6.

Introduction
to Investments

Mr. Christopher B. Cauan

Business Finance
 Learning Objectives ------------------------------------------ .
. .
. This chapter aims to achieve the following: .
. .
. discuss personal investments and finance; .
. .
introduce the concept of investments; and
. .
. differentiate types of investments/investors and to .
. effectively manage portfolios. .
. .
. .
. .
. .
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Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 What is the value of peso today?
A peso can only buy you a candy. But 5 decades ago,
a peso can buy you at least two packs of potato
chips.
This is inflation in action. The value of money is being
reduced.
Inflation happens with the general rise in the prices of
goods and commodities.
Ms. Riza Mantaring, President and CEO of Sun Life
Philippines Inc., dubbed it as “the silent thief”.
Inflation rate is 10%, generally means the value of your
money is losing 10% of its value.

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 Zimbabwe had an inflation rate of 231,150,888.87% in July
2008 known as hyperinflation.
Inflation rate in the Philippines is not that high as the average
inflation rate from 2009-2014 was 4.2% which means your
money is losing only 4.2% of its value.

“To beat inflation, invest a portion of your money as

everyone needs and deals with money”.

Investing – is the act of committing money or capital to an

endeavor with the expectation of obtaining an additional
income or profit.
Saving – is just the act of putting away some money for future
use while investing is making that saved money work for you.

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 6.1 Different Types
of Investments

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 Various types of investments: Traditional – stocks and
bonds; Exotic type – art collections; more speculative –
bitcoins.
Common Stocks

A common stock, colloquially known as stock, is a security

that represents small pieces of ownership in a business that
trades in a stock market.
A stock market is a place where or buyers and sellers
congregate to trade goods. Small pieces of ownership in a
business called stocks are being traded here.

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 Two types of Markets
Primary market – is the market where businesses needing
additional financing to expand their operations sell their
shares to the investing public for the first time.
This is a process known as Initial Public Offering (IPO). A
process of “going to public”, and “listing on the exchange.”
Secondary market – the first thing that comes to the public
mind when they see or hear the word “stock market”.
Someone who invests in the stock of a business is called
stockholder or shareholder and considered a part owner of
the business. Part owner is entitled to a portion of success
of the business through capital appreciation and cash
dividends.

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 Capital appreciation happens when the current market price
of the investment in stock is higher than its purchase price,
making the investor money in the process if he chooses to
sell these stocks.
Cash dividend payment happens when the business pays out
a portion of its earnings to its stockholders.
3rd richest person in the world has a net worth of USD 72.7
billion today. Warren Buffett invested in stock market and
turned an initial USD 105,000 into USD 25 million in just
thirteen years.

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 In the Philippines, the Philippines stock market as
measured by the Philippine Stock exchange Index
(PSEi) as posted a return of 11.7% from the period
of December 2006 to December 2014 with inflation
averaged 4.23% over the same period.

December 2006 to December 2008, the Philippine

stock market recorded a negative return of -20.76%
which makes stocks described as volatile and
therefore risky.

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 Guidelines on sound stock market investing:

1. Think of stocks as pieces of businesses and not chips in the

casino and determines ownership in a business.
2. Invest only the amount of money that you can afford to lose
without that loss affecting your daily life.
3. Identify and invest in superior businesses. Research the
business in question. Its annual reports, financial statements,
how they make money, products and services they are
selling, the industry and its financial status.
4. Do not touch what you do not understand.
5. Price and value are different. “Price is what you pay. Value
is what you get”, Buffett.

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 6. Buy those superior business only when they are cheap or
during crisis – be it a stock market crisis or a financial crisis
or an economic crisis. “Buy when there’s blood on the
streets”, Baron Rotschild.
7. Let the magic of compounding work by investing for the
long term.
8. Buy some more of that stock if the price goes down after
your initial purchase.
9. Do not put your eggs in one basket. This means your
investments should practice diversification.
10. Sell your stocks once it has gained 50% or after three years,
whichever comes first – Benjamin Graham, Buffett’s
11. mentor.
Do not invest in Initial Public Offering without reviewing it.
If you want to invest, visit www.pse.com.ph and need to open
SBA.
Introduction Mr. Christopher B. Cauan
to Investments Business Finance
 Bonds
Why invest in Because of safety of principal or
bonds? capital and cash flow.
 Receiving a fixed amount of money every few months
without working or lifting a finger.
 After sometime you get back the amount you invested in.
Bond is a security that represents the debt of a government or
business promising to pay a fix interest to the holder of the
bond for a definite period of time.
Bond is a debt security while stock is an ownership or equity
security. Debt is prioritized over equity and payout.

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 If you are a bondholder , the government or a business
will give your money back plus the regular interest
payments called coupon.
Terminologies that are unique and important to bond
investing.
1. Bond issuer - Borrower
2. Investor - Lender
3. Coupon/Coupon rate – Interest rate
4. Term/Tenor is the time it takes for all payments to be made
by the issuer and received by the lender.
5. Face Value/Principal/Par Value is the borrowed amount.
6. Bill is a debt security that matures in a year or less.

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 7. Bond is a debt security that matures after a year or more.
8. Treasury is a term that signifies that the debt security is
issued by the government.
9. Yield is the return that you would expect if you hold the
bond for a year and expressed in percentage.
Bonds can come in two types:
Government bonds, also known as treasury bonds, are
issued by the bonds. If they are issued by a stable
government, are considered risk-free investments as the
government can print additional money or increase the tax
rate pay offbonds
Corporate the debt.
are issued by a business.

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 The Philippine government issues three types of debt securities:

1. The short-term Treasury Bills – 91, 182 and 364 days.

2. Fixed Rate Treasury Note (FXTN) – 5, 7, 10, 15, 20, and 25
years.
3. Retail Treasury Bond (RTB) – 3, 5, 7, 10, 15, and 20 years.
4. Foreign currency-denominated bond called ROP bond is
guaranteed by the Philippine government. In January 2015,
the government sold a 25-year ROP bond for USD2 million
with a coupon rate of 3.95%.

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 Guidelines on sound bond investing:
1. Identify and invest in stable governments. Research the
economic growth, fiscal situation and debt to GDP ratio of
the government in question, and invest only in stable
governments.
2. Identify and invest in superior businesses. Research the
business.
3. Pay attention to the issuer’s credit rating.
4. Hold the bond for the whole duration of the term. Leave the
trading to the banks and professional bond traders.

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 Managed Funds
Managed funds are companies or trust funds that pool
money from various investors and through a fund manager,
who in turn, invests that collected money in stocks, bonds,
or a combination of various investments.
In the Philippines, managed funds could either be mutual fund or
a Unit Investment Trust Fund (UITF).
Both mutual funds and UITF’s are classified as follows:
1. Equity fund
2. Bond fund (also known as fixed-income fund and income
fund)
3. Balance fund
4. Money market fund
Introduction Mr. Christopher B. Cauan
to Investments Business Finance
 Equity funds invests primarily in stocks, while a bond invests
primarily in bonds. On the other hand, a balanced fund invests
primarily in a combination of stocks and bonds. Money market
funds invests primarily in short-term securities representing
high-quality, liquid debt, and monetary instruments. c

Mutual fund is classified as a corporation, and as such, is

being regulated by the Security and Exchange Commission.
- Has the same rights as shareholders or ordinary
companies.
- Invest a minimum of 5% of the fund’s assets in liquid
or semi-liquid assets but not limited to savings or time
deposits with government-owned banks or
commercial banks.

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 On the other hand, UITF is a trust fund and is subject to
stringent regulations imposed by the Banko Sentral ng
Pilipinas (BSP) and is sold mostly by banks.
- An investor in a UITF is buying units of participation
in the fund, and not considered a stockholder.
- Shares of mutual funds and units of UITF’s are valued
only once during the day using Net Asset Value Per
Share (NAVPS) and Net Asset Value Per Unit
- (NAVPU).
It is calculated by dividing the total Net Asset Value
(NAV) or the difference between the assets and
liabilities of the fund by the number of outstanding
shares or units. These are reported at the end of the
business day.
- Investing in managed funds can be had for as low as
₱5,000
Introduction Mr. Christopher B. Cauan
to Investments Business Finance
 Guidelines on sound managed fund investing:
1. Look at the long-term track record of the fund, checking
three-five years performance.
2. Read the Fund Prospectus (for mutual funds) and the
Declaration of Trust (for UITFs) to see if it is aligned with
your own investment objective.
Prospectus is a document that contains information on the
objectives and policies of the fund, the strategies of the
fund manager, investment risks, among others.
A Declaration of Trust sometimes simply called Plan,
also contains the same information regarding the Unit
Investment Trust Funds.
3. Let magic of compounding work for you by investing for
the long-term and measured in years.
Introduction Mr. Christopher B. Cauan
to Investments Business Finance
 6.2 Different Types
of Investors

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 Stock and Bond Investor
Stocks are volatile and risky.
Stock investor will tend to be more aggressive investor
than the money market, fixed-income bond investor.
Real Estate Investor
Real estate investors tend to hold on to real assets
reflecting their desire in lock in money in real properties
to hedge against significant inflation.
Similarly, investors who prefer gold invest in this asset
because it is real asset that is a safe hedge against
inflation.

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 Business Entrepreneur
The investor-entrepreneur usually starts up a business for
the following reasons.
 To express his creativity and talent
 To make use of his personal skills and knowledge
 To practice self-management
 To achieve for financial independence
 To tap unlimited opportunities and reach unlimited
financial benefits

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 Building your own business through franchising.
Franchising refers to the method of practicing and using
another’s perfected business concept, Philippine Franchise
Association.
In a franchise relationship, the franchisee is granted the
right to market a product or a service under a marketing
plan or a system that uses the trademark, name, logo, and
advertising owned by franchisor.

For more information about franchising, you may visit

http:/www.pfa.org.ph/index.php.

Introduction Mr. Christopher B. Cauan

to Investments Business Finance
 End of
Chapter 6

Introduction Mr. Christopher B. Cauan

to Investments Business Finance