 Lower interest income vs.

bonds
TYPES OF  Settlement risk if the bank closes
INVESTMENTS  If not held until maturity and pre-
terminated, investors gain or lose
An investment is a monetary asset purchased depending interest rates at the time of
with the idea that the asset will provide income in pretermination. If interest rates are
the future or will later be sold at a higher price for higher, investors in bonds can lose in the
a profit (Investopedia, 2020). The types of pretermination.
investment covered by the lesson will be grouped Upside. It refers to the potential increase in value,
into three: 1. Fixed Income and equities, 2. measured in monetary or percentage terms, of an
Alternative to Fixed Income and Equities and 3. investment.
Other investment, Assets.
Settlement Risk. Philippine banks are insured by
WHAT IS IT the Deposit Insurance Corporation (PDIC) and
An investment is a monetary asset purchased may recover up to PHP 500,000 per depositor in
with the idea that the asset will provide income in case of bank default/bankruptcy.
the future or will later be sold at a higher price for Classification of Stocks
a profit. In an economic sense, an investment is
the purchase of goods that are not consumed today Common Stocks (Ordinary Shares)
but are used to create wealth.
 Dividends
THE DIFFERENT TYPES OF INVESTMENTS  Voting Rights
ARE GROUPED INTO THREE:  Last in line for liquidation

(1) Fixed Income and Equities Hybrid Stocks (Convertible Preferred Shares)

Investment Type  Preferred stocks convertible to common

stock
Stocks (Equity) – A type of security that signifies  May/may not have voting rights.
ownership in a corporation and represents a claim
on part of the corporation’s assets and earnings Preferred Stocks (Preferred Shares)

Bank Deposits (Fixed Income) – Money placed  Promised dividends.

into a banking institution for safekeeping.  No voting rights.
 Priority in liquidation
Bonds (Fixed Income) – Debt investments where
an investor loans money to an entity that borrows Embedded-Derivative Stocks
the funds for a defined period at a variable or
commonly, fixed interest rate.  Could be common or preferred stocks.
 Stocks with call options (Callable
Advantages Stocks)
 Stocks with put options (Puttable Stocks)
 Unlimited upside
 Known income based on the outstanding (2) Alternatives to Fixed Income and Equities
principal and current interest rate
Investment Type
 Shorter, if any, holding period vs. bonds
 Known periodic payments for a certain Mutual funds – An investment that is made up of
period. a pool of funds collected from many investors to
 Can’t lose money if the bond investment invest in stocks, bonds, and similar assets.
is held until maturity
Unit Investment Trust Fund (UITF) – similar to
Disadvantages a mutual fund but is managed by banks.

 No guaranteed returns. Advantages

 Riskiest of all assets (can lose even more
than 50% of their money in one day)
 Give small investors access to  Unlike stocks, commodities, etc.,
professionally managed, diversified currency asset itself is a medium of
portfolios of equities, bonds, and other exchange that people can use to transact.
securities, which would be quite difficult  Natural hedge against inflation
(if not impossible) to create with a small  Negatively correlated with equities and
 Same as mutual funds. bonds (may be used for diversification)
 Easier access because clients can open an  Hedge against geopolitical risks
account in any branch of the bank near  Generally, appreciates over time because
them. land gets scarce.
 No entry and management fees  Have relatively low correlations with
other asset classes (may be used for
Disadvantages
diversification)
 Pay management fees.  Can be a source of recurring rental
 Value can also fluctuate just like the income.
stock market.  It may also be a hedge against inflation
 There are no shareholder rights for because of inflation-linked rent
investors such as dividends and voting escalation clauses.
rights.  Gives the insured individual/entity the
cash/capital to deal with unforeseen
Management Fee. This is the amount clients pay adverse financial consequences.
to the professionals who manage their mutual  May provide certain tax benefits (i.e., tax
funds, normally a certain percentage of portfolio deductibility, tax-free provisions)
value.
Disadvantages
Dividend. It refers to the distribution of the
company’s income to its shareholders.  Volatile and trades 24- hours a day (must
be closely monitored)
Voting Right. It discusses the right to be heard on  Generally, it uses margin trading which
certain policies that the company wants to allows clients to bet more than their
implement. capital (may also be an advantage.
(3) Other investment Assets  Same as currencies
 Impractical to invest directly considering
Investment Type storage, transportation, and insurance
costs involved.
Currencies – Generally accepted form of money,
 Huge capital needed; financing can be
including coins and paper notes, which is issued
difficult.
by a government and circulated within an
economy (i.e. USD, EUR, JPY)  Maintenance of the property needed to
preserve its value.
Commodities – a basic good used in commerce  Illiquid or difficult to sell.
that is interchangeable with other commodities of  Insurance premiums may be costly.
the same type (i.e., gold, nickel, oil).  On some the traditional insurance plans,
no sickness/death until a certain age may
Real Estate – Land and any improvements on it”
mean not getting any benefits at all
(i.e., hand, house and lot, condominiums)
(that’s why VUL’s are now very
Insurance – A contract (policy) in which an prevalent)
individual or entity receives financial protection or  Some insurance companies can go
reimbursement against losses from an insurance bankrupt (i.e., College Assurance Plan) if
company” (i.e., life insurance, educational plans, companies fail to factor significantly
VUL) adverse unforeseen circumstances.

Advantages Liquidity. It is the ability to be converted into

cash, the higher the liquidity the better.
 The largest market in the world in terms
of trading volume, so much liquidity
Margin Trading. It allows clients to trade more 3. Most of these stock brokerage firms now
than their capital. It can magnify both earnings provide online access to their client’s
and losses. stocks account (i.e., www.colfinancial.com,
www.bpitrade.com,
Inflation. It is described as a general increase in www.abcapitalsecurities.com.ph, etc.).
prices.
B. Bank Deposits
Hedge. It is an investment that reduces the risk of
1. Go to a bank (BDO, BPI, Metrobank,
adverse price movements in an asset.
etc.) and open a bank account (savings,
Diversification. It is the process of investing in time deposit, etc.) by signing the
different kinds of assets to lessen exposure in necessary account opening forms.
market/price volatility. 2. Minimum amounts will also be required
depending on which bank and the type of
Geopolitical risk. It refers to the risk of one bank deposit they want to open.
country's foreign policy influencing or upsetting 3. Some banks also now offer online access
domestic, political, and social policy in another to their client’s bank accounts (i.e.,
country or region. www.bpiexpressonline.com,
Correlation. It is how the price of an asset moves www.bdo.com.ph, www.lbpiacces.com,
concerning another asset (i.e., positive correlation etc.) where they can monitor their
if both assets move in the same direction, negative account, pay bills, transfer funds, etc. via
correlation if both assets move in the opposite the internet.
direction). C. Bonds
Escalation Clause. It is an agreement to raise 1. Same as bank deposits, go to a bank and
prices in the future depending on certain sign the necessary bond acquisition
circumstances (i.e., an increase in inflation leading forms.
to higher rental rates). 2. Minimum purchase of bonds is normally
Insurance Premium. It refers to the amount paid higher relative to stocks and bank
regularly to the insurance company in return for deposits.
the insurance/protection provided. 3. Clients may also view their bond’s
performance online depending on which
VUL. It means Variable Universal Life insurance bank they bought it from.
or life insurance that offers both death benefit and
investment features. D. Mutual funds

WAYS ON HOW TO ACCESS THESE 1. 1. Go to an insurance company or a

INVESTMENT ASSETS financial institution that offers mutual
funds (i.e., PRU Life UK, Phil equity,
A. Stocks Sunlife, Manulife, etc.) and sign the
necessary account opening forms.
1. Go to a stock brokerage firm (i.e., COL 2. As with stocks, minimum amounts will
Financial, AB Capital Securities, etc.) or be required to successfully open the
a bank with a stock brokerage arm (i.e., account.
BPI Trade, First Metro Securities, etc.) 3. Some of these financial institutions also
and open a stock market account by provide online access to monitor their
signing the necessary account opening mutual fund performance.
forms.
2. Minimum capital amount, depending on E. Unit Investment Trust Fund
the broker, will be required to be
deposited to successfully open the 1. Same procedures as a mutual fund except
account (i.e., PHP5,000 for BPI Trade, that UITF’s are accessed through banks.
PHP10,000 for AB Capital Securities, F. Currencies and Commodities
etc.).
1. Open a foreign currency/forex account
(i.e., panda, fxcm, cboe, etc.) online.
2. Minimum amount required for forex  Salespeople encouraging potential clients
accounts vary and is usually higher vs. to borrow money for it
stocks and usually in USD.  Salespeople requesting the client’s bank
3. Investments may also be monitored account details.
online.

G. Real Estate RISKS OF INVESTMENT

1. Contact/visit real estate companies Risk is the chance that an investment’s actual
directly (i.e., Ayala Land, Mega world, return will be different than expected. Risk
SM Prime, etc.). includes the possibility of losing some or all the
2. Contact real estate brokers. original investment (Investopedia, 2016).
H. Insurance WHAT’S IN
1. Contact/visit insurance companies Investments indeed provide income in the
directly (i.e., PRU Life UK, Sunlife, future since its either generate income or accrue a
Prulife, Manulife, etc.). higher price once sold provided the investment
2. Contact insurance agents or financial money will be managed rightfully. In the previous
advisors. lesson, you also learned how these investments are
classified such as Fixed Income and Equities,
CHARACTERISTICS OF INVESTMENT
Alternatives to Fixed Income and Equities, and
SCAMS
other Investment Assets.
 Unexpected and unsolicited phone calls,
WHAT IS IT
emails, letters, or personal visits from
strangers who are offering investments Concepts of Risk and Return
 Above market returns
 Low risk, no risk, or a guarantee  Investments follow a high-risk, high-
return principle.
 Giving custody and possession of
 Stocks are volatile and they can lose
invested capital to the investment
significantly from the investments
manager
especially if their investment time frame
 Aggregating assets into a pool with other
is short.
investors
 If the stock investments of a good
 Investing on the spot
company are invested over a much longer
 Special connections, secrets, or inside period, however, stock investments can
information not available to the public be financially rewarding as shown in the
 Invitations to join exclusive investment PSEi returns.
organizations.  The value of a bank investment, on the
 Opportunities for the “next big thing” or other hand, follows a relatively straight
a “once in a lifetime” deal upward line, but only gives low returns
 Sophisticated terminologies due to the low risk taken by the investor.
 Investments offered from overseas.
 No prospectus/offering memorandum. Risk is the chance that an investment’s actual
 Investments that cannot be verified return will be different than expected. Risk
 Sold by unlicensed/unregistered people. includes the possibility of losing some or all the
original investment (Investopedia, 2016).
 Troubles cashing out of the investment.
 Salespeople discouraging the second
opinion.
 Salespeople encouraging investing based
on trust.
 Salespeople asking potential clients to
put their life savings into a single
investment.
Based on the example, it is illustrated that a
company with a higher beta is more volatile and a
company with a lower beta is less volatile.

Note: The beta computed using the formula

given on the table may not be reliable if data
points used are for a short per only. Using data
covering five to ten years is suggested because
such a period will often cover the booms and busts
of an economic cycle.

These are the components of the formula: Beta can also be calculated by solving the
below equation if the inputs of the same are
𝑟𝑝 = the return on an investment asset readily available:

𝑟𝑏 = the return on the overall market 𝐶𝑜𝑟𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛𝑠𝑡𝑜𝑐𝑘 ,𝑚𝑎𝑟𝑘𝑒𝑡 = 𝛽𝜎𝑚 / 𝜎𝑠𝑡𝑜𝑐𝑘

𝐶𝑜𝑣 = Covariance (how changes in a stock’s Legend:

return are related to changes in the market’s
returns 𝜎𝑚 = Standard deviation of market returns

𝑉𝑎𝑟 = Variance (how far the market’s data points 𝜎𝑠𝑡𝑜𝑐𝑘 = Standard deviation of stock returns
spread out from their average value Correlation can be calculated using covariance.
These are the components of the 𝜎 formula: Example of Systematic Risk (With Excel
Template)
𝑥𝑖 = return
Let’s take an example to understand the
𝑥̅ = average of returns
calculation in a better manner.
𝑛 = no. of data points
Suppose we are given the following data, for a
Guide on beta interpretation below: bank stock, therefore, the

Equal to 1 investment’s price will have the same relevant market is a banking index:
volatility as the PSEi

Greater than 1 investment’s price will be more

volatile than the PSEi

Less than 1 investment’s price will be less volatile

than the PSEi

The formula for beta is the co-variance of the

investment asset’s returns with the returns of the
market divided by the variance of the market. Beta
can be easily computed through Microsoft Office
Excel/Spreadsheet. In getting an estimate of the
non-systematic risk, the total risk will be
computed first then from this, the systematic risk
will be deducted. Here are the examples of how a more
diversified portfolio can reduce the standard
Example: A company with a beta of 1.3 means deviation of the portfolio:
that if the PSEi goes up by 10%, this company’s
stock price, on average, will go up by 13%. The
reverse is true which means that if the PSEi goes
down by 10%, this company’s stock price, on
average, will go down by 13%.
investment professional making investment
decisions for large pools of funds, such as mutual
funds or pension plans. Money management can
also be referred to more narrowly as "investment
management" and "portfolio management”
(Investopedia, 2019).

Personal Finance includes all financial

decisions and activities of an individual including
budgeting, insurance, mortgage planning, savings,
and retirement planning.

It involves analyzing current financial

positions, projecting short-term and long-term
funding needs, and executing a plan to fulfill those
needs considering individual financial constraints.
It is primarily dependent on one’s earnings, cost
of living, and personal goals and wants
(Investopedia, 2016).

Cost Comparison. It is the process of comparing

the cost of two or more goods or services to find
the best value.

Cost-Benefit Analysis. It is the process of

analyzing whether the cost of an item is more
than, equal to, or less than the benefit that comes
from purchasing that item.

To get the, Cost. It refers to the price paid for a good or

service.
𝒙𝒊 = (current price – prev. price) / prev. price x
100 Benefit. It is described as an outcome that
promotes well-being.
𝐱̅ = average of the returns
Calculating Future Expenses. It is the process of
(𝒙𝒊 − 𝐱̅)𝟐 - don’t forget that this is in identifying the cost of meeting future needs and
percentage, so, x 100. goals.
Observe that the standard deviation computed Short-term, medium-term, and long-term goals.
for a portfolio goes down as the These refer to goals to achieve over specific
periods of time.
component stocks increase in number. Notice that
the PSEi has the least volatility because it is Budget. It is a plan for future spending and
composed of 30 stocks. saving, weighing estimated income against
estimated expenses.
MONEY MANAGEMENT Income. This is the payment received for goods or
PHILOSOPHIES services, including employment.

Expense. It refers to the cost paid to secure a good

WHAT IS IT or service.
Money Management is the process of
10 Best Financial Philosophies to Improve Your
budgeting, saving, investing, spending, or Finances
otherwise overseeing the capital usage of an
individual or group. The predominant use of the 1. You are responsible for your wealth. Your
phrase in financial markets is that of an financial status at any given point in time is due to
the series of actions you have taken in the past. It 8. Savings Accounts are stupid. You get less
is the small steps that count to give desired results. interest in Savings accounts. Keeping a huge
Whether it is taking a mortgage for vehicles or chunk of cash in a savings account is not wise
creating an asset, whatever you do to make your when you can get more interest money somewhere
financial life better, has consequences. Know what else. Invest in liquid or debt funds and close your
the difference between Good Debt and Bad Debt savings account.
is, what are your assets and liabilities, and how
you make decisions in everyday life. 9. Materialism inhibits wealth building and
leads to debt. Do not be a materialistic person.
2. Getting out of debt is an emergency. Alright, Do not buy things that you don’t need. Such
so you know the difference between Good Debt things will eat your money, time, and energy and
and Bad Debt. Good Debt is something that will avoid you from focusing and building your
help you increase your income; it is taken to buy wealth. Follow the principle of ‘less is more’ and
assets. Bad Debt is used to buy liabilities. podcasts teach. Avoid buying unnecessary stuff
and have fewer material things. It will save you
3. Always take free money. Your employer time and money.
provides you with a retirement plan, take
maximum advantage of that contribution. Even 10. Budgeting makes smart people smart with
when someone is offering free cash, never say no. money. Having a budget has proved to be one of
Maybe he does not know the value of a peso, but the ways to become smart in financial planning.
you should. Always accept free cash. You should know your spending patterns and
where you can cut your unnecessary expenses.
4. Super frugality is a waste of time and money. There are many free apps available in play stores
Some several blo you how to be super frugal and that will help you to have a monthly budget.
create everything by yourself. It does not work
always. Sometimes it is your waste of time and
resources. Live and enjoy your life. It’s okay to
spend some pesos on entertainment and other stuff
that makes you happy. Do not be in saving mode
throughout your life.

5. Credit cards make spending cheaper when

correctly used. Credit cards usually have cash
backs in the form of points. Take maximum
advantage of your credit card’s features. But at the
same time, use it wisely. Pay credit card bills in
full and on time. Use it wisely and purchase only
the required things. Do not buy unnecessary stuff
just because you are getting free cash temporarily.

6. Avoid bank fees. Avoid having savings or

checking accounts in banks that charge you.
Banks should not charge you to have your money
with them. They give your money to others and
make more money and charge you as well. Stop
having accounts in banks that charge you different
fees.

7. Automate your finance. Prefer automatic

payments of credit card bills, utility bills, and
other bills which can be automated. This not only
saves time and energy but avoids penalties in case
of late payments. Let the software do its job and
set for auto payments of bills.