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Lesson 2 - Investment
Lesson 2 - Investment
Lesson 2 - Investment
Metalanguage
The following are terms to be remembered as we go through in studying this unit. Please
refer to these definitions as guide in case you will encounter difficulty of understanding this topic.
Essential Knowledge
Lesson 2 – INVESTMENT
An investment is an acquired asset with an intention of generating income for an over period
of time. In general terms, investment is the use of money hoping that it can generate an income in the
future. It is a commitment to sacrifice your current consumption with a goal of return in the
coming months, or even years. There are two concepts of investment:
Economic Investment – this concept means addition to the capital stock of the
society or the goods used in producing other goods. Thus, investment in economic
sense means an increase in inventory, building and equipment
.
Financial Investment – this is the used of money resources to assets that are
expected to gain over a given period of time. This means, an exchange of financial
claims such as shares and bonds, real estate, etc.
Economic and financial concept of investment are somehow related to each other since
investment is part of individual saving which flow into the capital market. Investing is a practice that
spread continuously and made individual fortunes in the process. The starting point of this process is
to determine the characteristics of the various investments and then compared them with the needs
and preferences of an individual. Below are the main features or characteristics of investment:
1. Risk Factor – associated in every investment is the risk, this is the uncertain
circumstances in the future. Most investors prefer to lesser risk investments, but the lesser
the risk, the lesser the return.
2. Return – this is the ultimate goal of investment. Every investor aim for a regular and high
return.
UM Panabo College
Department of Business Administration Education
P.N. Arguelles St., San Francisco, Panabo City
Telefax # (084) 628-6437
3. Safety – expectation of an high and regular return, is associated with the expectation that
the investment is safe and protected from loss.
4. Liquidity – most investor aims that their investment or capital is easily convertible to cash
without any loss.
6. Stable Income – a feature of investment that aims investment to have a stable and regular
return.
SECURITIES OR PROPERTY
Direct or Indirect
Debt is simply a loan that obligates the borrower to pay the amount of principal
and the charge interest depending on the term given. For example if the company or
government is in need of cash then they issued securities called bonds. Which means
that when a firm issued bonds they serve as a borrower and they agrees to pay the
interest base on their terms and pay their principal in a future time. Thus, some
companies find bonds, cheaper compared to stocks because after the borrower can
pay their obligation, then they don’t have any responsibility to the bondholder who is
the borrower. Equity represents the active participation in the corporation then as
long as the business operated the stockholder has the right to receive dividends. The
most common type of security is the common stock. Some companies find stocks to
be expensive compared to bonds because it is the obligation to the company to give
dividends to the stockholder as long as the business operates. In other words, the
connection of the company to the stockholder is continuous. Derivative securities
can be either debt or equity because their value will depend upon on the underlying
security or asset. For example is the stock option that gives the right to the investor to
purchase or sell a share of their stocks in company with a fixed price for a limited
period of time.
Low risk investment provides lower return of investment but give predictable return
of the investment. Deposits through savings account, time deposits are considered
lower risk since the return is predictable considering that the interest rate are fixed.
And it is said that the lower the return, the lesser the risk involves. Most of the people
who enjoyed low risk investments are the conservative investors because these people
are not very particular with the return but more on to the safety and security of their
funds. High Risk investment provides higher returns but there is a great potential of
much higher loses. There are people who are said to be an aggressive investor, an
investor that is very attractive of investments that provides higher return. Example
of a high risk investment is the stock market since the volatility of the market is very
unpredictable. Thus, the average return of the stock market is 14% annually
compared to deposits that earned only 2% per annum. But stock market is a legitimate
investment that provides good return, only if you are equipped with the knowledge
and strategies. Nowadays, there are a lot of financial fraud that is happening around,
yet a lot of people has been a victim due to the promise of high return, then people
believe about it. Just like, what happen to KAPA ministry who enticing investors of a
return of 30% per month without knowing that this entity are into PONZI scheme.
Thus, people are need to be vigilant in terms of investing. That if the return are good
to be true, then that is a scam.
Short- term refers to investments typically nature with one year. Long- term, on the
other hand, is an investment with longer maturities
.
UM Panabo College
Department of Business Administration Education
P.N. Arguelles St., San Francisco, Panabo City
Telefax # (084) 628-6437
Domestic is within the country while Foreign is outside the country. The reason why
domestic investors invest in a foreign countries because it will help them to build a
more diversified portfolio.
OBJECTIVES OF INVESTMENT
All investors enter the world of investment with a goal to achieve certain objectives. These
objectives might be tangible or intangible and may be classifies as financial and personal objectives.
The mentioned feature or characteristics of investment above are all classified as financial objective.
On the other hand, personal objectives are social status, family commitments, educational
requirements, provision for retirement, peace of mind, lifestyle, etc.
The objectives can also be classified on the basis of investor approach:
1. Short term high priority objectives: This objective means prioritizing a certain goal for a short
period of time. For example, a newly married couple give high priority on acquiring house
and lot within a year. Thus, this couple will go for short term high priority objectives
considering their goal to invest in a short term basis
2. Long term high priority objectives: This is the opposite of the first objective. They want to
achieve financial independence in a long run. An example of this is an investment for
retirement or education of their children in the future.
3. Low priority objectives: This objective is not that painful if not achieved since it has low
priority in investing. An example of this is for local tours or acquiring appliances purposes.
4. Money making objectives: Its objective is to maximize its capital. Usually, the investors
invest in company shares that provide capital appreciation aside from the regular income from
dividend share.
TYPES OF INVESTORS
Knowing what kind of investor are you will help you identify the consequences of your
investment style. You’ll know what are the limitations, advantages and disadvantages that naturally
appear as a result from the way you invest. There are two types of investors:
1. Individual Investor – an investor who manages its own investment. He usually concentrates
on earning return of idle funds, building a source of retirement income, and providing
securities of their family
2. Institutional Investor – these are investment professionals who earn their living by managing
other people’s investment. This includes financial institutions like banks, life insurance
companies, cooperatives, mutual funds and pension funds
INVESTMENT AVENUES
1. Equity – an investment avenue that represent an ownership position and thus entitled for a
residual share of profits. And also like an owner, the investor also run the risk of losing the
investment if earnings are not sufficient to cover the obligations of the firm.
2. Debentures – also referred to as non-convertible debentures are fixed income debt paper
issued by a firm. The issuer or the firm agrees to pay a fixed interest on the investment. These
NCDs can either be secured or not secured. Secured debentures are when the issuer pay back
an asset to the investor if he can’t fulfill his obligations, the assets are liquidated to repay the
investor. Unsecured debentures are of high possible return due to high risk.
3. Bonds or Fixed Income Securities – a long-term investment avenue which has a specific
interest rate and maturity date. Bonds differ in terms of repayment, security pledge and
technical aspects:
Infrastructure bonds –these are long-term bonds notified by the Central Government
which are entitled for a deduction under section 80CCF. This has a minimum tenure
of ten years and lock-in period of five years.
4. Money Market Instruments – these are investment avenue that have high liquidity and short-
term maturity
Treasury bills – investor can invest for less than a year issued by the government
Certificate of deposits – deposits issued by scheduled banks having a maturity
ranging from 7 days to one year
Commercial papers – these are short-term funds issued in a form of promissory notes
by large corporations. This is unsecured since no collateral will be offered
Liquid bees – these are weird investment instrument that are listed and traded on a
recognized stock exchange. Investment is made in a basket of money-market
instruments (i.e. call money, short-term government securities or treasury bills,
commercial paper, certificate of deposits, etc). One unique feature of liquid bees is
that the price risk would be minimized.
Bank deposits – this is the most popular and simplest investment avenue, where you
will only open an account, deposit your savings and let it grow according to its
interest rate
Flexi deposits - in this type of savings, the excess of a stipulated amount is
automatically converted to fixed deposit for a default term of one year
Post office term deposits (POTD) – this is considered as one of the safest and easiest
mode of investment, especially in India. It is somehow similar to fixed deposits
offered by a bank, but it matures for a range of 1-5 years. Rates offered by POTD are
relatively higher than bank deposits
Monthly income scheme of the post office (MISPO) – this is one most popular
investment in rural investors where there is a defined return on the investment. The
interest is on yearly basis, but payable every month
National savings certificate (NSC) – another instrument where investor can keep their
money for slightly long-period of time and want this amount to compound. However,
this investment is taxable. But this is an excellent avenue to those who want their
investment to grow for a longer period.
6. Real Estate – this is considered as one of the sought after investment. The quick rise of real
estate is very attractive. There is an ever growing capital increase, real and tangible assets,
rental income, and aside from being an investment avenue, it can also be your shelter to live
in.
7. Precious Objects – these are items that are generally small in size, but are highly valuable in
terms of money (i.e. gold, silver, diamond, precious stones, etc).
8. Insurance Policies – this a contract where an individual or entity gets the protection against
losing from some uncertain events in the future. The concept of insurance is to form a pool of
funds from the investors, who ask for protection, that will be compensated to the same
investors in case of losses in the future.
UM Panabo College
Department of Business Administration Education
P.N. Arguelles St., San Francisco, Panabo City
Telefax # (084) 628-6437
9. Mutual Funds – a trust that pools all the savings of investors and forms a common fund that
will be invested to another financial instrument as shares or debentures or any other kind of
securities. The income earned will be divided among the holders in proportion to their
contribution.
10. Pension Funds – a required plan set by an entity for their retirement.