C H A P T E R 3:

INVESTING
A. I N V E S T I N G / I N V E S T M E N T D E F I N E D : Investing is the act of allocating funds to an
asset or committing capital to a business endeavor, with the expectation of generating
an income or P r o f i t In colloquial terms, investing can also mean putting in time or effort
- not just money - into something with a long-term benefi t such as an education.

I n v e s t i n g = is the process of placing funds in selected investment vehicles with the

expectation of generating positive income and preserving or increasing their value.
The most effective way is to build your personal wealth and secure you Financial
future. It is a long-term process by committing a portion of earnings to a share with
the expectation of receiving a return. It is the process of using your money with the
aim of making it grow.

Investment=is concerned with the management of an investor’s wealth, which is the sum of current
income and the present value of all future income. Is an activity that is engaged in by people who have
extra funds and/ or savings.

Investment = it is the employment or putting up of funds or assets to productive activities for earning
profit

Investment = is the commitment of funds to one or more assets that will be held over some period of
time in the future. It is concerned with the management of an investor’s wealth which is the sum of
current income and the present value of all future income.

Investment = is the use of financial capital in an effort to create more financial capital in the future.
(by Levy, Haim) That is, an investor forgoes consumption today in an attempt to achieve an even higher
level of consumption in the future.

Investment = is any vehicle into which funds can be placed with the expectation that they will generate
positive income and/or their value is preserved or increased. (Gitman, et. L)

Investment = is any asset or property right acquired or held for the purpose of conserving capital or
earning an income. T h i s d e fi n i ti o n does not limit to property intended to return cash income or
cash profit but moreover on returns in terms of: (a) family satisfaction; (b) exemption from rental payments;
and (c) protection from the peso devaluation.

B. CATEGORIES OF INVESTMENT:
a) Real Investment = refers to investments in the form of tangible assets such as land,
houses, precious metals, buildings, and equipment. These are income-generating assets
used to produce goods & services. Investors in physical assets usually plan to hold their
investments for a relatively long time. These are not liquid and are not easily
divisible.

b) Financial Investment = refers to investments in the form of paper assets which are
collectively called marketable securities such as bonds, stocks, convertible securities,
 mutual funds and short-term money market instruments. These represent claims
against the income generated by real assets. Investors in paper assets usually plan to
hold their investments for shorter period of time. Paper assets re very liquid and re
easily divisible.

c) Money Market Investment = investments in securities with maturities of less than one
(1) year. e.g. Treasury Bills issued by the Bureau of Treasury with maturities of less than
360 days. Aside from the BSP, the banking sector is the major investor in the money
market with other players such as SSS, the GSIS, & HDMF.

Treasury Bills = are domestic government debt issued regularly to balance the
national government needs for capital. These are used s monetary tools to control
liquidity, and are used for reserve requirements and collateral.

d) Capital Market Investment = investments in securities with maturities greater than one
(1) year.) e.g. Government Bonds issued by BTr, BSP & private companies like Globe
Telecoms with maturities of 2-30 years, ERAP Bonds & Municipal Bonds.

C. FEATURES OF INVESTMENT PROGRAM: These are the basic investment principles that will
serve as criteria for sound investment. In choosing a special investment, investors will need
to debate ideas regarding several features to be possessed by their portfolios:
1. Safety of Principal. This refers to the protection or preservation of the capital invested. This
does not necessarily mean that the market prices of one’s investment never shrink below
their cost but it means that investors must avoid unsound & profit less risk. This
may take the form of investing companies with a track record of earnings and sound
management. In short, this calls for a careful review of the economic & industry trends
before choosing types of investments or the time to invest. Sometimes investors are
carried away by the promise of very large returns, and in considering this possibility they
forget about the safety of the capital invested.

2. Adequate Liquidity of Investment & Collateral Value. This means that one’s investment
should have the capacity to be sold for cash or to be borrowed at full value without
delay and that it could be used as collateral in times of emergencies. Stocks and bonds are
liquid investments while real estate assets are less liquid.

3. Stability of income or Regular Income Stream. This means that the investing public may
look up to their investments as a supplementary source of c a s h f l o w , especially if
the investor depends closely on the income of the business, hence the investment should
have stable income. Most investors hope to get a regular return on their investment which
they may consider satisfactory.

4. Purchasing Power Stability. This means that the principal and income from the investment
should have stable ability to purchase goods & services in times of i n f l a t i o n Here,
the investors should carefully study the: (a) degree of price level i n f l a t i o n they
expect; (b) possibilities of gain & loss in the investment; and (c) limitations imposed by
personal and family considerations.
 5. Adequacy of Income After Taxes. Here, an investor is concerned with the amount of income
paid by the investment and with the burden of income taxes upon that income. Investors
oftentimes choose types of investments whose income is still enough even after taxes have
been paid.

6. Possible Capital Appreciation. An investment feature wherein the value of t h e

investment could increase as years pass by, hence, investors can profit by choosing carefully,
buying at the right time, and going from over-priced to underpriced items. This is the
probability of buying an asset cheaply and turning it around for a profit after a reasonable
holding period. Some investors are not as concerned with immediate income but look for
sound companies that are expected to have a larger than normal growth over the after (5) to
ten (10) year period.

7. Freedom from Care. This means that an investment needs constant skilled supervision of the
investor to avoid losses & obtain better returns; hence, maximum commitment is required.
Where the investor does not manage the investment; he employs counselors or
management services of a trust company.

8. Legality. The investment must be complete or absolute in legal compliance requirements

approved by law.

D. HABITS OF INVESTING:
1. Invest regularly. Regular investments increase the buying power of an individual especially
when the share price falls.

2. Invest for the long-term. Short-term investments are volatile while long-term investments
grow.

3. Invest in good quality companies. GEMS Principle is applied:

G – Growing Industry
E – Earnings Growth
M – Management Credibility
S – Superior products/service

4. Diversify. It is a portfolio of various assets that earns the highest return for the least risk. A
diversified portfolio is your best defense against a financial crisis.

Diversification = Most individuals are familiar with the saying that “one should not put all
of one’s eggs in one basket.” In the investment, it is essential to diversify. No matter how
good an investment opportunity looks, the investor should not put all his capital into one
investment. The average investor better diversified his holdings into several
d i ff e r e n t companies. Perhaps keeping investments in three (3) to more (5) companies
is reasonable.
 Diversification = is a risk management strategy that mixes a wide variety of investments
within a portfolio. A diversified portfolio contains a mix of distinct asset types and
investment vehicles in an attempt at limiting exposure to any single asset or risk. The
rationale behind this technique is that a portfolio constructed of different kinds of assets
will, on average, yield higher long-term returns and lower the risk of any individual holding
or security.

Diversification = spreading investment among different companies in different industries

and different locations. It refers to the assortment of investment commitments as a
means of averaging the risks or losses.

How does Diversification work? The basic idea behind Diversification is that the good
performance of some investments balances or outweighs the negative performance of
other investments. D i v e r s i f i c a t i o n is an asset allocation plan, which properly
allocates assets among different types of investment. By constructing a well-diversified
portfolio, they protect their investments, while allowing a growth potential. Also, the
proper asset allocation, allows them to leverage investment risk and portfolio volatility as
each asset is expected to react differently to various market conditions.

Ways to Diversify:
1. By Industry. Distributing your investment into different types of industry.

2. By Geographical Location. Distributing your investment in different areas or places.

3. By Personnel Management. Distributing your investment in different organizations as

to management.

4. By Financial Type. Distributing your investment in different organizations

as financial orientation stability
5. By Maturities. Distributing your investment in different stocks/securities of different
maturities.

E. DIFFERENCE BETWEEN SAVING AND INVESTMENT:

SAVING VS. INVESTING

Means putting money aside gradually, Investing is the process of using

typically into a bank account for unexpected money with the aim of making
financial emergencies. it GROW.

#1 Meaning Stimulates economic growth by giving

businesses access to funds, which can be Redirecting resources to create
invested to increase production and in turn profit in the future.
create more and better products.
 Are made to full short term or urgent Is made to provide returns and
#2 Purpose financial requirements. help in capital formation.

Short term goals Long term goals

#3 Goals
Less than or (5) years Five (5) years or more.
No risk of loss of principal Trade potential short term loss
#4 Risk for long term gains.

No or low real return after taxes and inflation Positive real return after taxes
#5 Return and inflation

Is done either in saving bank account or Is done by buying gold or

# Examples in liquid fund mutual accounts. investing in stocks, property or
shares in a mutual fund.

F. REASONS FOR INVESTING:

1. Financial Security = refers to the peace of mind you feel when you aren't worried about
your income being enough to cover your expenses. It also means that you have enough
money saved to cover emergencies and your future f i n a n c i a l goals. It is an individual
or family’s financial outlook as it relates to savings, planning, investments and long-term
income.

2. Financial Independence = refers to the status of having enough income to pay one's living
expenses for the rest of one's life without having to be employed or dependent on others.
Income earned without having a job is commonly referred to as passive income.

Financial Independence is the ability to live from the income of your own personal
resources.” – Jim Rohn

3. Financial Freedom = Generally, means having enough savings, investments, and cash on hand
to afford the lifestyle we want for ourselves and our families—and a growing nest egg that
will allow us to retire or pursue the career we want without being driven by earning a
certain amount each year. Financial freedom is about much more than just having money.
It’s the freedom to be who you really are and do what you really want in life. It’s about
following your passion, making choices that aren’t influences by your bank account, and
living life on your terms.
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