Business Finance Module 5 PDF

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BUSINESS FINANCEModule 5 - Quarter 2Type of Investment####### Senior High SchoolDepartment of Education • Republic of the PhilippinesIDevelopment Team of the ModuleAuthor: Benjie Mae A. Ramayan Content Editor: Language Editor: Cynthia M. Garrido Proofreader: Irish Joy Q. Nacua Illustrator/s: Shem C....

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Senior High School

BUSINESS FINANCE Module 5 - Quarter 2

Type of In Investment vestment

Department of Education • Republic of the Philippines

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Business Finance Alternative Delivery Mode Module 5- Quarter 2: Type of Investment First Edition, 2020 Republic Act 8293, section 176 states that: No copyright shall subsist in any work of the Government of the Philippines. However, prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office may, among other things, impose as a condition the payment of royalties. Borrowed materials (i.e., songs, stories, poems, pictures, photos, brand names, trademarks, etc.) included in this book are owned by their respective copyright holders. Every effort has been exerted to locate and seek permission to use these materials from their respective copyright owners. The publisher and authors do not represent nor claim ownership over them. Published by the Department of Education Secretary: Leonor Magtolis Briones, PhD Undersecretary: Diosdado M. San Antonio, PhD Assistant Secretary: Alma Ruby C. Torio, PhD Development Team of the Module Author: Content Editor: Language Editor: Proofreader: Illustrator/s: Layout Artists: Development Team: Chairperson:

Benjie Mae A. Ramayan Cynthia M. Garrido Irish Joy Q. Nacua Shem C. Tayanes Jr. Daryl H. Bao

Dr. Arturo B. Bayocot, CESO III Regional Director Co-Chairpersons: Dr. Victor G. De Gracia Jr. CESO V Assistant Regional Director Jonathan S. dela Peña, PhD, CESO V Schools Division Superintendent Rowena H. Para-on, PhD Assistant Schools Division Superintendent Mala Epra B. Magnaong, Chief ES, CLMD Members: Neil A. Improgo, PhD, EPS-LRMS; Bienvenido U. Tagolimot, Jr., PhD, EPS-ADM; Erlinda G. Dael, PhD, CID Chief; Ferminia M. Labis, EPS (Araling Panlipunan); Celieto B. Magsayo, LRMS Manager; Loucile L. Paclar, Librarian II; Kim Eric G. Lubguban, PDO II

Printed in the Philippines by Department of Education - Alternative Delivery Mode (DepEd-ADM) Office Address: Masterson Avenue, Upper Balulang, Zone 1, Cagayan de Oro City, Cagayan de Oro, Lalawigan ng Misamis Oriental Telefax: (02) 634 – 1054 or 634 – 1072 E-mail Address: [email protected] / [email protected] I

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Business Finance Quarter 2 – Module 5: Types of Investment

This instructional material was collaboratively developed and reviewed by educators from public and private schools, colleges, and or/universities. We encourage teachers and other education stakeholders to email their feedback, comments, and recommendations to the Department of Education at [email protected]. We value your feedback and recommendations.

Department of Education • Republic of the Philippines II

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III

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TABLE OF CONTENTS Page No.

Cover page

II

Table of Contents

IV

Overview

V

General Instructions

V

Lesson 1: Different Types of Investment

1

What I Need to Know?

1

What I Know

1

What‟s In

2

What‟s New?

3

What is it?

3

What‟s More?

8

What I Have Learned?

8

What Can I Do?

9

Assessment

10

Additional Activities

10

Answer Key

12

References

13

IV

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OVERVIEW This Chapter introduces the basic concept of investing and web like decision facing the individual investor. It presents a brief overview of the many investment alternatives, rewards and problems facing investors in today‟s environment. It also aims to provide reader with an understanding of basic investment that will help individual in investment decisions.

GENERAL INSTRUCTIONS For the learners: To be guided in achieving the objectives of this module, do the following:

For the teacher: To facilitate and ensure the students‟ learning from this module, you are encouraged to do the following:

1. Read and follow instructions carefully. 2. Write all your ANSWERS in your Activity Book 3. Answer the pretest before going through the lessons. 4. Take note and record points for clarification. 5. Compare your answers against the key to answers found at the end of the module. 6. Do the activities and fully understand each lesson. 7. Answer the self-check to monitor what you learned in each lesson. 8. Answer the posttest after you have gone over all the lessons.

1. Clearly communicate learning competencies and objectives 2. Motivate through applications and connections to real life. 3. Give applications of the theory 4. Discuss worked-out examples 5. Give time for hands-on unguided classroom work and discovery 6. Use formative assessment to give feedback 7. Introduce extensions or generalizations of concepts 8. Engage in reflection questions 9. Encourage analysis through higher order thinking prompts 10. Provide alternative formats for student work 11. Remind learners to write their answers in their Philosophy Activity Notebook

V

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Investment help us earn and at the same time exercise our business and entrepreneurial skills to be keener about the different business opportunities that area available around us. It is not enough for a person to have enough cash or assets; part of being financially mature is having that careful observation and being able to grab different opportunities to earn.

1

Different Types of Investment

What I Need to Know Learning Objectives In this lesson, you will: 1. Identify the types of investments particularly bank deposits, insurance, real state, mutual funds and stocks and bonds. 2. Indicate the advantages and disadvantages of each type of investment. 3. Explain the risk inherent in each type of investment.

Multiple choice. Encircle the letter of the best answer. 1. Which of the following investments do not earn interest? a. Savings account

c. Bonds

b. Current account

d. Time deposit

2. Which of the following is not an example of a deposit investment? a. Savings

c. Current

b. Mutual funds

d. Time deposit

3. The person that manages a person‟s mutual fund a. Creditor

c. Broker

b. Bondholder

d. Stockholder 1

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4. These payments are needed to maintain an insurance account a. Interest

c. Premium

b. Dividends

d. Capital gains

5. What is the income earned on a bond? a. Interest

c. Premium

b. Dividends

d. Capital Gains

6. What do you call an owner of a company‟s stocks? a. Stockholder

c. Broker

b. Bondholder

d. Creditor

7. What is the income earned on a stock? a. Interest

c. Dividend

b. Premium

d. Deposit

8. What is the strategy to earn short-term income from stocks? a. Buy high sell low

c. buy high sell high

b. Buy low sell high

d. buy low sell low

9. These are tangible assets held as investments a. Deposits

c. Stocks and bonds

b. Funds

d. Hard assets

10. What is the income earned on a building? a. Interest

c. Rent

b. Dividend

d. Credit

The word investment brings forth visions of profit, risk, speculation, bankruptcy and wealth. The dramatic changes in securities market, the proliferation of new investment products resulting from financial engineering, the continuous changes in the tax rules are examples of additional factors that investors must consider in developing and implementing https://www.nuwireinvestor.com strategies. Likewise, it would be best to remember that the investment medium or vehicle must ensure that the money will be available when it is needed and the investment money should grow because a peso‟s real value today is greater than a peso‟s value tomorrow in a world of inflation.(Bus. Finance Principles and Application,2017)

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What you will do Activity 1.1: “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? Allowance

Expenses

Savings

Monday Tuesday Wednesday Thursday Friday Saturday Sunday 4. Where do I put my savings?

Lesson 5: Types of Investment What is investment? 1. Investment opportunities should be grabbed only when you have extra resources available for such, but it does not always mean that it should always be grabbed. If you are only operating within your means, learn to prioritize; investment can take a back seat first. After all, these opportunities are not always once in a lifetime. If you missed one today, you could grab the next one soon enough. You just need to keep your eyes open. 3

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2. Investment should not be your main source of income . Unless you are a stockbroker, an insurance salesman. Or an investment banker, you should not heavily rely on the income coming from your investment. One good reason is that your investment generate income and/or cash flows that are largely independent from your main line of business. Heavy reliance on the inflows coming from these assets would create a „feast or famine‟ condition. This means heavily relying on the resources that these assets might generate, given that they do not produce regular cash flows, might make you very prosperous one moment and then very unfortunate the next. 3. Investments require additional risk-taking. Investments are quite risky asset, a person planning to invest must be able to learn how to take risks. It is from these risks that the investor earns. Different Types of Investments will be grouped into three (1) fixed income and equities (2) alternatives to fixed income and equities, (3) other investment assets 1. Fixed income and equities Investment Type Stocks (Equity) “Type of security that signifies ownership in a corporation and represents a claim on part of the corporation‟s assets and earning” Bank Deposits (Fixed Income) “Money placed into a banking institution for safekeeping” - common type of investment - the availability of funds also depends on the investment opened. Types of Bank Deposit · Current account/ Checking account - do not earn interest. · Savings account - earns interest but not that significant, but the most common among individuals. · Time deposit account earn the highest interest rate. It is not always available for withdrawal. It is evidenced by a certificate of deposit which can be bought

Advantages

·

Disadvantages

· ·

Unlimited Upside

No guaranteed returns. Riskiest of all assets (can

lose even more than 50% of their money in one day)

·

Known income based on

outstanding principal current interest rate

·

and

Shorter, if any, holding

period vs. bonds

4

·

Lower interest income vs.

Bonds

·

Settlement risk if the bank

closes.

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or sold by the depositor themselves.

Bonds (Fixed Income) “Debt investments where an investor loans money to an entity which borrows the funds for a defined period of time at a variable or commonly, fixed interest rate”

·

Known periodic payments

for a certain period

·

Cannot lose money if bond

investment maturity

is

held

until

2. Alternatives to fixed income and equities Investment Type Advantages “Give small investors access Mutual funds “An investment that is made to professionally managed, portfolios of up of a pool of funds diversified collected from many equities, bonds and other investors for the purposes of securities, which would be difficult (if not investing in stocks, bonds, quite impossible) to create with and similar assets” small amount of capital” - can be short or long term Unit Investment Trust Same as mutual funds. Fund (UITF) “Similar to a mutual fund but Easier access because is managed by banks clients can open an account

· ·

·

If not held until maturity

and pre-terminated, investor can gain or lose depending on the prevailing interest rates at the time of pretermination. If interest rates are higher, investor in bonds can lose in the pretermination

Disadvantages

· Pay management fees · Values can also fluctuate just like the stock market

·

No shareholder rights for

investors such as dividends and voting rights

in any branch of the bank near them.

·

No entry and management

fees. Management Fee- the amount clients pay to the professionals who manage their mutual funds, normally a certain percentage of portfolio value. Dividends - distribution of the company‟s income to its shareholders. Voting Rights - right to be heard on certain policies that the company wants to implement.

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3. Other investment assets Investment Type Currencies “Generally accepted form of money, including coins and paper notes, which is issued by government and circulated within an economy” (i.e. USD, EUR, JPY) Commodities “A basic good used in commerce that is interchangeable with other commodities of the same type” (i.e. Gold, nickel, oil)

Advantages

Disadvantages

· Largest market in the world · in terms of trading volume, so much liquidity

Volatile and trades 24-

hours a day (must be closely monitored)

· Unlike stocks, commodities, ·

Generally, uses margin

etc., currency itself is a medium of exchange which people can use to transact

trading which allows clients to be more than their capital (may also be an advantage)

·

·

Natural hedge against

Same as currencies

inflation.

·

Negatively correlated with

equities and bonds (may be used for diversification)

· Hedge against geopolitical

·

Impractical

to

invest

directly considering storage, transportation and insurance costs involved

risks Real Estate “Land and any improvements on it” (i.e. land, house and lot, condominiums)

· Generally,

appreciates overtime because land get scarce

·

Have relatively low correlations with other asset classes (may be used for diversification)

·

· Huge

capital

needed,

financing can be difficult

·

Maintenance

of

the

property needed to preserve its value

· Illiquid or difficult to sell

Can be a source of recurring rental income

·

May also be a hedge against inflation-linked rent escalation clauses Insurance “A contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company (i.e. Life insurance, educational plan, VUL)

· Give

the

insured

individual/entity the cash/capital to deal with unforeseen adverse financial consequences

·

May provide certain tax

benefits (i.e. tax deductibility, tax-free provisions)

·

Insurance premiums may be costly

·

On some of traditional insurance plans, no sickness/death until a certain age may mean not getting any benefits at all (that‟s why VUL‟s are now very prevalent)

·

Some insurance companies can go bankrupt (i.e. College Assurance Plan) if companies fail to factor significantly adverse unforeseen circumstances

6

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Liquidity - ability to be converted into cash, the higher the liquidity the better. Margin Trading - allows clients to trade more than their capital. It can magnify both earnings and losses. Inflation - general increase in prices. Hedge - investment that reduces the risk of adverse price movement in an asset. Diversification - process of investing in different kinds of assets to lessen exposure in market/price volatility. Geopolitical risks -” risks of one country‟s foreign policy influencing or upsetting domestic, political and social policy in another country or region” (source: Columbia Threadneedle Blog. (2016) Correlation - how price of an asset moves with respect to another asset (i.e. positive correlation if both assets move in the same direction, negative correlation if both assets move in opposite direction) Escalation Clause - agreement to raise prices in the future depending on certain circumstances (i.e. increase in inflation leading to higher rental rates). Insurance Premium - the amount paid on a regular basis to the insurance company in return for the insurance/protection provided. VUL - Variable Universal Life Insurance or a life insurance that offers both death benefit and investment features.

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What Have I Learned Activity 1.2: 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

____ 1.

Stocks

____ 2.

Bank Deposit

A. On some of traditional plans, no sickness/death until a certain age may mean not getting any benefits at all B. Shorter, if any, holding period vs. bonds

____ 3.

Mutual Funds

C. Can be a source of recurring rental income

____ 4.

Real Estate

D. Riskiest of all assets (can lose as much as 50% of their money in one day)

____ 5.

Insurance

E. Pay management fees

Where to Invest? → the amount of cash should be considered. The investor must invest within his means. Not all his extra resources must be used to buy investment, because there will always be circumstances in which cash will be needed in case of emergency. → the risk inherent in the investment should be considered. Higher risk entails higher return. Deposits are the least risky investments, but they earn the least, too. Real Estate investments do earn a lot, but they are so risky that they could even cause a national economy crash. We must not put all the money in one investment, so as to spread or diversify risk. The good thing with managing risk or diversifying our investment, is if ever we are not successful in one of the investment opportunities that we grabbed, we will still have other investments left which wo...