FM8B

• Investment is any vehicle where funds can be placed with the expectation of generating positive income and/or preserving or increasing its value
• Return is the reward for owning an investment, which includes current income and capital gains
• IASB defines investment as assets held by an entity for the accretion of wealth, capital appreciation, or other benefits like ownership control, meeting business requirements, or protection
• Types of investments include stocks, bonds, mutual funds, UITF, real estate, certificates of deposit, cooperatives, variable unit linked insurance, collectibles, and others like Pag-ibig and M2
• Four Life Cycle Phases:

  • Accumulation Phase: individuals in early-to-middle years of their working careers accumulating assets for immediate or long-term goals
  • Consolidation Phase: individuals past mid-career point, paying off debts, and investing for future retirement or estate planning
  • Spending Phase: begins at retirement, living expenses covered by social security and prior investments, seeking capital protection
  • Gifting Phase: individuals with sufficient income and assets providing financial assistance or funding trusts for estate planning
• Types of Investments:

  • Securities or Property: securities (stocks, bonds, options), real property (land, buildings), tangible personal property (gold, artwork, antiques)
  • Direct or Indirect: direct acquisition of a claim or owning an interest in a professionally managed collection of securities or properties
  • Debt, Equity or Derivative Securities: debt (lending funds for interest income and repayment), equity (ownership in a business or property), derivative securities (derive value from an underlying asset)
• • Low Risk or High Risk: chance that actual investment returns will differ from expected
  • Short-Term or Long-Term: mature within one year or longer
  • Domestic or Foreign: U.S.-based or foreign-based companies
• Suppliers and Demanders of Funds:

  • Government: federal, state, and local projects typically net demanders of funds
  • Business: investments in production of goods and services typically net demanders of funds
  • Individuals: some need for loans, typically net suppliers of funds
• The investment process brings together suppliers and demanders of funds, aided by financial institutions or financial markets where transactions occur
• Types of Investors:

  • Individual Investors: invest for personal financial goals like retirement or house
  • Institutional Investors: manage other people's money, trade large volumes of securities, include banks, life insurance companies, mutual funds, and pension funds
• Investment Principles:

  • Money Has a Time Value
  • Risk-Return Tradeoff
  • Cash Flows Are the Source of Value
  • Market Prices Reflect Information
• Steps in Investing:

  • Meeting Investment Prerequisites: provide for necessities and protection against losses
  • Establishing Investment Goals: accumulating retirement funds, enhancing income, saving for expenditures, sheltering income from taxes
  • Adopting an Investment Plan: develop a written plan with target dates and risk tolerance
  • Evaluating Investment Vehicles: assess return and risk
  • Selecting Suitable Investments: research and gather information, make selections
  • Constructing a Diversified Portfolio: use different investments for diversification
• • Managing the Portfolio: compare actual behavior with expected performance and take corrective action when needed
• Investment Suitability is defined as an investment appropriate based on an investor's willingness and ability to take on a certain level of risk
• Investors are people who invest their money with the expectation of gaining returns over a longer timeframe
• Short-term investments last up to 2 months
• Mid-term investments range from 6 weeks to 9 months
• Long-term investments are for more than 9 months
• Stock is ownership in a publicly traded company
• Stock is a direct claim on the company's assets and earnings
• The more stock you have, the greater your claim as an owner
• Types of Stock:

  • Common Stock:
  • Most common form of stock
  • One vote per share
  • Dividends are not guaranteed
  • Preferred Stock:
  • Fixed dividend
  • May not include voting
• Blue Chip Stocks are stocks of the biggest companies in the country and compose the PSEI
• Primary Markets are where stocks are created
• Secondary Markets are where investors trade previously issued stocks
• The Philippine Stock Exchange (PSE), New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and NASDAQ are exchanges where stocks are bought and sold
• Indices:

  • PSEI: 30 most significant stocks in the Philippine stock market
  • Dow Jones: 30 most significant stocks in the stock market
  • S&P 500: 500 largest companies on the US stock market
  • NASDAQ Composite: all stocks on the NASDAQ
• A Broker is a firm or individual licensed to execute buy and sell orders in exchange for a commission fee
• Ticker Symbols are unique series of letters assigned to a stock for trading purposes
• Prices:

  • Ask Price: the price at which sellers want to sell a stock
  • Bid Price: the price at which buyers want to buy a stock
  • Average Cost/Price: the total price at which a group of shares was bought plus commission fees, divided by the total number of shares
  • Market Value: the value at which a stock can be sold in the market at a specific point in time
• BUY or SELL ORDER is a request made by an investor when they want to buy stocks
• Board Lot is the standardized minimum and multiple shares to be traded for a particular stock, depending on the price range
• Initial Public Offering (IPO) is the first time a stock is sold to the public and is sold in the Primary Market
• Bulls and Bears:

  • Bull Market: the economy is great and stock prices are rising
  • Bear Market: the economy is bad and a recession is looming
• • Price/Earnings Ratio: the current stock price divided by earnings per share for the last four quarters
• Reading a Stock Table:

  • Ticker Symbol: the alphabetic name that identifies the stock
  • Price: current stock price
  • Open: current day's opening price
  • Close: the last trading price from the previous day
  • Net Change: the net change from the previous day
  • Day's Range: the current day's price range
  • 52-Week Hi and Low: the highest and lowest prices at which a stock has traded over the past year
  • Trading Volume: the total number of shares traded for the day
  • Market Capitalization: the market value of the company
  • Dividend Per Share: annual dividend payment per share
• Dividends are the amount of money paid by the company to its shareholders
• Why do we need to invest?

  Inflation
• It is the general increase in the cost of goods and services

  Inflation
• How do I beat inflation?

  Place money in investments that earn more than the inflation rate