Learning Module 5

Subject : Business Finance

Grade Level : Grade 12-ABM
Subject Teacher : Alma Angelie D. Agresor
Mobile No. : 0928 713 7973

I. INTRODUCTION: This Chapter introduces the basic concept of investing and web like
decision facing the individual investor. It presents a brief overview of the many investment
alternatives, rewards and problems facing investors in today’s environment. It also aims to
provide reader with an understanding of basic investment that will help individual in investment
decisions.

II. STANDARDS:
Lesson Content Standards Most essential K to 12 CG Objective
Learning Code
competencies
The learners
demonstrate an The learner…. The learners are able
understanding of…. to…
Types of The definition, Compare and contrast ABM_BF-  Identify the types of
Investments purpose, kinds, the different types of IVm-n-23 investments
advantages and investments particularly bank
disadvantages and deposits, insurance,
the risks of real state, mutual
investment Measure and list ways ABM_BF- funds and stocks and
to minimize or reduce IVm-n-25 bonds.
investment risk in  Indicate the
simple case problems advantages and
disadvantages of each
type of investment.
 Explain the risk
inherent in each type
of investment.

III. TRANSFER: At the end of the lesson the students are able to differentiate and identify the types
of investments particularly bank deposits, insurance, real state, mutual funds and stocks and
bonds. Indicate the advantages and disadvantages of each type of investment and explain the risk
inherent in each type of investment.

IV. DISCUSSION:

Different Types of Investment

The word investment brings forth visions of profit, risk, speculation, bankruptcy and wealth. The
dramatic changes in securities market, the proliferation of new investment products resulting from
financial engineering, the continuous changes in the tax rules are examples of additional factors that
investors must consider in developing and implementing strategies.
Likewise, it would be best to remember that the investment medium or vehicle must ensure that
the money will be available when it is needed and the investment money should grow because a peso’s
real value today is greater than a peso’s value tomorrow in a world of inflation. (Bus. Finance
Principles and Application,2017)
Investment helps us earn and at the same time exercise our business and entrepreneurial skills to
be keener about the different business opportunities that area available around us. It is not enough for a
person to have enough cash or assets; part of being financially mature is having that careful observation
and being able to grab different opportunities to earn.

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What is investment?
1. Investment opportunities should be grabbed only when you have extra resources. Available
for such, but it does not always mean that it should always be grabbed. If you are only operating
within your means, learn to prioritize; investment can take a back seat first. After all, these
opportunities are not always once in a lifetime. If you missed one today, you could grab the next
one soon enough. You just need to keep your eyes open.
2. Investment should not be your main source of income. Unless you are a stockbroker, an
insurance salesman. Or an investment banker, you should not heavily rely on the income coming
from your investment. One good reason is that your investment generates income and/or cash flows
that are largely independent from your main line of business. Heavy reliance on the inflows coming
from these assets would create a ‘feast or famine’ condition. This means heavily relying on the
resources that these assets might generate, given that they do not produce regular cash flows, might
make you very prosperous one moment and then very unfortunate the next.
3. Investments require additional risk-taking. Investments are quite risky asset, a person
planning to invest must be able to learn how to take risks. It is from these risks that the investor
earns.

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

1. Fixed income and equities

Investment Type Advantages Disadvantages
Stocks (Equity) · Unlimited Upside · No guaranteed returns.
“Type of security that · Riskiest of all assets (can
signifies ownership in a lose even more than 50% of
corporation and represents a their money in one day)
claim on part of the
corporation’s assets and
earning”
Bank Deposits (Fixed · Known income based on · Lower interest income vs.
Income) “Money placed into outstanding principal and Bonds
a banking institution for current interest rate · Settlement risk if the bank
safekeeping” · Shorter, if any, holding closes.
- common type of investment period vs. bonds
- the availability of funds
also depends on the
investment opened.
Types of Bank Deposit
· 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) · Known periodic payments · If not held until maturity
“Debt investments where an for a certain period and pre-terminated, investor
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 investor loans money to an · Cannot lose money if bond can gain or lose depending
entity which borrows the investment is held until on the prevailing interest
funds for a defined period of maturity rates at the time of pre-
time at a variable or termination. If interest rates
commonly, fixed interest are higher, investor in bonds
rate” can lose in the pre-
termination

2. Alternatives to fixed income and equities

Investment Type Advantages Disadvantages
Mutual funds “Give small investors access · Pay management fees
“An investment that is made to professionally managed, · Values can also fluctuate
up of a pool of funds diversified portfolios of just like the stock market
collected from many equities, bonds and other
investors for the purposes of securities, which would be
investing in stocks, bonds, quite difficult (if not
and similar assets” impossible) to create with
- can be short or long term small amount of capital”
Unit Investment Trust · Same as mutual funds. · No shareholder rights for
Fund (UITF) · Easier access because investors such as dividends
“Similar to a mutual fund but clients can open an account and voting rights
is managed by banks in any branch of the bank
near them.
· No entry and management
fees.

 Management Fee- the amount clients pay to the professionals who manage their mutual funds,
normally a certain percentage of portfolio value.
 Dividends - distribution of the company’s income to its shareholders.
 Voting Rights - right to be heard on certain policies that the company wants to implement.

3. Other investment assets

Investment Type Advantages Disadvantages
Currencies · Largest market in the world · Volatile and trades 24-
“Generally accepted form of in terms of trading volume, hours a day (must be closely
money, including coins and so much liquidity monitored)
paper notes, which is issued ·Unlike stocks, commodities, · Generally, uses margin
by government and etc., currency itself is a trading which allows clients
circulated within an medium of exchange which to be more than their capital
economy” (i.e., USD, EUR, people can use to transact (may also be an advantage)
JPY)
Commodities · Natural hedge against · Same as currencies
“A basic good used in inflation. · Impractical to invest
commerce that is
· Negatively correlated with directly considering storage,
interchangeable with other equities and bonds (may be transportation and insurance
commodities of the same used for diversification) costs involved
type” (i.e., Gold, nickel, oil)· Hedge against geopolitical
risks
Real Estate ·Generally, appreciates ·Huge capital needed,
“Land and any improvements overtime because land get financing can be difficult
on it” (i.e., land, house and scarce · Maintenance of the
· Have relatively low
lot, condominiums) property needed to preserve
correlations with other asset
classes (may be used for its value
diversification) ·Illiquid or difficult to sell

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 · Can be a source of
recurring rental income
· May also be a hedge
against inflation-linked rent
escalation clauses
Insurance ·Give the insured · Insurance premiums may
“A contract (policy) in which individual/entity the be costly
an individual or entity cash/capital to deal with · On some of traditional
insurance plans, no
receives financial protection unforeseen adverse financial
sickness/death until a certain
or reimbursement against consequences age may mean not getting
losses from an insurance · May provide certain tax any benefits at all (that’s why
company (i.e., Life benefits (i.e., tax VUL’s are now very
insurance, educational plan, deductibility, tax-free prevalent)
VUL) provisions) · Some insurance companies
can go bankrupt (i.e., College
Assurance Plan) if
companies fail to factor
significantly adverse
unforeseen circumstances

 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 movement 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” (source: Columbia Threadneedle Blog.
(2016)
 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 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.

Where to Invest?
 the amount of cash should be considered. The investor must invest within his means. Not all his
extra resources must be used to buy investment, because there will always be circumstances in
which cash will be needed in case of emergency.
 the risk inherent in the investment should be considered. Higher risk entails higher return.
Deposits are the least risky investments, but they earn the least, too. Real Estate investments do
earn a lot, but they are so risky that they could even cause a national economy crash. We must
not put all the money in one investment, so as to spread or diversify risk. The good thing with
managing risk or diversifying our investment, is if ever we are not successful in one of the
investment opportunities that we grabbed, we will still have other investments left which would
still help us earn.
 We should consider our intent. We should ask ourselves if the intent is short term or long term
because that would greatly influence the kind of investment that he needs to buy. If we would
like to earn for a shorter term, maintaining a short-term deposit is enough. We could also
purchase some stocks, and then immediately sell them if the price increases. Stocks and bonds

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 can also be held as long-term investments. Bonds pay regular interest, and stocks do earn
dividends.

Risk of investment
 “Risk is the chance that an investment’s actual return will be different than expected. Risk
includes the possibility of losing some or all of the original investment.”

(Source: Investopedia – Sharper Insight. Smarter Investing. | Investopedia. (2016). Investopedia. Retrieved 8
May 2016, from http://investopedia.com)

Systematic and Non-Systematic Risk

Risk Definition Also Known As Examples

Systematic Uncertainty Market risk, Changes in interest
inherent undiversifiable rates, recession,
to the entire market risk wars
Non-systematic Uncertainty that Specific risk, Rumors of a
comes with the diversifiable risk, potential default,
company or residual risk labor strikes,
industry landslide in a mining
company that
disrupted the
operations

Activity #1: Matching type

Direction: Match the investment asset in column A with its advantage and disadvantage in column B by
writing the capital letter.

(A) Investment Asset (B) Advantage/Disadvantage

1. Stocks A. On some of traditional plans, no
sickness/death until a certain age may mean
not getting any benefits at all
2. Bank Deposit B. Shorter, if any, holding period vs. bonds

3. Mutual Funds C. Can be a source of recurring rental income

4. Real Estate D. Riskiest of all assets (can lose as much as

50% of their money in one day)
5. Insurance E. Pay management fees

Activity #2: Direction: Answer the question briefly.

Let us say you have Php1,000,000 today which you can invest for the next 10 years, where will
you put it? Choose at least 2 types of investment and explain why?

V. GENERALIZATION
 Investment is an asset or item acquired with the goal of generating income or appreciation.
 Different Types of Investments will be grouped into three (1) fixed income and equities (stock, bank
deposits, and bonds) (2) alternatives to fixed income and equities (mutual fund and unit investment
trust fund (UITF) (3) other investment assets (currencies, commodities, real estate and insurance)
 Types of risk: Systematic and Non-systematic

VI. EVALUATION (FORMATIVE)

A. Multiple choice: Read and analyze the questions carefully and write the letter of the correct
answer.
1. Which of the following investments do not earn interest?
a. Savings account c. Bonds
b. Current account d. Time deposit
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 2. Which of the following is not an example of a deposit investment?
a. Savings c. Current
b. Mutual funds d. Time deposit

3. The person that manages a person’s mutual fund

a. Creditor c. Broker
b. Bondholder d. Stockholder
4. These payments are needed to maintain an insurance account
a. Interest c. Premium
b. Dividends d. Capital gains
5. What is the income earned on a bond?
a. Interest c. Premium
b. Dividends d. Capital Gains
6. What do you call an owner of a company’s stocks?
a. Stockholder c. Broker
b. Bondholder d. Creditor
7. What is the income earned on a stock?
a. Interest c. Dividend
b. Premium d. Deposit
8. What is the strategy to earn short-term income from stocks?
a. Buy high sell low c. buy high sell high
b. Buy low sell high d. buy low sell low
9. These are tangible assets held as investments
a. Deposits c. Stocks and bonds
b. Funds d. Hard assets
10. What is the income earned on a building?
a. Interest c. Rent
b. Dividend d. Credit

B. True or False: Write TRUE if the idea being expressed is correct and FALSE if otherwise.
1. Investments generally earn passive income.
2. Time deposit accounts do not earn interest.
3. Banks issue bank statement on savings deposit accounts.
4. Insurance is set up for some specific purpose at some certain time in the future.
5. Mutual funds generally earn more than savings account.
6. Bonds earn dividends.
7. Dividends are always declared regularly.
8. Stocks are generally riskier than bonds.
9. Real Estate investments earn rents
10. Hard assets are tangible assets.

VII. WORKSHEET
A. Direction: Ask your parents and answer the following questions. Compute your daily expenses
for a week.
1. Where does my money came from?
2. Where does my money go?
3. How much do I save?
4. Where do I put my savings?
Allowance Expenses Savings
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Sunday

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 B. Case Analysis
Ellison is nearing his retirement. He was able to save up to a significant amount of money and is
planning to invest it to earn something when he has already retired. After considering a lot of
factors, he came down with two choices; buy stocks or construct a building to be rented out to
others as a dormitory. Which option would work best for Ellison and why?

Note: Answer all questions/activities/evaluation intended for you and write your answer/s in a clean
yellow pad paper.

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