business finance

• Types of Investments will be grouped into three (1) fixed income and equities (2) alternatives to fixed income and equities, (3) other investment assets
• Stocks (Equity)


  Type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings
• Bank Deposits (Fixed Income)


  Money placed into a banking institution for safekeeping
• Types of Bank Deposit


  • Current account/ Checking account
  • Savings account
  • Time deposit account
• Current account/ Checking account


  • Do not earn interest
• Savings account


  • Earns interest but not that significant, but the most common among individuals
• Time deposit account


  • Earn the highest interest rate
  • It is not always available for withdrawal
  • It is evidenced by a certificate of deposit which can be bought or sold by the depositor themselves
• Bonds (Fixed Income)


  Debt investments where an investor loans money to an entity which borrows the funds for a defined period of time at a variable or commonly, fixed interest rate
• B. ALTERNATIVES TO FIXED INCOME AND EQUITIES

  Mutual funds “An investment that is made up of a pool of funds collected from many investors for the purposes of investing in stocks, bonds, and similar assets” - can be short or long term

  Unit Investment Trust Fund (UITF) “Similar to a mutual fund but is managed by banks
• 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
• 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
• Insurance “A contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company (i.e. Life insurance, educational plan, VUL
• Currencies “Generally accepted form of money, including coins and paper notes, which is issued by government and circulated within an economy” (i.e. USD, EUR, JPY)
• Commodities “A basic good used in commerce that is interchangeable with other commodities of the same type” (i.e. Gold, nickel, oil)
• Real Estate “Land and any improvements on it” (i.e. land, house and lot, condominiums)
• Business Risk


  Related to the nature of the company's products and its operating strategy. Companies with stable sources of sales and earnings have relatively low business risk. Businesses whose products are patronized even during times of recession have low business risk. Business risk is also associated with the cost structure of the issuing company. If the issuing company chooses to incur higher fixed operating costs then its business risk increases. Higher fixed operating costs result in greater variability in the operating income or loss as the sales of the company fluctuate. Business risk is usually measured by the degree of operating leverage.
• Financial Risk


  The risk created by the choice of capital structure - the financing mix of the issuing company. A company usually funds its operations through debt and equity financing. As the debt portion increases, financial risk increases. Incurring debt creates a fixed financial obligation. Just like a fixed operating costs, this fixed financial costs create more variability in the returns of the issuing company. Financial risk is usually measured by the degree of financial leverage.
• Liquidity Risk


  The uncertainty that an investment can be converted to cash at a known price. The existence of exchanges facilitates the liquidation of an investment. If there is no ready market for the investment, it is considered illiquid and a higher liquidity premium is required by the investors. The presence of many ready buyers and sellers reduces illiquidity risk.
• Exchange Rate Risk


  Exists if the investment is denominated in another currency different from that of the local currency of the investor. An additional uncertainty exists if the investor needs to liquidate the foreign currency-denominated investment and convert it to Philippine peso, for example. The investor then must consider the direction and variability of the exchange rate between the local currency and the various foreign currencies.
• Country Risk


  Associated with political and economic uncertainty of a particular business environment. Investors will only invest in countries with political instability if a higher rate of return is expected. Country risk also increases if natural disturbances usually occur such as typhoons and earthquakes. Investments in countries prone to changes in government through coup d'etat, rebellion, or revolutions have higher country risk premium.
• Accumulation Phase


  Those who have just started working or in the early part of their respective careers. Since they are relatively young, they can afford to take on high risk investments for they can simply start again if they fail in some of their business ventures and investments. In this phase, they are still accumulating assets that will satisfy their individual goals. Typical assets that any individual or household acquires at this stage include their own car or house. It is also at this stage that individuals start living separately from their parents. Individuals may start by first renting a condominium unit or house then eventually buying one of their own.
• Liabilities


  Car and home mortgages. These mortgages are typically paid over a long-time horizon. Most car loans are paid over five years while housing loans extend much longer, for 20 to 25 years.
• Aside from these short-term goals, they will also intend to save for future expenditures such as that vision of their children and for their eventual retirement as well if funds are still available after considering the required daily living expenditures and their fixed obligations.
• Consolidation Phase


  Those in this phase already have the necessary assets required of a typical household and have settled most of their outstanding liabilities. Major concerns at this stage include the ability to pay for the education of their children (from grade school to college). Individuals also fulfill family objectives such as going on vacations and the purchase of luxury goods period of course, this is second priority relative to providing the typical needs of their children - education and their daily allowances.
• Investments of moderate risk


  Taken by individuals in the consolidation phase since they still have a longer time horizon before retirement yet not willing to venture on two risky investments since it will be hard for them to start all over again specially with the needs of their children taking high priority.
• Spending Phase


  Retired individuals belong to this stage. Their main source of income comes from their pension although they also benefit from the returns of their existing investments. Capital preservation is their main return objective with the intention of earning more than inflation to protect the value of their investments in real terms.
• Gifting Phase


  Not everyone is expected to reach this phase and most of the time this stage is concurrent with the consolidation phase. This stage focuses on how the individual provides support to the family members, friends, or any charitable institution. The focus of the individual is consistent on how he wants to allocate his funds to these beneficiaries in case of his death or even during his remaining years.
• Personal Financial Planning Process


  1. Objective Setting

  2. Prioritize objectives

  3. Examine objectives with individual's resources and limitations

  4. Use surveys, questionnaires, and interviews to gather quantitative and qualitative information

  5. Data Analysis

  6. Financial Plan Recommendation

  7. Plan Implementation

  8. Plan Monitoring
• Objective Setting


  Quantify monetary objectives with definite time frames
• Quantitative information


  • For assessing financial status (i.e. investments, liabilities, etc.)
• Qualitative information


  • To identify individual's goals objectives, lifestyle, risk-tolerance, etc.
• Data Analysis


  1. Analyze the individual's financial position and cash flows

  2. Review legal papers (i.e. insurance policies, trust agreements, wills, etc.)

  3. Evaluate objectives vis-à-vis the individual's resources and economic conditions