FIN CHAP3

• Investing


  The act of allocating funds to an asset or committing capital to a business endeavor, with the expectation of generating an income or profit
• Investment


  The process of placing funds in selected investment vehicles with the expectation of generating positive income and preserving or increasing their value
• Investment


  The employment or putting up of funds or assets to productive activities for earning profit
• Investment


  The commitment of funds to one or more assets that will be held over some period of time in the future
• Investment


  The use of financial capital in an effort to create more financial capital in the future
• Investment


  Any vehicle into which funds can be placed with the expectation that they will generate positive income and/or their value is preserved or increased
• Investment


  Any asset or property right acquired or held for the purpose of conserving capital or earning an income
• Categories of investment


  • Real investment
  • Financial investment
  • Money market investment
  • Capital market investment
• Real investment


  • Investments in the form of tangible assets such as land, houses, precious metals, buildings and equipment
  • Income-generating assets used to produce goods & services
  • Investors plan to hold for relatively long period of time
  • Not liquid and not easily divisible
• Financial investment


  • Investments in the form of paper assets which are collectively called marketable securities such as bonds, stocks, convertible securities, mutual funds and short-term money market instruments
  • Represent claims against the income generated by real assets
  • Investors plan to hold for shorter period of time
  • Paper assets are very liquid and easily divisible
• Money market investment


  • Investments in securities with maturities of less than one (1) year
  • Treasury Bills issued by the Bureau of Treasury with maturities of less than 360 days
  • Major investors are the banking sector, SSS, GSIS, & HDMF
• Capital market investment


  • Investments in securities with maturities greater than one (1) year
  • Government Bonds issued by BTr, BSP & private companies like Globe Telecoms with maturities of 2-30 years, ERAP Bonds & Municipal Bonds
• Features of an investment program


  • Safety of principal
  • Adequate liquidity of investment & collateral value
  • Stability of income or regular income stream
  • Purchasing power stability
  • Adequacy of income after taxes
  • Possible capital appreciation
  • Freedom from care
  • Legality
• Safety of principal


  Protection or preservation of the capital invested
• Adequate liquidity


  Investment should have the capacity to be sold for cash or to be borrowed on the full value without delay and that it could be used as collateral in times of emergencies
• Stability of income


  Investment should have stable income so that it can be a supplementary source of cash flow
• Purchasing power stability


  Principal and income from the investment should have stable ability to purchase goods & services in times of inflation
• Adequacy of income after taxes


  Investor is concerned with the amount of income paid by the investment and with the burden of income taxes upon that income
• Possible capital appreciation


  Value of investment could possibly increase as years pass by, allowing investors to profit
• Freedom from care


  Investment needs constant skilled supervision of the investor to avoid losses & to obtain better return
• Legality


  Investment must be complete or absolute in legal compliance requirements approved by law
• Habits of investing


  • Invest regularly
  • Invest for the long-term
  • Invest in good quality companies
  • Diversify
• Diversification


  A risk management strategy that mixes a wide variety of investments within a portfolio to limit exposure to any single asset or risk
• Ways to diversify

  • By industry
  • By geographical location
  • By personnel management
  • By financial type
  • By maturities
• Diversification protects investments while allowing potential for growth, and allows leveraging of investment risk and portfolio volatility
• Difference between saving and investing

  • Meaning
  • Purpose
  • Goals
  • Risk
  • Return
  • Examples
• Saving


  Putting money aside gradually, typically into a bank account for unexpected financial emergencies
• Investing


  The process of using money with the aim of making it grow, redirecting resources to create profit in the future
• Reasons for investing

  • Financial security
  • Financial independence
  • Financial freedom
• Financial security


  Peace of mind from not worrying about income covering expenses, and having enough savings to cover emergencies and future goals
• Financial independence


  Having enough income from personal resources to live without needing employment or dependence on others
• Financial freedom


  Having enough savings, investments, and cash to afford the desired lifestyle and retire or pursue desired career without being driven by earning a certain amount each year