Investment 101

INVESTMENT 101

Why should I invest? - Why shouldn't you? ;)
I'm being taught by my dad the basics about investment (yes he wants me to learn, so he's forced to teach me step by step). So I thought why not blog about it? Someone else could pick up a thing or two after reading. So here it goes...

Let's begin with an outline of the first lecture which is then followed by a brief explanation of each.

Main Objectives of Investment:
A. Capital Preservation
B. Return, Yeild, % per annum
C. Cash Flow

Main Determinants/Factors:
A. "Credit", Profitability
B. Yield
C. Liquidity
D. Term

Main Types/Forms:
A. Fixed Income
B. Quidty
C. Real Estate
D. Commodities
E. Foreign Exchange
F. Derivatives
G. Cash/Cash Equivalents

Risks on:
A. Capital
B. Liquidity
C. Return/Price


Objectives:
To Preserve Capital- we must always keep in mind that we want our money to grow and not
end up losing it all. Invest, then retrieve your capital, then reinvest your profits.
That's the safer move.

To get a good return- we must constantly look for good deals. Savings in banks offer such low returns/interest rates. So it's best to ask them for other products that they can offer you; these usually comes with an extra price-which is usually the length of time your money is tied up with them. But if you're not planning to use your money in the near future, then investing it for a longer period would be suggested.

To increase cash flow- we should be continuously earning more money through interest, dividends etc. this helps increase our cash flow and in turn may enable us to invest more.


Determinants:
How do we determine whether an investment is "good/great"?

We have to look at the company's credit (the ability to pay back their debts) and profitability. A good business cannot last long if it does not make money (so why invest there?!). Take a look at the company's records/financial statements and see whether or not they are doing well.

What yield are they offering you? How much are you expected to make from investing in their stock? Compare compare and choose wisely. Liquidity, the ability to convert assets into cash. Even if a company says they hold a great amount of assets, you must check whether these assets are easily converted to cash. In case of a market crash, and the company needs cash, can they sell these assets fast? If the answer is no, then be careful.

Term, the length of time your money is invested with the bank/company. The longer the term, the higher the interest rate. But, make sure that if you are investing for a longer term that you are not planning to use the money, because there are products which have a pretermination fee and you may end up losing money instead of earning money.

Main Types of Investments:
Fixed Income may include the following:
- Time Deposits which are from Banks which can have terms from one year to 5+ years.
(usually TDs are 1-3months long). TDs have a pretermination fee.
Tip: Deposits for over 5 years (5 years and 1 day) are considered as long term and are tax exempt (Philippines)

- Bonds are issued by governments, corporations and banks. These can be resold.

Equity is more commonly known as stocks, these stocks may be listed or non-listed.

Real Estate includes land, houses, condominiums, etc.

Commodities are similar to stocks except you are trading goods such as gold, silver, iron, sugar etc. There is a different market for this type.

Foreign Exchange, this is making money through trading different currencies. Let's say
you bought 1 US dollar with Phil. Pesos at the rate of $1=P43. Then tomorrow you sell it at the exchange rate of $1=P50. You have just earned yourself P7 for every dollar.
There are several foreign exchange transactions such as spot, forwards, etc.

Derivatives

Cash/Cash Equivalents, holding your money... in cash is also considered as an investment. While waiting for a deal you may choose to hold your money in cash rather than tie it up in a TD or any other type of deposit.

Risks:
There are always risks. No investment is 100% sure.

First there is a risk on your capital. You must always watch out for this. As we stated earlier, we have to preserve our capital. Make sure there is no unnecessary risk on your capital.

Liquidity. Stocks are considered liquid most of the time. However there are instances where your stocks can be frozen and you won't be able to sell.

Return, Price.