INVESTMENT BASICS

• 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
• Types of investments can be securities (stocks, bonds, options), real property (land, buildings), or tangible personal property (gold, artwork)

  • Investments can be direct (investor acquires a claim) or indirect (investor owns an interest in a managed collection)
  • Debt securities involve lending funds for interest income and repayment (bonds), equity represents ownership in a business or property (common stocks), and derivative securities derive value from an underlying asset (options)
• • Investments can be low risk or high risk, short-term (mature within a year) or long-term (maturities longer than a year), domestic (U.S.-based companies) or foreign (foreign-based companies)
• Suppliers and demanders of funds include government (typically net demanders), business (typically net demanders), and individuals (typically net suppliers)
• The investment process brings together suppliers and demanders of funds, aided by financial institutions or financial markets where transactions occur
• Types of investors include individual investors (invest for personal financial goals) and institutional investors (manage other people's money, trade large volumes of securities)
• 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
  • Establishing investment goals: accumulate retirement funds, enhance income, save for expenditures, shelter 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 make selections
  • Constructing a diversified portfolio: use different investments for diversification
• • Managing the portfolio: compare behavior with expected performance and take corrective action when needed
• Investment suitability is defined as an appropriate investment based on an investor's willingness and ability to take on a certain level of risk