Investment-Scenario

Unit III: The Philippine Financial System

The Investment Scenario

  • Investment Definition: Any vehicle that funds can be placed into, with the expectation of generating positive income or increasing/preventing loss of value.

  • Overall Investment Process: Mechanism connecting suppliers (those with extra funds) and demanders (those needing funds) through financial institutions or markets, sometimes including direct transactions like property deals.

Financial Institutions

  • Role: Organizations channeling savings from individuals, corporations, and governments into loans or investments.

  • Types of Institutions: -Banks -Investment Houses -Mutual Funds -Pension Funds -Insurance Companies

Financial Markets

  • Definition: Framework that enables the connection of suppliers and demanders for secure and efficient financial transactions.

  • Function: Usually through intermediaries like securities exchanges.

  • Transfer Methods: Funds can be transferred through financial markets, institutions, or directly between savers and issuers.

Investment Lifespan

  • Short-term Investments: Mature within one year.

  • Long-term Investments: Include bonds and stocks, which may have no set maturity.

Investment Fundamentals

  • Investment Process: Allocating money with expected benefits (income or profit).

  • Purpose of Investments: -To realize income and profits. -Increase equity. -Protect financial resources against inflation.

Types of Investments

Categories

  • Deposits/Cash

    • Types of Deposit Accounts:

      • Savings

      • Current/Checking

      • Time Deposit

      • Offshore Accounts

      • Managed Investment Accounts

      • Foreign Currency Deposits

  • Securities:

    • Types:

      • Credit/Fixed Income

      • Stocks/Equities

      • UITFs

      • Mutual Funds

      • Derivatives

  • Properties/Real Estate:

    • Types of Properties:

      • Domestic/Residential

      • Commercial/Industrial

      • Agricultural

    • Forms of Real Estate Investments:

      • Direct Investment

      • REITs

      • Special Vehicle Trusts

Financial Market Segments

  1. Money Market: Deals with short-term investments.

  2. Capital Market: Focused on long-term investments.

    • Funded by:

      • Governments for infrastructure projects.

      • Businesses for operational costs and product development.

      • Individuals through deposits or purchases of securities.

Investors in the Financial System

  1. Individuals: Handle their investments for personal financial goals.

  2. Institutional Investors: Fund managers handling large sums for clients or corporations.

Types of Securities

  • Debt: Represents borrowed funds with interest returns and repayment promises (e.g., bonds, commercial papers).

  • Equity: Ownership interest in businesses (e.g., stocks).

  • Fixed Income Securities: Long-term debt instruments like bonds and preferred stocks.

  • Convertible Securities: Allow conversion into common stock shares.

  • Mutual Funds: Pooled investments managed by professionals.

Property Investment

  • Types:

    • Real Estate: Raw land and buildings.

    • Tangibles: Collectibles (gold, gemstones, art).

  • Forms of Real Estate Investments:

    • Direct Investment - Owning specific properties.

    • Indirect Investment - Shares in real estate trusts.

Real Estate Considerations

Pricing Factors

  • Quality, location, and infrastructure impact value.

Advantages and Disadvantages

  • Advantages:

    • Tangible, income-generating potential, usable as collateral.

  • Disadvantages:

    • Illiquidity, tax implications, vulnerability in crises.

UITF (Unit Investment Trust Fund)

  • Definition: Collective investments managed by professionals.

  • Types:

    • Fixed Income

    • Equity Funds

    • Balanced Funds (mix of both)

Derivatives

  • Definition: Instruments linked to underlying asset prices.

  • Types:

    • Futures: Obligation to buy or sell at a future date.

    • Options: Rights to buy or sell within a specified timeframe.

Classifications of Financial Markets

  1. Money Market: Short-term securities.

  2. Capital Market: Long-term securities, divided into:

    • Primary Market: New securities sold to the public for the first time (e.g., IPOs).

    • Secondary Market: Existing securities traded (e.g., purchase of shares from other investors).

Stock Market Overview

  1. Functionality:

    • Organizes buying/selling of securities.

    • Continual price reflection based on available information.

  2. Accessibility: Open to public viewing, accessible for transactions.

  3. Key Players:

    • Investors: Buyers/sellers of securities seeking income/appreciation.

    • Stockbrokers: Agents facilitating trades.

    • Stock Exchange: Organizational structure overseeing transactions.

    • Transfer Agents: Record transactions for stock ownership.

    • Clearing House: Centralized payment and certificate delivery system.

  4. Listed Companies: Corporations that issue shares to the public, following exchange regulations.

Sources

  • Bangko Sentral ng Pilipinas

  • PNB

  • Allianz

  • Money and Banking Textbooks

Prepared by: Jay Pee Ilacas, Associate Professor