CHAPTER INVESTMENT OPTIONS AND AVOIDING INVESTMENT SCAMS Expected Learning Outcomes After studying the chapter, you should be able to... iE 2 Non Sf Be familiar with the various investment alternatives available to investors, individual as well as institutional. Know the difference between equity securities and short-term debt securities. Explain the difference between intermediate and long-term debt securities and hybrid securities. Describe what “derivatives” are. Give examples of investments in real assets. Describe the nature of international investments. Describe the most common Investment Instruments and Medium. Describe the most common types of Investment Scams. Know how to spo! Explain how the Commissions (SEC) Investment Scams. t and avoid Investment Scams. securities and Exchanges protects individuals from oe SEooeCHAPTER 13 INVESTMENT OPTIONS INTRODUCTION This Chapter presents the various investment alternatives available to investors, individual, as well as institutional. Likewise, discussions of the common types of investments scams as well as measures to avoid them are included in the latter part of this Chapter. SECTION I INVESTMENT ALTERNATIVES Brief description I. Equity Securities A. Ordinary share* Represents ownership interest in Pl P issuing corporation. 1. Class A Nonvoting ordinary share Entitled to receive dividends. 2. Class B Voting ordinary share not receive dividends. B. Preferred Shares* Usually motivating but has ordinary share in dividend and liquidation rights. IL Short-term Debt Securities Obligations that mature in one year or less. A. Negotiable certificates of deposit** Issued by authorized commercial banks.Investment Options _225 B, Commercial papers** C. Banker's acceptances** D. Treasury bills** IIL Intermediate and Long-term Debt Securities A. Philippines government Securities 1. Treasury notes *.* * 2. Treasury bonds*** B. Corporate bonds* Promissory negotiable notes issued by larger, well known corporations. Used by importers to secure trade credit from exporters. The accepting bank guarantees payment by borrower. Obligations issued by government treasury sold at a discount from face value. Obligations that mature in more than one year. Issued by government treasury with maturities between | and 10 years; sold at face value with a specified interest payment. Government treasury securities with maturities over 10 years. Debt obligations issued by corporations. Many types of corporate bonds exist; they differ in the way the principal and interest payments are made and in the collateral used to back the bonds.246 Chapter 15 Securities that have tl acid characteristics of both equity and debt. The convertible feature allows the investor to convert the preferred share to a specified number of share of ordinary share. A. Convertible preferred stock” B. Convertible bonds* The convertible feature allows the investor to convert the bond to a specified number of shares of ordinary share. V. Derivative Securities Securities that derive their value from the value of an underlying asset. A. Options* Provide the right to buy or sell shares of ordinary share of a specific corporation within a limited period of time at a designated price. B. Commodity futures* Provide the contract holder the right to sell a specified amount of an agricultural or natural resources commodity at a designated price within a Specified period of time. . C. Financial futures* Provide the contract holder the right to sell a specified amount of an ordinary share index, bonds, or foreign currencies at @Investment ms 227 D. Options on futures* E. Rights* F. Warrants VI. Real Assets A. Precious metals**** B. Real estate**** C. Collectibles designated price within a specified period of time. Provide the right to buy or sell a specified commodity or financial future within a limited period of time at a designated Price. Issued by a corporation to existing ordinary share in connection with the sale of additional shares of share. Issued by a corporation that provide the holder the right or option to purchase additional bonds or ordinary shares from the issuing corporation at a specified price within a designated period of time. Non-financial assets Includes gold, silver, copper, etc. Includes single- and multifamily residences, undeveloped land, commercial property, and farmland. Includes diamond; fine art, numismatic coins.228 Chapter 13 Investments by individuals in debt or equity securities issued by organization outside the country of residence of the investor. VIL International Investments Shares and bonds issued by large corporations with A, Shares in Multinational Corporations significant business interests in more than one country. B. Foreign shares traded on a Shares of large firms that have domestic and foreign exchange local exchange established trading for their securities on domestic as well as foreign exchanges. C. Foreign currencies Include dollars, Euros, British pounds, etc. VIL. Other Investment - A. Pension funds Public or private investment (not remarketable) funds that provide retirement and other benefits to eligible employees. B. Mutual funds Investment companies that sell (OTC market and direct shares of ordinary share that transaction with individual Tepresent an ownership interest . funds) in a portfolio of domestic and/or foreign securities. IX. Cryptocurrency A form of encrypted digital currency (e.g., bitcoin)Investment Options 229 DESCRIPTION OF MOST COMMON INVESTMENT INSTRUMENTS AND MEDIUMS A. SAVINGS ACCOUNTS AND MONEY-MARKET FUNDS Savings accounts are available through banks; money-market funds are available through mutual-fund companies Saving accounts and money- market funds are nearly identical, except that money-market funds generally pay a better rate of interest. The interest rate paid to you also known as the yield, fluctuates over time, depending on the level of interest rates in the overall economy. (Note that some banks offer money-market accounts, which are basically like savings accounts and shouldn’t be confused with money-market mutual funds.) Government backs bank savings account with Philippine Deposit Insurance Corporation (PDIC)insurance. Money-market funds are not insured. But don’t give preference to a bank account just because your investment (principal) is insured. In fact, your preference should lean toward money-market funds, because the better the ones are higher- yielding than the better bank savings accounts. And money market funds offer check-writing and other easy ways to access your money funds. Money-market funds generally have several advantages over bank savings accounts: * The best money-market funds have higher yields. * If you’re in a higher tax bracket, you may net more after factoring in taxes using tax-free money-market funds, No savings account pays tax-free interest, * Most money-market funds come with free check-writing privileges. As money you put into bank savings account, money-market funds are Suitable for money that you can’t afford to see dwindle in value.230 Chapter, 13 B. SHARES OF STOCKS Shares are units of ownership interest in a corporation that are available for investors to buy or sell. Companies crate shares in order to raise capital, which they can invest to grow their business. How it Works Shareholders are investors who buy the shares a company creates, and who . therefore own a part of the company. When shareholders buy a share, it is usually an “ordinary share” which means that they can vote in the election of the company’s executive team, approve or vote against new share issues and other money-raising activities, and in some cases receive payouts * known as dividends. Shareholders are entered on the company’s shareholder register, which is a list of all the investors who hold a stake in it. Investors buy shares for capital growth (hoping the underlying value or price of the shares will rise) and for income if the shares pay dividends. Share prices rise and fall based on a company’s financial performance, general economic news, and market sentiment—how investors feel about a company or the wider economy. If a share price fluctuates in a short space of time it is said to be volatile. If one company’s share price is volatile it can indicate investor worries about that company; if volatility affects all shares prices it can indicate instability in entire markets. Need to Know ¢ Listed a share that appears on the register (list) of the stock exchange on which it is being traded (bought or sold) Quote the most recent price at which a share has been traded. Stock exchanges are now all electronic, and prices can be seen changing minute by minute during the course of the day. “Stocks” describes the ownership of shares in general. “Shares” refers to the ownership in a particular company.Investment Options 231 Corporate Shares Shares are units of ownership. interest in a corporation that are available for investors to buy or sell, Shareholders are investors who purchase the shares the corporations create and who therefore own a part of the company. They receive payouts known as dividends. Investors buy shares for (1) capital growth (i.e., increase in price or value of the shares) and (2) for income if the shares pay dividends. Shares of stocks, as well as units of corporate bonds could be purchased directly from financial institutions (banks, non-bank financial institutions) responsible for underwriting the issue or through the Financial Markets (e.g., Philippine Stock Exchange). Philippine Stock Exchange Listed Companies (Partial) ®2@ MS PRIME i sgaor WOLOINGS =P & Mayalaand — OP PLOT Beanery z bad at sce noe SANMQUE, aboltiz “Ss Mayas ® ooo ALLIANCE BDO wo, 2 @ & ‘trgmenine Metrobank aa BEA CRM Bon.VIWELSNV © NYMIVL O a G) VWasOy ©) vIGNI © SNOYONOH | O @ WNIHD Boquiooig woy veg :o4n0g VvolusY HLNOS Wzvua Oo Oo NIWdS © Salvis GaLinn xwu © Ge) O\ vs ONVTY3ZLIMS © anv ©) © sams Q | (~6) SQNV183HI3N va¥NvD syoyrey) Gu) Bew3 SJE pedojarsq | oO JOEL OIE [BGOLD aq Jo MatA a4q s,pAIg_Y Ter any 1 sadouy— zetInvestment Options _ 233 Cc. BONDS Companies and governments sell bonds to raise money without issuing shares. They are effectively fixed-term loans bought by investors who receive interest until the end of that term. How it Works Bonds are securities for long-term debt, although they are not always held until their term. The price of a bond rises and falls depending on current interest rates, and how likely investors feel the bond issuer is to repay the initial sum invested. There are different kinds of bonds such as savings bonds, company bonds, and government bonds, and some can be traded between investors. In savings bonds, investors deposit a lump sum with retail savings institution (such as bank), receive regular interest, and are repaid the original sum in full. In other types of bonds, repayment of the original sum is not guaranteed, since the issuer could go bust. Because the risk of government default is so small, gilts are seen as the least risky bond type. Investing in Bonds When choosing a bond, investors must balance the total sum received in interest against the likelihood of the capital sum (initial cash investment) actually being repaid at the end of the term. They must also decide whether a bond offers good value by analyzing its current value on the secondhand market. Although bondholders have slightly higher chance of being paid than shareholders if a company collapses, there is no guarantee of payment. Need to Know «Face value is the initial price at which the bond was issued. © Market or par value is the price at which a bond is traded. © Coupon is the amount of interest paid to bond investors. © Yield is a general term that relates to the return on the capital invested in a bond, . © Savings bonds are cash deposits on which regular interest rate is paid. ; © Securities are financial instruments, such as bonds, that can be traded,234 Chapter 13 Corporate. Bonds are medium to long term investments issued by SEC- Registered Philippine corporations. It earns fixed interest rate, high interest rate compared to government securities and tradable in the open market, Sampling of PDS Enrolled Corporate Bonds PhP 8,000,000,000 AU Fixed Rate Bonds Due 2023 Usting Date - 05 October 2018 PhP 10,200,000,000 AP Fixed Rate Bonds Due 2024 and 2028 PP 00000, AEON Fixed Rate Ni Enrollment Date 16 November 2018 loves PhP 2,902,730,000 PBCOM Long-Term Negotiable Cetificates of Time Deposit Oue 2024 Usting Date - 08 October 2018, PhP 25,000,000,000 BPI Fixed Rate Bonds Due 2020 Usting Date ~ 06 December 2018Investment Options 235 PhP 18,000,000,000, MBT Fixed Rate Bonds Due 2020 (Reopening) sting Date ~ 17 December 2018, Guinea mane PhP 10,250,000,000 PhP 1,781,750,000 HIB Long-Term RBANK Long-Term Negotiable Certificates of] Negotiable Certificates of Time Deposit Due 2026 Time Deposit Due 2024 sting Date ~12 uly 2018 J} Usting Date ~ 16 July 2018 B34 Cees l (SMC GLOBAL POWE! ‘PhP 15,000,000,000 SMCPG Series G Fixed Rate Bonds Due 2023 Listing Date ~17 August 2018 After the securities (i.e., stocks, bonds, warrants) are initially sold to the public and other private investors (institutions and individuals), they can be traded in the secondary market, popularly known as Stock Market or Exchange [e-g., Philippine Stock Exchange (PSE)] between investors. Securities brokers are agents of investors who match buyers with sellers of securities while Securities Dealers link buyers and sellers by buying and selling securities at stated prices,NVAVE %0T AY %z Broquioojg Woy Req :204n0g VOONI %t RIVLI%P SALVLS GALINA %ZE VRILSA %I YTION %7 YNIHO %L ANVTYAZLIMS %l ANVINUGD NIGAMS “I SONVIAIHLIN %Z ayesodio> qUaWUaACD, = e e EW PUT 1EqOLD ay Jo Mat, a4q s,paIg y — TEL aansyy E] aidoyd — 9¢7Investment Options _237 D. DERIVATIVES A type of financial instrument, the value of derivatives is based on the Price of an underlying asset or index. They are commonly used by investors to spread risk, and/or to speculate. How it Works Investors may buy derivatives in order to reduce the amount of volatility in their portfolios, since they can agree on the price for a deal in the present that will, in effect, happen in the future, or to try to increase their gains through speculation. Derivatives can enable an investor to gain exposure to a market via a smaller outlay than if they bought the actual underlying asset. The most common are futures and options--leveraged products which the investor puts down a small proportion of the value of the underlying asset and hopes to gain by a future rise in the value of that asset. Derivatives for Hedging Companies use derivatives to protect against cost fluctuations by fixing a price for a future deal in advance. By settling costs in this way, buyers gain protection--known as the hedge--against unexpected rises or falls in, example, the foreign exchange market, interest rates, or the value of the commodity or product they are buying. Derivatives for Speculation Investors may buy or sell an asset in the hope of generating a profit from the asset’s price fluctuations. Usually this is done on a short-term basis in assets that are liquid (easily traded). Warning Referred to as financial weapons of mass destruction, derivatives can be volatile. Relying on debt leverage, they use complex mathematical models and not all traders clearly understand the risks they are taking. They can. suffer large and catastrophic losses as a result.238 Chapter 13 E. CRYPTOCURRENCY ic . sed A form of encrypted digital currency, a cryptocurrency is created, regulated, and kept secure by a network of computers. Bitcoin was the first example of a cryptocurrency, but there are now several thousand types. How it Works There are two main features of cryptocurrency. The first is that it exists only in the form of virtual “coins”. Instead of being generated by a national central bank, it is created digitally by teams of specialists known as “miners”, who use dedicated computer hardware. Encrypted in constantly changing digital codes to reduce the risk of counterfeiting, cryptocurrency can be transferred online between individuals independently of financial or government institutions. The second is that the total amount of a cryptocurrency is capped. Each “coin” created by a “miner” is listed on a virtual public ledger called a “blockchain”. Every coin spent is registered on the same ledger, so unlike currencies generated by central banks, once this cap is reached no more coins can be created. As a result, cryptocurrencies are considered less Prone to the pressures of inflation and deflation resulting from political and economic changes that affect conventional currency. Conventional Currency Compared with Cryptocurrency The appeal of a cryptocurrency is that it can be used to make direct financial transactions anywhere without requiring a bank account. Transactions are virtually anonymous, there is no central control from banks or governments, and fees are minimal, Cryptocurrencies differ from the national currencies in every way, such as how they are valued, generated, and controlled, to their storage and transfer. How To Value Cryptocurrency Look at market capitalization and daily trading volume A high market capitalization can indicate a high value per “coin”, or it can simply mean that there are a lot of coins in circulation. The daily trading volume is an indicator of the number of coins that change hands in a day.Investment Options 239 It is best to review the two statistics together. A cryptocurrency that has a substantial trading volume as well as a high market capitalization is likely to have a high value. Verification of How Transfers Are Made Different cryptocurrencies have varying ways of verifying and securing transactions. The systems rely on complex mathematical problems, and their effectiveness is based on the time a transaction takes and its vulnerability to attack. Most currencies us one of the two systems, Proof of Work (bitcoin) or Proof of Stake, or a combination of both, to ensure the best network security. Warning Cryptocurrency balance is stored on a computer. If the currency crashes and there is no back-up of the transactions, there is no proof of cryptocurrency funds held by that person. Not many retailers accept cryptocurrency. In general, the more retailers that accept it, the better, but some cryptocurrencies have specialty uses.*AQUDIND [BUONUAAUOD Joy 0} Uosied uo WOY APOAIIP pa.iaysuBN aq Uv OY, “OUN|U PIOS pue YIM IYBNOG Jo JousaIUI ay ssosoR soyjoue 10 payesquad are satouasinsoidé19 Joyjo pur urloog NIOOLIA “1 [Sau IO MO] $day pur snowAUOUE “YBiy aq Wed siaysueH [euOReUISIUT IA ere siaysueN Yong “siaysuen | Jo} saaq ‘poses aq ues Kay) pue unos9B SHE UBD ss2d2v SUI|UO YIM sUOoAUY | YuRQ B BIA aIQISSOd A[UO ae suonoesuel, | safsusy “JSSpe] qn jenwia e uo aday are sprosay “sjen| UI JO SJaypear “sJapjoy lunosoe [eUSIP ey UT jay ase sorsuauinsoyd 41g, JO spsooss YIM syueq UI Play st Keuoyy aso1g, Sasi] Way Suisn Sia[lejar Jo soquinu "WE JO a10ur at Pur “eunoas aso! pur sarsey st ou | SuNUIsd Xq Souaund e anyeAap ues syueq YoRsesue ‘asn O1 Jaisea ove Kay uayM | JeNUID “uonejnoso ul Keuow Jo yunowe | aigenten axou awiosaq se}ouauins0)d£15 | ay) pue 10198} d1LUOUODa Aq pouruuaisg an ij “speaiyy AyLndas pue syreuLiojem “Buntayzoiunod saonpau | Jo Woy ay) Ur AoUaLMS aYX OUI IYMq sojzznd jeonewayzew xajdwioo Sulsueyo | si ABojouyse} Hayioqunoonuy “Aianoe Ajjenunuoy woo enya Yora JO} snoioidsns jo suSis soy suonoesuen P09 24} 04 Ul Ying si UONdA1DUa aundag low Ajyenuyjuos — syueq prey jouod “SUBO] “428pa| o1qnd autjuo ue uo pausistdou | Jo wuoy ay) ut syueq [rear Aq AjoBue] Yay) axe suloo ayy ‘azempsey jeioads | “Auouos9 OU) OW! paseajal Udy? aue yey? 7 Buisn suo: feniia ayeos9 siouly,, | sujoo JUL puke sajou juLid syueq fenUsg ayo AONTAANIO LAA ANAND TWNOLLIGVAL | | AduasinooydarD pue [2UOnIpeLy UseMyog, uosteduiog, raandig ET sardouD oveInvestment Options 241 How it Works Launched in 2009, Bitcoin was the first ever cryptocurrency and is still the most widely used. Unlike the conventional currency, which is backed by the state, a bitcoin is based on cryptography, a system that creates mathematical codes to spend funds from another user’s digital wallet, or to corrupt transactions, as each transaction needs to be verified by other users. This is done by users transforming it into a piece of unique digital code using open-source software. Users who verify transactions are rewarded with bitcoins. Coins can be traded on digital exchanges or by individuals. How Bitcoins Are Used 1. Buyer pays seller for item. A buyer pays a seller in bitcoins using an online transaction form, stating the wallet of the recipient and the amount to send. The transaction becomes visible to the buyer, and to everyone on Bitcoin’s network. It contains a secret code called a private key, showing which wallet it is from. It is grouped with other transactions from a set period into an encoded list called “block.” 2. Mining for bitcoins. To prove that the transactions contain in the block are legitimate, and do not contain coins that have already been spent elsewhere, bitcoin miners use computer programs to solve the complex mathematical puzzles protecting the block. The first miner to do so is rewarded with new bitcoin-this is how currency is issued-and the block joins the blockchain. 3. Blockchains. The blockchain is a bit like a public edger that can be viewed online. Each verified block is added to the previous one. As the “hash” or signature of each file is generated using part if the previous block’s signature, it timestamps each transaction. This makes them very difficult to tamper with. 4. Bitcoins arrive for use. Once bitcoins arrive in the seller’s account, they can be used to make purchases through a retailer, oF sold through an exchange or directly to an, online buyer. Using websites such as LocalBitcoins.com.and Meéetupicom, users cad. make face-to-face transactions, bringing their digital’ wallets toma mobile device) to make the trade.242 Chapter 13 G. PROPERTY A. Rental Income from Property Buying property to rent has recently become a popular choice for investment because of low interest rates on mortgages and comparatively high rents. Investor / landlord needs to spend money on a regular basis such as mortgage interest, VAT, insurance, maintenance and repairs, He/she also needs to spend time managing the property. The risk of financial losses that the investor / landlord assumes are 1. the property remaining empty 2. tenants defaulting on payments 3. tenants causing damage on the property B. Selling the Property for a Profit One objective of investing in property to increase one’s wealth, is to buy when the value is low and sell for a profit, then use any profit to finance additional property purchase. H. INSURANCE Life Assurance VS. Life Insurance Though the above terms are often used interchangeably, life assurance if different from Jife insurance, Life assurance policy promises the holder a payment-either when the policy holder due or provides a lump sum if the holder outlive the policy term or the term of the policy comes to an end. The fact that a payout is guaranteed inevitably means that monthly or annual premiums are higher ~. for life. assurance. It is an investment for long-term.Investment Options 243 Life insurance comes the holder for a fixed period of time with their estate receiving a payout if he dies within the term stated in the contract. Premiums are cheap but if they outlive the agreed period they get nothing. Holders may sell or cancel a policy because the longer wants it or he wishes to purchase a different policy or he cannot afford the premium. He may claim the cash surrender value of the insurance policy at the termination date Sample of Insurance Plan: Variable Unit Linked (VUL) - Variable Unit Link (VUL) plans that allows an individual to secure his / her future by potentially growing his / her savings and having high return of investment. At the same time, having a protection from unfortunate circumstances in life. A list of the top ten life insurance companies is shown below Rank Company - NBAPE 1 ‘Sun Life (Sun Life of Canada Phils. Inc.) 9.61 billion 2 Pru Life (Pru Life Insurance Corporation of U.K) _7.67 billion 3 Axa Philippine Axa Life insurance Corporation) 5.50 billion 4 Manulife (The Manufacturers Life Insurance Co. 4.36 billion Phils. inc.) 5 BPLPhilam —(BPLPhilam Life Assurance 3.90 billion Corporation) 6 BDO Life (BDO Life Assurance Company Inc.) 3.68 billion 7 Phila Life (Philippines American Life & General 3.48 billion Insurance Co.) 8 . — FWD(FWO Life Insurance Corporation) 2.94 billion 9 Coco Life (United Coconut Planters Life 2.18 billion Assurance Corporation) 10 Insular Life (The Insular Life Assurance Company, 1.91 billion Utd.)244 Chapter 13 L PENSIONS A pension plan is a type of savings plan to help an individual to save money for retirement. Pensions enable workers to save a proportion of their income regularly during their working life so they can have an income when they retire. Company pension plans require the employees and employers make monthly payments into a fund managed by a pension company. Government Pension Plans In the Philippines, private companies are required to register their companies and their employees with the Social Security System (SSS). Premium payment by the employee is deducted from their salary and employer contributes a corresponding amount to the fund. Upon, retirement, the SSS pays the employee his pension monthly. For government employees, pension fund is managed by the Government Security and Insurance System (GSIS). Company Pension Funds In addition to the above pension fund, a company may offer “Defined Benefit” pension plan which guarantees a set pension payment determined by salary, age and length of employee service. This plan is quite risky for employers, who have to pay out regardless of how the pension investments perform. An alternative plan which an enterprise may adopt is called “Defined Contribution Pension” plan. In this case, it is the employee who carries the investment risk. Poor investment performance can also affect pension payouts from these funds. Some company pensions have a funding shortfall that could mean retirees receiving less than expected.Avoiding Investment Scams 245 SECTION IT COMMON TYPES OF INVESTMENT SCAMS Advance Fee Scam It starts with a call, message or pitch for some action on a victim's part with a promise for a handsome reward in the end. In an advance fee scheme, the victim is persuaded to pay money up front to take advantage of an offer promising significantly more in return. The catch is , that the scammer takes the money and the victim never hears from them again. Scammers often target investors who have lost money in a risky investment. They’ll contact the investor with an offer to help recover their losses. They * may say they will buy or exchange the investment at a substantial profit to the investor, but the investor must first pay a “refundable” fee, deposit or taxes. If the investor sends more money, they’lI lose that, too.The scheme was “designed mainly to favor its top recruiters,” the regulator said. noting that investors in the bottom of the pyramid were likely to lose their money The Ponzi scheme is among the three most widely used scams in the country after pyramid scams and boiler room operations, the SEC Enforcement and Investor Protection Department said in an e-mail. “When it becomes difficult to recruit new investors or when a large number of investors ask to cash out, the Ponzi scheme collapses as the inflow of funds is Rot enough to support the promised return,” the SEC said. “Double your money in 60 days, guaranteed!" This how many Ponzi schemes’ empty promises sound. It's named after Charles Ponzi, an Italian swindler, who convinced people to invest in a product or endeavor for unrealistic profits. These schemes recruit people through ads and e-mails that Promise everything from making big money working from home to turning P1,000 into P20,000 in just 6 weeks. Or, you may be given the chance to Join a special group of investors who are going to get rich ona great investment. The invitation might even come from someone you know. Investors who get into the scheme early may receive high returns fairly soon from what they think are interest cheques. They're often so pleased that they invest more money, or recruit friends and family as new investors. But the investment doesn’t exist. The “interest cheques” are paid from the investors’ own money and money from new investors, Eventually, new people stop joining the scheme.Avoiding Investment Scams 247 There is no more money to pay out and you don’t see another peso. That’s when the promoters will vanish, taking all the money with them. 3. Pyramid Pyramids are similar to Ponzis in that they involve endless recruitment. Only in a pyramid scheme, the fraudster does not borrow money from later participants to pay Mr. A, but Mr. A is paid if he convinces Mr. B to join the scheme. For Mr. B to get paid himself, he has to recruit Mr. C. When Mr. C does join, both Mr. B and his recruiter, Mr. A, get paid. The network of recruiters and recruits who also become recruiters breaks down when later recruiters fail to get people to join. A multi-million pyramid busted in 2018 in Mindanao posed as a rent-a-car marketing business. 4. Pump and Dump Scam How a Pump and Dump Scheme Works? This is an illegal scheme to boost a stock's or security’s price based on false, misleading, or greatly exaggerated statements. Most fraudsters or scammers use social media or online chat groups, forums, and bulletin boards to hype up stocks. When they sell their overvalued shares, the price drops and the victims lose their money.248 Chapter 13 © High retums and low risk. * Hot tip or insider information. © Pressure to buy now. * Seller not registered to sell investments. 5. Coaching Scheme Coaching or tutoring claims often come with an attractive proposition: "you can make a fortune without needing money!" or "If you buy that ebook and attend that program, the knowledge you gain will make you rich... quickly.” But instead of delivering their promises, the classes or books or sessions are staged to make a customer or mentee pay for other classes and books and Sessions. The versions we saw in the Philippines also involves a promise for recruitment abroad. Coaching scams attract subscribers because they: * Tell "compelling rags to riches stories." * Exhibit "testimonials from supposedly happy customers." © Create a sense of urgency or exclusivity, There are tons of legitimate coaching programs, Unfortunately, there are investment scams in the Philippines disguised as coaching schemes, too. Some examples of these coaching schemes include online business coaching where experts will teach you a proven method with 100% guaranteed success. It can also be a real estate and investment coaching scheme where experts talk up the success of everyone who joined the Program with statistics and numbers in a highly charged and energetic atmosphere,Investment Options 249 6. Boiler Room Scam Investment scams are often pulled off by a team of people who set up a makeshift office, called a “boiler room”. To convince you their company is real, they might send you to the company’s website, which looks very professional. They might also set up a toll-free number and a respectable address to make the company seem legitimate. However, the company doesn’t exist. Everything on the website is fake, and the office is just a post office box or temporary office. By the time you realize you’ve lost your money, the scammer will have closed up shop and moved on to another scam. Meanwhile, a boiler room operation — usually a call center — uses high- pressure salespeople to call so-called sucker lists or potential investors to peddle speculative, sometimes fraudulent stocks. Aside from the three, scammers also use foreign exchange trading and cryptocurrency mining as a front for their illegal activities.250 Chapter 13 7. Exempt Securities Scam When a company wants to sell securities in Canada. it must file a prospectus with securities regulators. Exempt securities are an exception. They may be sold without a prospectus, but they’re limited to accredited investors or certain other conditions. On their own, exempt securities aren’t scams. But some scammers pitch fraudulent investments as “exempt” securities. Be suspicious if you get an unsolicited phone call or email about a hot tip on promising business that is about to “go public”. You may be told that the investment is only available to very wealthy people, but an exception will be made for you. You could be asked to sign some paperwork that misrepresents your income or net worth. If you have to lie about how much money you have, you are dealing with someone who breaks the rules. Foreign Exchange Scam The foreign exchange (forex) market is considered to be the largest and most liquid financial market in the world. Investors buy and sell currencies with the aim of making money on changes in exchange rates, But trading in foreign currencies can be very risky.Avoiding Investment Scams _251 But foreign exchange trading is dominated by large, well-resourced international banks with highly trained staff, access to leading edge technology and large trading accounts. It’s extremely difficult to consistently beat these professionals. You may not be told how risky forex trading is. HOW TO SPOT INVESTMENT SCAM 1. Efforttess and Impressive ROIs I's so easy to scam victims with the sway of easy money. If the promised returns are really high (e.g., 2% daily or 30% monthly) and the risk is low, this should ring an alarm bell for you. When it sounds too good to be true, like doubling your money in just 30 days, it most likely is a scam. Watch for “phantom riches.” Compare promised yields with current returns on well-know stock indexes. Any investment opportunity that claims you'll receive substantially more could be highly risky — and that means you might lose money. Be careful of claims that an investment will make “incredible gains,” is a “breakout stock pick” or has “huge upside. and almost no risk!” Claims like these are hallmarks of extreme risk of outright fraud. Naturally, high-yielding investment opportunities are hard to resist especially if you have a decent amount of cash, such as your mid-year bonus, just sitting around in your payroll account. This is precisely the perfect moment for fraudsters to tempt you into giving them your hard-earned money. Moreover, such attractive offers will come to your doorstep when you least expect them. You may have come across emails, SMS or calls from unknown senders who identifies themselves as investment experts. 2. Name Changing A company’s name is part of its brand. Its name is what the public associates the company with. If someone approaches you introducing an investment opportunity with company X, and then changes its name to Company Y for “relocation purposes” after a few months, you’re most likely dealing with a scammer. No reputable company with longstanding credibility will change its name as quickly and as easily as that.252 Chapter 13 3. Recruitment Medel to double your PHP 50,000 by Ifa company presents you with an opportunity I a recruiting at least five other people who will inject their own cash, it’s saad be wary. It’s time to question whether the company is making money from tl investments or from their recruitment schemes 4. Complicated Investment Plans When you've tried to understand the investment plan but still can’t make sense of it and how your investments are going to earn, then don’t do it. You should easily assess the financial condition and the potential of the company. It should not be hard to get a prospectus or a financial ‘statement if an investment company is legit. 5. Ne Physical Office If you're mostly having meetings at coffee shops or restaurants because the company has no physical office, be wary. Companies that only perform transactions online and through social media platforms will be harder to track down should they run away with your money. 6. Fraudulent Address Where a message originates from, matters. It’s easier to spot fraudulent email addresses because you can see the domain names (text after the *@’) used. Some scammers use public domain email addresses for their “investment company”. Legitimate investment companies would always use custom domain names that are more professional. It also indicates that they have an existing website where you can get more information from, As for SMS, they will often be just a random phone number with no sender ID. Though, sender IDs are not by any means an indicator of legitimacy, having none at all is an even bigger red flag. For social media, check for a blue or gray checkmark next to the account name to ensure the account is legitimate. If said company claims to be a startup and has no verification marks, better to do more research. .Avoiding Investment Scams _ 253 7. “Urgent” Tones Subject lines such as “URGENT” or “everyone is buying it" or “send money right now”, or tonality that is rushing you into making a decision about the investment offer may be dubious. Ideally, investment companies would always be mindful, professional, courteous, and calm when communicating with Potential investors. Unlike scammers, they are not trying to scare investors into doing anything rash. A stable investment offer would always be “time-based” and not “timing- based”. Timing isn’t everything in investments. Promises of a quick payout can never be guaranteed even at the most favorable investment environments. Never rush into deciding to invest, and never let anyone rush you. 8. Reciprocity Fraudsters often try to lure investors through free investment seminars, figuring if they do a small favor for you, such as supplying a free lunch, you will do a big favor for them and invest in their product. There is never a reason to make a quick decision on an investment. If you attend a free lunch, take the material home and research both the investment and the individual selling it before you invest. Always make sure the product is right for you and that you understand what you are buying and all the associated fees. HOW THE SEC PROTECTS YOU FROM INVESTMENT SCAM IN THE PHILIPPINES Issues Warnings Against Fraudulent Companies Register Legitimate Companies Suspends Stammers with Cease and Desist Orders (CDOs) Files Criminal Charges Against Unregistered Companies Gives the Authority to Solicit Investments Very254 Chapter 13 WHERE TO REPORT INVESTMENT SCAMS IN THE PHILIPPINES Report the seam While ignoring scam messages is fine, it's more prudent to report them. This way. you can help break the chain of these illegal acts that burden our fellowmen who are just trying to make a living. If you should spot any suspicious messages, advise your bank about them. For example, Metrobank advises to do the proper thing by calling your bank for verification or by reporting them to authorities like the National Bureau of Investigation (NBI) Anti-Fraud Division at (02) 8525-4093 or e-mail at afad@nbi.gov.ph Wheiher you're an individual or an organization who wants to contribute in the fight against fraud, the public is encouraged to participate in the Scam Proof platform (https://www.scamproof.ph/), an_ industry-wide initiative by the Philippine banking industry to promote fraud, awareness and curtail financial fraud. If you wish to report a company that's involved in a scam, you may report it to the Enforcement and Investor Protection Department of the SEC at the following numbers: (0961) 519-7829 (0961) 684-4088 . (0927) 162-2792 (0931) 141-0788 (0951) 949-8920 (0961) 713-1472 (0951) 656-5571 (254-257)Investment Options and Avoiding Investment Scams 255. REVIEW QUESTIONS I. Questions 1 i) 12. 13. 14. Distinguish between equity securities and short-term debt securities. Give examples of each category. Distinguish between intermediate and long-term debt securities and hybrid securities. Give examples of each category. What are the “derivative securities”? Give and describe at least three (3) types of derivatives. What do “real assets” compose? Give examples of international investments that a Filipino can make. Would you invest in eryptocurrency? Why? What are the advantages of investing in money-market funds as compared with bank saving accounts? Distinguish investment in shares of corporate bonds. Give examples of corporations in the Philippines who have issued bonds to finance their long-term capital requirements. Give examples of corporations in the Philippines whose equity securities are traded in the Philippine Stock Exchange. Distinguish between the form of income derived from bond investment as against from that of stock investment. Describe what derivatives are, Describe how bitcoins are used. What are types of income that may be derived from investment in property? What are the benefits of obtaining life insurance policies?256 Chapter 13 16. What are the sources of an individual’s pension upon retirement? 17. Describe the nature and how the following investment scams could happen a. Advance fee scam b. Pyramiding Pump and Dump Scam d. Boiler Room Scam e. Foreign Exchange Scam 18. What are the effective ways of spotting investment scams? What should an investor do if he discovers that he has bena victim of investment scam? What is the role of the Securities and Exchange Commission in preventing and reducing investment scams? 19. 20.