INTRODUCTION TO INVESTMENT

This chapter introduces students to different type of investments such as bank deposits,
bonds, stocks, and mutual funds. The advantages and disadvantages of each alternative investment
are also discussed. Basic risk and risk-return measures are also highlighted in this chapter.

LEARNING OBJECTIVES:
1. Compare and contrast the different types of investments
2. Classify investment according to its type and features, and advantages and disadvantages
3. Evaluate and list ways to minimize or reduce investment risks in simple case problems.

What’s New
Warm up Activity

I. “My weekly budget”

Direction: Answer the following questions and 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?

II. “Watch me Activity”

Please watch the story of Warren Buffett through a biography video from YouTube, Warren Buffett:
Bio of the World’s Greatest Businessman, 2006 (https://www.youtube.com/watch?v=yUfUMymDVyo)

At your age, you have the most valuable asset in investing – TIME. (Just like Warren Buffett who
started investing at the age of 9, and felt it was even too late. He is now one of the richest men in the
world)

Who wants to be like Warren Buffett? So, invest as early as now!

DISCUSSION: LESSON PROPER

WHAT IS INVESTMENT?

Investing is the act of committing money or

capital to an endeavor with the expectation of obtaining
an additional income or profit.
According to Warren Buffet, it defines as “the
process of laying out money now to receive more
money in the future.” Its goal is to put your money to
work in one or more types of investments in the hopes
of growing your money over time. In other words,
investing is really about “working smarter and not
harder”. It’s about making priorities for our money.
Spending is easy and gives instant gratification.
However, it gives your hand-earned money a quick
release. Investing requires that we prioritize our
financial future over our present desires.

1
HOW DO YOU INVEST?

There are many different ways you can go about investing. 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 of uncertainties that even the investment aside from the promised return will not
be recovered.

The different TYPE OF INVESTMENT are as follows:

TYPE OF INVESMENTS ADVANTAGES DISADVANTAGES

1. Investing in a Bank • One of the advantages of • The security being provided
investment or financial tools is balanced out by the
Investing money in a bank is available at a bank is painfully Lower Returns on
an investment option either: actually about Security. these financial services.

1.1 Savings account –safety • Bank investment whether in • Liquidity can be either
keeping of excess funds a savings account, time advantage or a
where it will accrue a small deposit or money market disadvantage.
amount of interest which account is safe or least risky
makes it not the best option since it is insured and Advantage if investment is
for long-term growth. It can guaranteed by Philippine in savings account. While it
easily withdrawn in case of Deposit Insurance earns small returns, it has
need or for other Corporation (PDIC) access to money in a
productive purposes. compared to the investment savings account at any time.
1.2 Time deposit- with higher in stock market considering
interest rates but contains the volatility of the stock Disadvantage if investment
some serious restrictions market due to the impact of is in time deposits and
on its withdrawal. economic trends. money market accounts.
2. Investment in Bonds

• A bond is like an IOU (I

owe you) issued by a
government or by a
company with profitable
tract record. Public or • Investing is always with a
anybody will lend money fixed term ordinarily more
for a number of periods to than a year, if money is
• One of the safest ways to
paid fixed interest rate- needed in a short run, it will
make money considering
called coupon. be sold for a lower amount
the fixed interest.
meaning receiving an
• The level of risk involved amount lower than the
depends on the issuer of original investment.
bonds.

• Sometimes called fixed

interest investments.

3. Investment in Shares of
Stock
• Owning stocks has been
• Like buying a small part of the best way historically to
a company. Company build wealth but depends
• Dividends or share in profit
makes money and it will however with company’s
will be dependent on the
be distributed to each performances and affected
BOD declaration, meaning a
share through dividends. by economic factors.
corporation cannot be
• Aside from receiving
obliged to give dividend
• Share market prices are dividends, a possibility of
every year.
expected to go up capital gain when
overtime and give a increases in the stock
“capital gain” on its prices in the market.
original investment aside
from dividends received

2
 but sometimes can fall in
value depending on the
performance of the
company.
Managed funds have plenty to
offer investors.

• Diversification- means
investors who don’t have
enough money can have • Pay fees for hiring a
the opportunity to buy professional money manager
4. Mutual Funds different types of to manage investment of
investments through funds even if the fund loses
• A managed fund is a pooling of funds of other money.
financial product that buys investors.
a number of shares and • Easy for Novices to get • Although money is
other investments such as involved- need not to be professionally managed,
property, term deposits, sophisticated investors there is still no guarantee
and cash. since there are so many specifically during market
different types of funds down time.
• An investment that is available.
made up of a pool of • Convenience- essentially • Being handed over
funds collected from many an all-in-one package. completely to the control of a
investors for the purposes • Fund Management- stranger.
of investing in stocks, managed by a professional
bonds, and similar assets. fund manager which is • Dividends and capital gains
more beneficial to a are taxable.
starting investor with
minimum amount of
investment.
• Investment amount-
minimum amount is as low
as P10,000.
• Price ordinarily is
5. Real Estate Investments
appreciating or increasing.
• Investment is a long term
• “Land and any process.
• Cannot be taken away by
improvements on it” (i.e.
anybody and can be
land, house and lot, • Realization of profits will take
passed on to the
condominiums) time and looking for
beneficiaries.
interested buyers is
• Safest among other sometimes a challenge.
• Can be a source of
investments
recurring rental income
6. Other alternatives

Other investment types can include things such as private equity, hedge funds, fine wine, exotic
cars and stamps. There are different reasons for buying each one but as with all investments,
their value can go up or down.

WAYS AND MEANS TO MINIMIZE INVESTMENT RISKS

Investments are typically categorized according to their corresponding risks and returns. Risk
is not a bad thing but there is a need to understand what kind of risks the investment can take and
how to reduce unacceptable level of risk.

5. Determination of tolerance to different kinds of risk. Understanding the type of risk, or

combination of types of risk is essential in reducing those risks. There are two factors that can
help determine the risk tolerances are net worth and risk capital. The net worth is assets
minus liabilities. The 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 is higher. But if the net worth is modest or nothing, and risk capital is not much,
probable to be better off with conservative, low-risk investment.

3
 6. Conducting due diligence. Make research about the investment instruments before finalizing
the investment plan.

7. Diversification of investment portfolio. It’s the risk management strategy of combining a

variety of assets to reduce the overall risk of an investment portfolio. It also lowers its volatility
as movements or changes are not expected to happen at the same time in all asset categories,
industries or stocks.
For example, investment money can be made as follows:
8. 25% into CDE stock;
9. 25% into time certificate of deposit;
10. 25% into Treasury bonds; and
11. 25% into real estate

Profit is realized when there will be an increase in the market price of stock of CDE Company.
But this profit potential is reduced by the fact that only a portion of the money is invested in
the said stock. In case, CDE Company fails, the loss is also limited since 75% of the money
is invested in other products.

12. Monitoring of investments. A regular reallocation of resources is necessary for control

purposes. Proper allocation depends on such factors as age, investment period and
temperament.

13. 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 insurance from the
Philippine Deposit Insurance Corporation.

WHAT I HAVE LEARNED

Activity 2: Matching type
Direction: Match the investment asset in column A with its advantage and disadvantage in column B
by writing the capital letter on the left side of column A.

(A) Investment Asset (B) Advantage/Disadvantage

A. Safest ways to make money considering the fixed

____ 1. Share of Stock
interest.

B. Security, insured and guaranteed by Philippine

____ 2. Bank Deposit
Deposit Insurance Corporation (PDIC).

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

D. Dividends or share of profit will be dependent on

____ 4. Real Estate
the BOD declaration

____ 5. Bonds E. Pay professional fees