REMINDERS

(Google Classroom)

Please:

[Link] account:
SURNAME, FIRST NAME, MIDDLE NAME

2. Camera must be OPEN AT ALL TIMES during class.

[Link] microphone in mute mode.

[Link] note of your class number for recitation.

Thank you.
Jewelyn E. Ciocon,
DBA
 COURSE SYLLABUS
LEARNING PLANS
Session/ Content/Topic
Week

1. INVESTMENT ENVIRONMENT
•Develop a clear understanding of the course contents and
2-3 understand the term investment and factors used to differentiate
types of investments
•Be able to explain and describe the investment process and
types of investors
•Discuss the basic types of investment vehicles.
2. SECURITIES
•. Identify the different types of securities that investors routinely
4 buy and sell in financial markets around the world
•Develop a clear understanding of the different classes, Interest-
Bearing Assets, Equities, Derivatives and Option Contracts
Session/ Content/Topic
Week
5
3. SECURITIES REGULATION CODE OF THE PHILIPPINES

6 PRELIMS

7-8 4. EQUITY VALUATION MODELS

9-11 5. FINANCIAL STATEMENT ANALYSIS

12 MIDTERM

13-15 6. FUNDAMENTAL AND TECHNICAL ANALYSIS OF AGGREGATE

MARKET

16 FINAL EXAM
 MODULE 1

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WHAT IS A SECURITY?

• The term "security" refers to a fungible,

negotiable financial instrument that holds some
type of monetary value. It represents an
ownership position in a publicly-traded
corporation via stock; a creditor relationship
with a governmental body or a corporation
represented by owning that entity's bond; or
rights to ownership as represented by an option.
(Investopedia)
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Types of Securities

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Module 1
The Investment
Environment

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The Investment Environment

• Learning Goals
1. Understand the term investment and factors used to
differentiate types of investments.
2. Describe the investment process and types of investors.
3. Discuss the principal types of investment vehicles.
4. Describe the steps in investing and managing personal tax
issues.
5. Discuss investing over the life cycle and in different
economic environments.
6. Understand the popular types of short-term
investment vehicles.

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What is an Investment?

• Investment: any vehicle into which funds can be

placed with the expectation that it will generate
positive income and/or that its value will be
preserved or increased
• Return: the reward for owning an investment
– Current income
– Increase in value

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Types of Investments

• Securities or Property
– Securities: stocks, bonds, options
– Real Property: land, buildings
– Tangible Personal Property: gold,
artwork, antiques

• Direct or Indirect
– Direct: investor directly acquires a claim
– Indirect: investor owns an interest in a professionally
managed collection of securities or properties

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Types of Investments (cont'd)

• Debt, Equity or Derivative Securities

– Debt: investor lends funds in exchange for interest
income and repayment of loan in future (bonds)
– Equity: represents ongoing ownership in a business or
property (common stocks)
– Derivative Securities: neither debt nor equity; derive
value from an underlying asset (options)
• Low Risk or High Risk
– Risk: chance that actual investment returns will differ
from those expected

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Types of Investments (cont'd)

• Short-Term or Long-Term
– Short-Term: mature within one year
– Long-Term: maturities of longer than a year

• Domestic or Foreign
– Domestic: Phil.-based companies
– Foreign: foreign-based companies

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Suppliers and Demanders of
Funds

• Government
– Federal, state and local projects & operations
– Typically net demanders of funds
• Business
– Investments in production of goods and services
– Typically net demanders of funds
• Individuals
– Some need for loans (house, auto)
– Typically net suppliers of funds

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• Suppliers and Demanders of Funds
• Key participants or rather suppliers and
demanders of funds in the financial markets are
individuals, businesses, and government. firms
and government
• Government
• Governments are typically net demanders of
funds. They typically borrow more than they
save. This is because of the need to finance State
and local projects & operations.

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• Business
• Business firms are are also net demanders of
funds. They typically borrow more than they
save. The borrowing can be attributed to
Investments in production of goods and
services.
• Individuals
• Individuals as a group are the net suppliers of
funds for financial institutions (They save more
than borrow). Some are neede of loans to
finance house, auto, among others. The
individuals are therefore Typically the net 1-15
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Figure 1.1
The Investment Process
The investment process
involves the financial
institutions (banks,
savings and loans, savings
banks, credit unions,
insurance companies,
pension funds) actively
participate in the financial
markets as both suppliers
and demanders of funds.
The financial
markets (Money and
capital markets) act
as forums in
which suppliers of funds
and demanders of funds
can transact business
directly
Then we have
the suppliers and
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demanders 1-16
of
Types of Investors

• Individual Investors
– Invest for personal financial goals
(retirement, house)
• Institutional Investors
– Paid to manage other people’s money
– Trade large volumes of securities
– Include: banks, life insurance companies,
mutual funds and pension funds

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Investment vehicles

• Investment vehicles are assets offered by

the investment industry to help investors move
money from the present to the future, with the
hope of increasing the value of their money.
These assets include securities, such as shares,
bonds, and warrants; real assets, such as gold;
and real estate.

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Table 1.1
Overview of Investment Vehicles

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Steps in Investing

• Step 1: Meeting Investment Prerequisites

a. Adequately provide for necessities of life, including
funds for meeting emergency cash needs
b. Adequate protection against losses from death,
illness and disability
• Step 2: Establishing Investment Goals
Examples include:
a. Accumulating retirement funds
b. Enhancing current income
c. Saving for major expenditures
d. Sheltering income from taxes

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Steps in Investing (cont'd)

• Step 3: Adopting an Investment Plan

a. Develop a written investment plan
b. Specify target date and risk tolerance for each goal
• Step 4: Evaluating Investment Vehicles
a. Assess potential return and risk
b. Chapter 4 will cover risk in detail
• Step 5: Selecting Suitable Investments
a. Research and gather information on
specific investments
b. Make investment selections

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Steps in Investing (cont'd)

• Step 6: Constructing a Diversified Portfolio

a. Use portfolio comprised of different investments
b. Diversification can increase returns or decrease risks

• Step 7: Managing the Portfolio

a. Compare actual behavior with expected performance
b. Take corrective action when needed

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Taxes in Investing Decisions

• “It’s not what you make, it’s what you

keep that is important.”
• Tax Planning Involves:
– The desired return after-taxes
– Type of income received from investments
– Timing of profit-taking and loss recognition

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Taxes in Investing Decisions
(Philippine setting)

• Basic Sources of Taxes in Investing

– Income Tax: tax rates from 10% to 35%
– 0.6% stock transaction tax for every time you sell your
– capital gains tax of 15%.
– commissions you pay to them are subject to a 12%
value-added tax
– cash dividends from your stocks, that will be subject to
a 10% final withholding tax.
– initial public offering, there's also tax ranging from 1%
to 4%
– a documentary stamp tax amounting to P1.50 for every
P200 par value of the shares.
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Types of Income for Individuals

• Active Income: income from working (wages,

salaries, pensions)
• Portfolio Income: income from investments
(interest, dividends, capital gains)
• Passive Income: income from special
investments (rents from real estate, royalties,
limited partnerships)

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Taxes in Investing Decisions
(cont'd)

• Ordinary Income
– Active, portfolio and passive income included
– Taxed at progressive tax rates (rates go up as income goes up)

• Capital Gains and Losses

– Capital Asset: property owned and used by taxpayer, including
securities and personal residence
– Capital Gain: amount by which the proceeds from the sale of a
capital asset are more than its original purchase price
– Capital Loss: amount by which the proceeds from the sale of a
capital asset are less than its original purchase price

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Table 1.2 Philippine Tax Rates and Income
Brackets for Individuals

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Investing Decisions
Over Investor Life Cycle

• Investors tend to follow different investment

philosophies as they move through different
stages of the life cycle.
• Youth Stage
– Twenties and thirties
– Growth-oriented investments
– Higher potential growth; Higher potential risk
– Stress capital gains over current income
• What are some examples of age-appropriate
investments?
– Common stocks, options or futures

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Investing Decisions
Over Investor Life Cycle (cont'd)

• Middle-Aged Consolidation Stage

– Ages 45 to 60
– Family demands & responsibilities become important
(education expenses, retirement savings)
– Move toward less risky investments to preserve capital
– Transition to higher-quality securities with lower risk
• What are some examples of age-appropriate
investments?
– Low-risk growth and income stocks, preferred stocks,
convertible stocks, high-grade bonds

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Investing Decisions
Over Investor Life Cycle (cont'd)

• Retirement Stage
– Ages 60 and older
– Preservation of capital becomes primary goal
– Highly conservative investment portfolio
– Current income needed to supplement
retirement income
• What are some examples of age-
appropriate investments?
– Low-risk income stocks and mutual funds, government
bonds, quality corporate bonds, bank certificates of deposit

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Investing in Different
Economic Environments

• Market Timing: process of identifying the current

state of the economy/market and assessing the
likelihood of its continuing on its present course
• Three Conditions of the U.S. Economy
– Recovery or expansion
• Corporate profits are up, which helps stock prices
• Growth-oriented and speculative stocks do well
– Decline or recession
• Values and returns on common stocks tend to fall
– Change in the general direction of the economy’s
movement

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Figure 1.2 Different Stages
of an Economic/Market Cycle

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The Business Cycle is the pattern of upward and downward
movement in the general level of real economic activity. The
business cycle is divided into four phases:
[Link]: downturn when output declines for six months or
more. Unemployment rises and economic activity declines. A
depression is a prolonged recession.
2. Trough: occurs when output stops falling—when output reaches
its low point.
3. Recovery or Expansion: the period after the trough, when the
output increases, unemployment falls and economic activity
increases.
[Link]: the final stage of the business cycle and precedes a
recession. Output growth ceases.

Since 1924 business cycles average about 5 years in length:

recessions one year and recoveries four years.
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Investing Decisions
and Interest Rates

• Interest rates are the single most important

variable in determining returns to investors
for bonds and fixed-income securities.

• Interest rates and bond prices move in

opposite directions:
– When interest rates go up, bond prices go down
– When interest rates go down, bond prices go up

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The Role of Short-Term
Vehicles
• Liquidity: the ability of an investment to be
converted into cash quickly and with little or
no loss in value
• Primary use is for emergency cash reserve
or to save for a specific short-term
financial goal

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The Advantages and Disadvantages
of Short-Term Vehicles

• Advantages
– High liquidity
– Low risks of default

• Disadvantages
– Low levels of return
– Loss of potential purchasing power
from inflation

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Chapter 1
Additional
Chapter Art

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17 Best Investment Vehicles for
Filipinos [Link]

Investment Minimum Capital Average Returns Risk Level

Social Trading ₱5,000 10-70% per year Medium
Exchange Traded
₱5,000 6–11% per year Medium
Fund (ETF)
4.58%–8.11% per
Pag-IBIG MP2 ₱500 Low
year
Low
Bonds ₱5,000 4.7–6.3% per year

Insurance (VUL) ₱2,000/month 7.8–16.6% per year Medium

P2P Lending ₱1,000 10–15% High
Stocks ₱5,000 10.8% per year High
Mutual Funds and
₱1,000 2–5% per year Medium
UITF
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17 Best Investment Vehicles for
Filipinos [Link]
Investment Minimum Capital Average Returns Risk Level
Real Estate
₱10,000–₱15,000 High High
(Foreclosed)
REIT ₱5,000 10% per year Medium
Cryptocurrencies ₱100 -2% (2018) High
Blogging/Website
₱2,000 – ₱10,000 High Medium
Flipping
Forex Trading ₱5,000 1–10% per month High
Angel Investing ₱50,000 27% in 3.5 years High

Personal Equity and

Retirement Account ₱10,000/year 5%–15% per year Low
(PERA)

New Skills Time and effort High Low

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INVESTMENT IN GOVERNMENT
BONDS AND SECURITIES
(source: Bureau of Treasury)

On many occasions, the Philippine National Government or its agencies issue

debt securities to finance deficits and development projects. Selling to the
buying public originates from the Bureau of Treasury (BTr). through a network
of licensed dealers. Government securities (GS) are no longer certificated, they
are known as “scriptless”. GS discount and coupons are subject to 20% final
income tax, which is withheld upon floatation of Treasury Bills, or upon
payment of the coupon for Treasury Bonds. No other tax is imposed on the
secondary market buyer.
Government and government-owned and controlled corporations also offer
shareholding to the public in the form of bonds or securities. Government
securities are unconditional obligations of the State, and backed by its full
taxing power, making them practically free from default.

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1. Treasury Bills Treasury Bills
(T-bills)

1. Treasury Bills Treasury Bills (T-bills) are direct and

unconditional obligations of the national government. They
are issued by the BTr. They carry maturity of one year or
less and can be traded in the secondary market before
maturity. Various tenors of T-bills exist: (1) 91 day, (2) 182
or (3) 364 days. Banks that comprise majority of the
Government Security Eligible Dealers (GSED) bid for T-
bills in the weekly auctions held by the BTr. The banks then
resell the T-bills to investors. Treasury Bills do not bear
interest. They are issued and sold at a discount from face
value and are redeemed at maturity for the full face value of
the instrument.
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2. Treasury Notes
Fixed Rate Treasury Notes (FXTNs)

2. Treasury Notes
Fixed Rate Treasury Notes (FXTNs) are direct and
unconditional obligations
of the national government. They are issued by the Bureau
of Treasury (BTr). They
are interest bearing and carry a term of more than one year
and can be traded in the
secondary market before maturity. The tenors for these
debt instruments can vary.

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 3. Retail Treasury Bonds Retail
Treasury Bonds (RTBs)
3. Retail Treasury Bonds Retail Treasury Bonds (RTBs) are like
treasury notes but are usually longer in maturity (10 years and above).
They are direct and unconditional obligations of the national
government that primarily caters to the retail market or the end-users.
They are issued by the Bureau of Treasury (BTr). They are interest
bearing and carry a term of more than one year and can be traded in the
secondary market before maturity. RTBs are safe, liquid and offer
attractive returns to investors. The interest coupons of treasury bonds
are paid to the investor quarterly. Further, RTBs serve as a critical part
of the government’s program to make government securities available
to small investors. They are issued to mobilize savings and encourage
retail investors to purchase long-term papers. In contrast to PhP
500,000 in the wholesale market, the minimum placement of RTBs is
PhP 5,000.
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4. Dollar Linked Peso Notes (DLPN)
Dollar Linked Peso Notes (DLPNs)

4. Dollar Linked Peso Notes (DLPN) Dollar Linked Peso Notes

(DLPNs) are direct and unconditional obligations of the national
government and are issued by the BTr. They are interest bearing
and 2 carry a term of more two (2) and three (3) years and can be
traded in the secondary market before maturity. The notes track
the movement of the Philippine Peso and US Dollar exchange
rate. Payments of interest and principal are linked to the
movement of the exchange rate and computed based on the
foreign exchange factor.

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Investment Suitability

• Short-Term Vehicles are used for:

– Savings
• Emphasis on safety and security instead
of high yield
– Investment
• Yield is often as important as safety
• Used as component of diversified portfolio
• Used as temporary outlet waiting for attractive
permanent investments

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46