOPLE INVEST

1. Safety Cushion
Companies store a substantial amount of money to ensure that the
company can continue to operate even in the face of extreme adversity. It

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follows the principle that investments are sometimes made to give a
company a ready source of funds on which can draw when needed.

2. Investment for Influence

Some companies invest in other companies for many reasons other
than to earn a return. Some are to ensure a supply of raw materials and to
gain access to company’s research and technology.

3. Cyclical Cash Needs

Companies that operate in seasonal business environment that need
cyclical inventory build-up large amount of money, the time when excess
cash exists for a company. Sometimes companies are not satisfied with
the interest offered by the bank, they invest in a corporate shares (equity)
and bonds or notes (debts) of other companies and earn a higher rate of
return by accepting a higher degree of risk.

4. Investment for a Return

Investors invest simply to earn money. But some companies engage
in small amount of investment for the purpose of earning return though
dividends from equity shares of interest income on notes, bonds or other
income arising from appreciation of investment values.

5. Investment for control

A company purchases equity shares of another company large
enough to be able to control its operation, investment and financial
decisions of the letter. This is done when there is a plan of expanding its
business operations or maybe increasing its control over the market
industry.

TYPES OF INVESTMENTS

1. Fixed income and equities

Investment Type Advantages Disadvantages

Stocks (Equity) “Type of • No guaranteed returns

security that signifies Unlimited Upside • Riskiest of all assets (can
ownership in a lose even more than 50%
corporation and of their money in one day)
represents a claim on
part of the corporation's
assets and earnings”

Bank Deposits (Fixed • Known income • Lower interest income vs.

Income) “Money placed based on outstanding bonds
into a banking principal and current • Settlement risk if the bank
institution for interest rate closes
safekeeping” • Shorter, if any,
holding period vs.

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bonds

Bonds (Fixed income) • Known periodic • If not held until maturity

“Debt investments payments for a and preterminated,
where an investor loans certain period of investor can gain or lose
money to an entity time depending on the prevailing
which borrows the • Can’t lose money if interest rates at the time of
funds for a defined bond investment is pre-termination. If interest
period of time at a held until maturity rates are higher, investor in
variable or commonly, bonds can lose in the pre-
fixed interest rate” termination

2. Alternatives to fixed income and equities

Investment Type Advantages Disadvantages

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

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3. Other Investment assets

Investment Type Advantages Disadvantages

Currencies “Generally • Largest market in the • Volatile and trades

accepted form of world in terms of 24-hours a day
money, including coins trading volume, so (must be closely
and paper notes, which much liquidity • Unlike monitored) •
is issued by a stocks, commodities, Generally uses
government and etc., currency asset margin trading
circulated within an itself is a medium of which allows clients
economy” (i.e. USD, exchange which people to bet more than
EUR, JPY) can use to transact their capital (may
also be an
advantage)

Commodities “A basic Natural hedge against • Same as currencies •

good used in commerce inflation • Negatively Impractical to invest
that is interchangeable correlated with equities directly considering
with other commodities and bonds (may be used storage,
of the same type” (i.e. for diversification) • transportation and
gold, nickel, oil) Hedge against insurance costs
geopolitical risks involve

Real Estate “Land and Generally appreciates Huge capital needed,

any improvements on over time because land financing can be
it” (i.e. land, house and gets scarce • Have difficult • Maintenance
lot, condominiums) relatively low correlations of the property needed
with other asset classes to preserve its value •
(may be used for Illiquid or difficult to
diversification) • Can be sell
a source of recurring
rental income • May also
be a hedge against
inflation because of
inflation-linked rent
escalation clauses

Insurance “A contract • Gives the insured • Insurance premiums

(policy) in which an individual/entity the may be costly • On
individual or entity cash/capital to deal with some of traditional
receives financial unforeseen adverse insurance plans, no
protection or financial consequences • sickness/death until a
reimbursement against May provide certain tax certain age may mean
losses from an benefits (i.e. tax not getting any
insurance company” deductibility, tax-free benefits at all (that’s
(i.e. life insurance, provisions) why VUL’s are now
educational plans, VUL) very prevalent) • Some

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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 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:
Columbia Threadneedle Blog. (2016). Columbia Threadneedle Blog. Retrieved 2 May
2016, from http:// 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.

INVESTMENT ALTERNATIVES

1. Equity Securities

Equity securities are financial assets that represent shares of a corporation. It

represents ownership interest held by shareholders in an entity of a company,
partnership or trust, realized in the form of shares of capital stock, which includes
shares of both common and preferred stock.

a. Ordinary share/ Common Share – A shares of a company that give shareholders

the right to vote in the company's meeting. An income in the form of dividends from
the corporation's profits.

• Class A – nonvoting ordinary share entitled to receive dividends

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• Class B – Voting ordinary share not entitled to receive dividends

a. Preferred Shares/ Preferred Stock - A shares of a company's stock with

dividends that are paid out to shareholders before common stock dividends
are issued. It has priority over ordinary share in liquidation rights and
dividends.

A. Short-term Debt Securities

Obligations issued with less than 12 months to maturity.

a. Negotiable certificates of deposit – usually issued by any authorized commercial

banks

b. Commercial papers – Negotiable promissory notes issued by a well-known

corporation

c. Treasury Bills – Obligations sold at a discount from its face value usually issued
by the government treasury

d. Banker’s acceptance - is an instrument representing a promised future payment

by a bank usually used by the importers to secure trade credit from exporters.

B. Intermediate and Long-term Debt Securities

An obligation that matures in more than one year. The interest on these debt
securities is greater than that of short-term debt.

a. Philippine government securities

Treasury notes – issued by the government treasury with maturities 1 and 10

years; sold at face value with a specified interest payment.

Treasury bonds – A government treasury with maturities over 10 years.

b. Corporate bonds – bonds issued by private corporations to finance their long-

term funding financing.

MAJOR CONSIDERATIONS IN MAKING INVESTMENT DECISIONS

1. Investment Objective

The objective will dictate an individual the purpose of investing. An individual

will invest money that will generate the desired wealth for future plans. People
invest to increase wealth when it is needed for education of children, travel,
retirement, expansion of business or other financial goals.

2. Rate of Return

When investing your money in asset, always considered the desired amount or
rate of return. However, the forecast return may not be accurate and some
variability about the precise amount thus it requires an analysis of risk.

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3. Expected Risk

Risk maybe defined as a variability in possible outcomes of an event based on

chance. Higher risk entails higher return. The greater the outcomes that may
occur, the greater the risk will be. Therefore, the investor must assess and find
alternative or combination that matches his or her particular risk tolerance.

4. Level of risk the investor is willing to assume

• Risk-neutral investors willing to accept equal levels of expected return for
a higher level of risk.
• Risk-taker investors willing to accept lower levels of expected returns for a
higher level of risk.
• Risk-averse investors willing to maximize expected return for any level or
risk of investors than minimize risk for any given level of expected return.

5. Taxes

Tax consequences must be considered in choosing investment. The appropriate

number to consider is the net after-tax-return.

6. Timing
Investment timing is another critical consideration in selecting any investment.
Purchasing an asset just before it is likely to increase in value and selling it just
before it is likely to increase its value. Usually, prices of assets follow some pattern
and as an investor you must accurately forecast the change in prices.

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III. Exercises

ACTIVITY SHEET 8
Comparing and Contrasting the Different Types of Investments

Exercise 19. Directions: Compare the different types of investment in column A

with its description in column B. Write the letter of the correct answer on your
answer sheet.

COLUMN A COLUMN B

____1. Stocks (Equity) A. 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.

____2. Bank Deposits (Fixed B. Land and any improvements on it.

Income)

____3. Mutual Funds C. Type of security that signifies ownership in a

corporation and represents a claim on part of
the corporation's assets and earnings.

____4. Real Estate D. A contract (policy) in which an individual or

entity receives financial protection or
reimbursement against losses from an
insurance company.

____5 Insurance E. Money placed into a banking institution for

safekeeping

Exercise 20. Compare the investment asset in column A with its

advantage/disadvantage in column B. Write the letter of the correct answer on your
answer sheet.

(A) Investment Asset (B) Advantage/Disadvantage

____1. Stocks (Equity) A. Disadvantage: On some of traditional plans,

no sickness/death until a certain age may mean
not getting any benefits at all

____2. Bank Deposits (Fixed B. Advantage: Shorter, if any, holding period vs.
Income) bonds

____3. Mutual Funds C. Advantage: Can be a source of recurring

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rental income

____4. Real Estate D. Disadvantage: Riskiest of all assets (can lose

as much as 50% of their money in one day)

____5 Insurance E. Disadvantage: Pay management fees

Exercise 21. Essay. Answer the following questions on your answer sheet.
(10 points each number)

1. Why would a risk-taker (likes to take risks) type of investor prefer equities
over fixed income?

2. Why would a risk-averse (likes to avoid risks) type of investor prefer fixed
income over equities?

3. What could be the primary motivation of an individual to invest his assets?

4. Let’s say, if you have P500,000 today which you can invest for the next 10
years. What are your investment preferences and why?

Good work!

Prepared by: Noted by:

NECCA T. PALCAT-BERIN LOURENE J. GUANZON

Subject Teacher ABM Group Head
Approved by:

SALVADOR J. SEMBRAN, PhD

Asst. Principal II - SHS

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