BUSINESS FINANCE

Quarter 4 - Module 1
The Different Types of Investments
What I Need to Know:
In this module you will learn about investments as well as their advantages and disadvantages. You will know the meaning, the
similarities and the differences between the types of investments.
After reading and understanding the content of this module the learners shall be able to identify the types of investments
particularly bank deposits, insurance, real estate, hard assets, mutual funds, and stocks and bonds, etc.

LEARNING COMPETENCIES:

· Compare and contrast the different types of investments.

(ABM_BF12-IVm-n-23)

· Classify investments according to its type, features, and advantages and disadvantages.
(ABM_BF12-IVm-n-24)
 

OBJECTIVES:
K: Identify the types of investments.
S: Compare and contrast the different types of
investments according to its features
A: Recognize and explain the
advantages and of investments
 

What’s New:
Task 1:

Direction: Read the short scenario below and answer the question that follows. Write your answer in your notebook or in a clean sheet of paper.

Scenario: Angel is looking forward to invest her savings as a part time tutor. She planned to deposit her savings in a bank for it has a higher
security and offers 3% interest per annum. On the other hand, her friend Liza introduced her about ABC Food Corporation that is selling some of
their stocks, giving high and promising returns but with higher risk due to poor security and unstable market price. According to Liza, shares of
stocks are sold in a lower price due to the pandemic and once everything will be back to normal, the price of the stocks will rise again.

If you are Angel, are you going to deposit your money in the bank or you are going to purchase shares of stocks from ABC Food
Corporation? Why?

What Is It?
What is Investment?
To invest is to allocate money in the expectation of some benefit in the future. In finance, the benefit from an investment is called a
return. The return may consist of a gain or loss realized from the sale of a property or an investment, unrealized capital appreciation (or
depreciation), or investment incomes such as dividend, interest, rental income or a combination of capital gain and income. The return may also
include currency exchange rates.

Investment is an asset or item acquired with the goal of generating income of appreciation. Appreciation refers to an increase in the
value of an asset over time.
 There are types of investments that investors are giving focus into. If you are planning to go into an investment you need to consider the
risks that you might encounter during the investing process. A very good tolerance of risk is very important, and this will surely help you in facing
what might happen in your investment in the future.

A financial investment is any asset or instrument purchased with the intention of selling the said asset for a price higher than the
purchase price at some future point in time. There are many ways in investing. Buying and selling products can be considered investing. Buying
the products in lower cost and selling them in a higher price.

Financial investments can be an equity investment, where you buy stocks from companies and be part of the company’s ownership. This
can also be in a form of loans that is being purchased and will generate income in the future.

Investors look for different ways in investing their money to generate more income. Even today, investors are not only using physical currencies in
purchasing assets to gain profits. Many are now using crypto currencies or digital assets in trading online. Investing now is not only done in the
physical market but is now also happening in the digital market. But trading online or offline still comes with the goal of investing which is to gain
profit.

In investing, you need to consider the risk return trade-off. Higher risk is associated with greater probability of higher return and lower
risk with a greater probability of smaller return. This trade off which an investor faces between risk and return while considering investment
decisions is called the risk return trade off.

 What are the different types of investments?

Investments can be any form and there are many of its types. Stocks, bonds, investment funds, bank products, options, annuities, retirement,

saving for education, alternative and complex products, initial coin offerings and cryptocurrencies, commodity futures, security futures and

insurances are some of the various types of investments. These types of investments do have their own advantages and disadvantages, and these

can be used for investors to compare each.

The types of investments are grouped into three: (1) fixed income and equities, (2) alternatives to fixed income and equities, (3) other

investment assets.

1. Fixed Income and Equities

Both equity and fixed income products are financial instruments that can help investors achieve their financial goals. Equity investments

generally consist of stocks or stock funds, while fixed income securities generally consist of corporate or government methods. Equity and

fixed income products have their respective risk-and-return profiles; investors will often choose an optimal mix of both asset classes to

achieve the desire risk-and-return combination for their portfolios.

The term fixed income refers to the interest payments that an investor receives are based on the solvency of the borrower and

current interest rates. This type of investment offers higher interest based on how their maturities are.

Equity investment refers to buying shares in a particular company and, thereafter, holding it in order to gain ownership interest that

can be sold later to generate reasonable returns depending on its investment objectives.

To know more about this type of investment, the table below will help you distinguish each from the other.

 Table 1. Advantages and Disadvantages of Fixed Income and Equities

Investment Type Advantages Disadvantages

Stocks (Equity) · Unlimited upside · No guaranteed returns
 
· Riskiest of all assets (can lose even more
than 50% of their money in one day)

Bank Deposits · Known income based on outstanding · Lower interest income vs. bonds
(Fixed Income) principal and current interest · Settlement risk if the bank closes
rate
· Shorter, if any, holding period vs.
bonds
Bonds (Fixed Income) · Known periodic payments for a · If not held until maturity and pre-
certain period of time terminated, investor can gain or
lose depending on the prevailing
· Can’t lose money if bond investment
interest rates at the time of pre-
is held until maturity termination. If interest rates are
higher, investor in bonds can lose in
the pre-termination

Other examples of fixed income investments are treasury bills, money market instruments, and asset-backed securities.
Owner’s investment in his business, investment in shares of a public company, acquisition of stake in another company through
merger, venture capital investment in startup, and private equity investment in mature companies are also examples of equity investments.

2. Alternative to fixed income and equities

An alternative investment is a financial asset that does not fall into one of the conventional equities, income, or cash categories.
Alternative investments tend to be somewhat not easily converted to cash or illiquid.
 
Table 2. Advantages and Disadvantages of Alternative Investments
Investment Type Advantages Disadvantages
  · Advanced portfolio management · High Expense Ratios and sales charges
· Dividend reinvestment · Management abuses
Mutual funds
· Risk reduction · Tax inefficiency
· Convenience · Poor trade execution
· Fair pricing

  · Same as mutual funds. · ❖No shareholder rights for investors such as

· Easier access because clients can open an dividends and voting rights.
Unit Investment
account in any branch of the bank near
Trust Fund (UITF)
them.
· No entry and management fees.

Mutual funds give small investors to access to professionally managed, diversified portfolios of equities, bonds, and other securities, which
would be quite difficult to create with a small amount of capital. Management fee is required in mutual funds. These are the amount that clients
pay to the professionals who manage their mutual funds, normally a certain percentage of portfolio value. Those who are investing in mutual funds
also receive dividends from the company every year. Dividends are income given to the shareholders from the company.
 
Unit Investment Trust Funds (UITF) is somehow the same as with mutual funds aside from it is being controlled by banks. Clients or investors
do have the option to choose their choice of bank to where they like to open a trust fund account. Also, there is no management fee in opening a
UITF account. Unlike mutual funds, UITF holders do not receive any dividends since it gives no shareholder rights to the account owner.
 
3. Other Investment Assets
Investment assets are tangible or intangible items obtained for producing additional income or held for speculation in anticipation of a
future increase in value. Here are other investments assets that investors intended to take:
Investment Type Advantages Disadvantages
Largest market in the world in terms of Volatile and trades 24hours a day
  trading volume, so much liquidity Generally, uses margin trading which allows clients
  Unlike stocks, commodities, etc., currency
asset itself is a medium of exchange
to be more that their capital.

  which people can use to transact.

 
Currencies
 Protection from inflation Can be used for illegal transactions
  Self-governed and managed Data losses can cause
  Secure and private
Currency exchanges can be done easily
financial losses
Decentralized but still operated by some organization
  Decentralized Some coins not available in other fiat currencies
Adverse effects of mining on the environment
Cost-effective mode of transaction
  A fast way to transfer funds Susceptible to hacks
No refund or cancellation policy
 
Cryptocurrencies /  
Digital Currencies

Natural hedge against Same as currencies

  inflation Impractical to invest directly considering storage,
Commodities Negatively correlated with equities and bonds transportation and insurance costs involved
Hedge against geopolitical risks

 
 
  Generally, appreciates over time because land Huge capital needed, financing can be difficult
get scarce Maintenance of the property needed to
 
Have relatively low correlations with other preserve its value
  asset classes Illiquid or difficult to sell
Can be source of recurring rental income
Real Estate May also be a hedge against inflation because
of inflation-linked rent
escalation clauses

  Gives the insured individual/entity the
cash/capital to deal with foreseen adverse
financial consequences.
  May provide certain tax benefits.
 
Insurance
Insurance premiums may be costly on some
traditional insurance plans, no
sickness/death until a certain age may
mean not getting any benefits at all
Some insurance companies can go bankrupt if
companies fail to factor significantly
adverse unforeseen circumstances.

· Currencies are the most generally accepted form of money, including coins and paper notes, which is issued by a government and circulated
within an economy. This includes Peso, Dollars, Euro and other currencies within the country or around the world.

· Crypto currencies on the other hand is a form of payment that can be exchange online for goods or services. Cryptocurrencies work using a
technology called blockchain. Blockchain is a decentralized technology spread across many computers that manages and records
transactions. Part of the appeal of this technology is its security. Example of crypto currencies are Bitcoin, Ethereum, Litecoin, Bitcoin Cash,
etc. wherein these cryptos do have their equivalent values in different currencies. These can also be convertible to cash using a technology
application.

· Commodities are the basic goods used in commerce that is interchangeable with other commodities of the same type. Three of the most
commonly traded commodities include oil, gold, and base metals like nickel.

· Real estate investing involves the purchase, ownership, management, rental and/or sale of real estate for profit. Improvement of realty property
is part of a real estate investment strategy is generally considered as a sub-specialty of real estate investing called real estate development.
Real estate is an asset form with limited liquidity relative to other investments (such as stocks or bonds that openly trade on financial
markets). It is also capital intensive (although capital may be gained through mortgage leverage) and is highly cash flow dependent. If these
factors are not well understood and managed by the investor, real estate becomes a risky investment. Insurance is a contract or policy in
which an individual or entity receives financial protection or reimbursement against losses from an insurance company, i.e. life insurance,
 educational plans, and VULs.

· Insurance policies are used to hedge against the risk of financial losses, both big and small, that may result from damage to the insured or her
property, or from liability for damage or injury caused to a third party. Policy holders are paying an amount in regular basis to the insurance
company in return for the insurance/protection provided and this is called insurance premium.

 
Task 1: Essay

Direction: Answer the following questions below. (not less than 50 words)

1.Why would a risk-taker type of investor prefer equities over fixed income?

2.For the 10 years in your life, if you are to invest, where will you put it and why?

Task 2: Identification

1. Offered by banks

2. Dividends are given to holders at the end of the year.

3. Powered by block chain technology.

4. Includes gold, oil and other base metals

5. Includes land improvements and other real properties

6. On some of traditional plans, no sickness/ death until a certain age may mean not getting any benefits at all

7. Circulated globally and is the most liquid among other assets

8. Signifies Ownership in a corporation

9. Money placed into a banking institution for safekeeping

10. Units of corporate debts

 
Task 3: True/False

1. Currencies are powered by blockchain technology.

2. Real Properties are illiquid and difficult to sell.
3. In investing, it is always considered that the higher the risk the higher the returns.
4. Investing commodities can also give investors high returns.
5. Currencies are considered as the biggest market in the world.
6. In risk return trade-off, when risk goes up the return goes down.

7. The biggest difference between saving and investing is the amount of interest you earn from your money.

8. Investment does not come with risk and/or profit.

9. Savings can change its value over time if placed in a bank time deposit or equity investment.

10. Investments can make people suffer it not guided and done properly.

 
 Quarter 4 - Module 2
Ways to Minimize or Reduce
Investment Risks
 

 What I Need to Know:

After reading and understanding the content of this module and by doing the given tasks, the learners shall be able to learn the
ways on how to minimize investment risks.

LEARNING COMPETENCIES:

· Measure and List Ways to Minimize or Reduce Investment Risks in Simple Case Problems (ABM_BF12-IVm-n-25)
 

OBJECTIVES:

· K: Identify the ways and means to minimize investment risks;

· S: Apply ways on how to reduce investment risks in simple case problems;
and
 
· A: Discuss the importance of applying ways to reduce investment risks in
simple case problems.

  What’s New:
Investing is a process of making money grow and have a return. But in every type of investment, each has its own level of
risk and return. The higher the potential return on top of the investment, the higher the risk or uncertainties that even the
investment aside from the promised return will not be recovered.
We have discussed different types of investments and its advantages and disadvantages in the previous module.
Before we proceed with the next topic, let us have a review on the types of investments through this activity.
Task 1:
Direction: Write √ (check mark) if the term refers to a type of investment and X if not. Accomplish this on a clean sheet of paper.
______ 1. shares of stocks
______ 2. bonds
______ 3. mutual funds
______ 4. real estate
______ 5. investment

What Is It?
Ways and Means to Minimize Investment Risks
Investments are typically categorized according to their corresponding risks and returns. As a rule, the higher the return, the
higher will be the risk. But that the rule is not necessarily true in reverse order that higher risk would translate into higher potential
reward. Sometimes greater risk is just greater risk with little potential return. Risk isn’t a bad thing. But there is a need to understand
what kind of risks the investment can take and how to reduce unacceptable levels of risk.
1.Determination of tolerance to different kinds of risks
Every investment involves some level of risks. Understanding the type of risk, or the combination of types of risk, is essential
in reducing those risks. Two factors that can help determine the risk tolerance:
a. Net worth - is assets minus capital;
b. Risk capital- is money that, if lost on an investment, won’t impact the financial position and lifestyle.
If there is a high net worth and substantial risk capital, the risk tolerance if higher.
But if the net worth is modest or nothing, and the risk capital is not much, it’s probable to be better off with conservative, low-risk
investment.
2. Conducting due diligence
This means making research about the investment instruments before finalizing the investment plan. Checking out the
investment’s history, earnings’ growth, management team and debt load will provide more information about the investment
portfolio. This information can be compared with other similar investment products as well as to other assets in the investment
portfolio.

 
The data about the stock’s price- to- earnings ratio or P/E ratio will measure the relationship between a company’s stock price and its
annual after-tax earnings. A company with a significantly higher P/E ratio than other comparable companies in the same industry
typically involves a higher risk. Investment risk can be minimized by weeding out stocks with high P/E ratios, unstable management
and inconsistent earnings and sales growth.
3. Diversification of investment portfolio
Diversification of investment portfolio is the risk management strategy of combining a variety of assets to reduce the overall
risk of an investment portfolio. One of its purposes is portfolio risk management.
Diversification of investment portfolio also lowers its volatility as movements or changes are not expected to happen at the
same time in all asset categories, industries, or stocks. The decrease in the instability of the portfolio considers that the different
assets market price can rise and fall at different time intervals. This results to a well balance risk and return or risk is spread over a
variety of products. For example, investment money can be made as follows:
A. 25% into ABC stock;
B. 25% into time certificate of deposit;
C. 25% into Treasury bonds; and
D. 25% into real estate.
Profit is realized when there will be an increase in the market price of stock of ABC company. But this profit potential is
reduced by the fact that only a portion of the money is invested in the said stock.
However, if ABC Company fails, the loss is also limited, because 75% of the money is invested in other products.
4. Monitoring of investments
Regular reallocation of resources is necessary for control purposes. Proper allocation of the investments depends on such
factors as age, investment period and investment temperament.
For example, it is necessary to evaluate holdings at least once a year for an investment portfolio consisting of 40% in
intermediate-term bonds, 25% in large capital stocks, 10% in short-term bonds, 10% in medium capital stocks, 10% in small capital
stocks and 5% in international stocks. This is to assess whether there is a need to buy or sell assets to bring the portfolio back to
proper asset allocation.
5. Taking advantage of government guaranteed investment products
It is very safe to invest in an instrument which is guaranteed by the government like Treasury bonds. These securities are
fully backed by the Philippine government aside from an insurance from the Philippine Deposit Insurance Corporation. In addition,
holding investment until its maturity is better than early withdrawal considering the market risks and penalties except for a secured
recovery of principal and interest.
 
Categories of investment risk and its example:
1. Systematic Risk
Systematic risk is associated with the market. This risk affects the overall market of the security. It is unpredictable and
undiversifiable however, the risk can be mitigated through hedging.

For example, political upheaval is a systematic risk that can affect multiple financial markets, such as the bond, stock, and currency
markets. An investor can hedge against this sort of risk by buying put options in the market itself.
 
2. Unsystematic Risk

The second category of risk, unsystematic risk, is associated with a company or sector. It is also known as diversifiable risk
and can be mitigated through asset diversification. This risk is only inherent to a specific stock or industry. If an investor buys an oil
stock, he assumes the risk associated with both the oil industry and the company itself.

For example, suppose an investor has invested in an oil company, and he believes the falling price of oil affects the company.
The investor may look to take the opposite side of, or hedge, his position by buying a put option on crude oil or on the company, or 8
he may look to mitigate the risk through diversification by buying stock in retail or airline companies. He mitigates some of the risk if
he takes these routes to protect his exposure to the oil industry. If he is not concerned with risk management, the company's stock
and oil price could drop significantly, and he could lose his entire investment, severely impacting his portfolio.
 

What’s More
Task 2
 
Case Problem:
Mister Ang is 60 years old. He just received his retirement benefits amounting to ₱ 1,000,000. He is planning to buy a small
farmland so that he can have a simple life of planting fruit bearing trees and vegetables. However, there is an offer from his friend
who wanted to borrow his money for a 10% interest per annum for 5 years.
 
Questions:
1. If you were the grandchild of Mr. Ang, which among the type of investment would you suggest to him? Why?
 
2. Evaluate the ways and means to minimize investment risks in the chosen investment?
 
Task 3
 
Direction: Fill in the missing words in the paragraph.

1.______________are typically categorized according to their corresponding risks and returns. As a rule, the higher the
return, the 2.____________ will be the risk. But that the rule is not necessarily true in reverse order that higher risk would translate
into higher potential 3.____________ Sometimes greater risk is just greater risk with little potential 4.______________. Risk isn’t a
bad thing. But there is a need to understand what kind of risks the investment can take and how to reduce unacceptable levels of
risk. There are ways and means to minimize investment risks: 5.____________, 6.____________
_,7._____________,8.____________,9.____________
There are two factors that can help in determining the risk tolerance, these are the 10. ____ and 11.______ . We also have
two categories of risk, these are the12. and 13. . The risk which is associated with the market is called_ ___while 15._ _is also known
as diversifiable risk and can be mitigated through asset diversification.