MT. CARMEL COLLEGE OF SAN FRANCISCO, INC.
San Francisco, Agusan del Sur
AN OVERVIEW OF THE INVESTMENT PROCESS
INVESTMENT
When current income exceeds current consumption desires, people tend to save the excess. They can do
any of several things with these savings. One possibility is to put the money under a mattress or bury it in
the backyard until some future time when consumption desires exceed current income. When they
retrieve their savings from the mattress or backyard, they have the same amount they saved.
Another possibility is that they can give up the immediate possession of these savings for a future larger
amount of money that will be available for future consumption. This tradeoff of present consumption for
a higher level of future consumption is the reason for saving. What you do with the savings to make
them increase over time is investment.
INVESTING
- It is the act of allocating resources, usually capital (i.e., money), with the expectation of
generating an income, profit, or gains.
Putting money to work for a period of time in some sort of project or undertaking in order to generate
positive returns (i.e., profits that exceed the amount of the initial investment). One can invest in many
types of endeavors (either directly or indirectly) such as using money to start a business, or in assets such
as purchasing real estate in hopes of generating rental income and/or reselling it later at a higher price.
Investing differs from saving in that the money used is put to work, meaning that there is some implicit
risk that the related project(s) may fail, resulting in a loss of money. Investing also differs
from speculation in that with the latter, the money is not put to work per-se, but is betting on the short-
term price fluctuations.
Investing is to grow one's money over time. The expectation of a positive return in the form of income or
price appreciation with statistical significance is the core premise of investing. The spectrum of assets in
which one can invest and earn a return is a very wide one.
Economists view investing and saving to be two sides of the same coin. This is because
when you save money by depositing in a bank, the bank then lends that money to
individuals or companies that want to borrow that money to put it to good use.
Therefore your savings is often someone else's investment.
A Brief History of Investing
While the concept of investing has been around for millennia, investing in its present form can find its
roots in the period between the 17th and 18th centuries, when the development of the first public
FM MC 6 – Investment & Portfolio Management
Lea Andrelei Banasig
Lecture Notes #1 1
MT. CARMEL COLLEGE OF SAN FRANCISCO, INC.
San Francisco, Agusan del Sur
markets connected investors with investment opportunities. The Amsterdam Stock Exchange was
established in 1602, and the New York Stock Exchange (NYSE) in 1792.
Industrial Revolution Investing
The Industrial Revolutions of 1760-1840 and 1860-1914 resulted in greater prosperity as a result of
which people amassed savings that could be invested, fostering the development of an advanced banking
system. Most of the established banks that dominate the investing world began in the 1800s.
20th Century Investing
The 20th century saw new ground being broken in investment theory, with the development of new
concepts in asset pricing, portfolio theory, and risk management. In the second half of the 20th century,
many new investment vehicles were introduced, including hedge funds, private equity, venture capital,
real estate investment trust (REITs), and exchange-traded fund (ETFs).
In the 1990s, the rapid spread of the Internet made online trading and research capabilities accessible to
the general public, completing the democratization of investing that had commenced more than a century
ago.
21st Century Investing
The bursting of the [Link] bubble — a bubble that created a new generation of millionaires from
investments in technology-driven and online business stocks—ushered in the 21st century and perhaps
set the scene for what was to come.
One of the most notable events in the 21st century, or history for that matter, is the Great
Recession (2007-2009) when an overwhelming number of failed investments in mortgage-backed
securities crippled economies around the world. Well-known banks and investment firms went under,
foreclosures surmounted, and the wealth gap widened.
The 21st century also opened up the world of investing to newcomers and unconventional investors by
saturating the market with discount online investment companies and free-trading apps.
Understanding Investing
Investing is to grow one's money over time. The expectation of a positive return in the form of income or
price appreciation with statistical significance is the core premise of investing. The spectrum of assets in
which one can invest and earn a return is a very wide one.
Risk and return go hand-in-hand in investing; low risk generally means low expected returns, while
higher returns are usually accompanied by higher risk. At the low-risk end of the spectrum are basic
investments such as Certificates of Deposit (CDs); bonds or fixed-income instruments are higher up on
the risk scale, while stocks or equities are regarded as riskier. Commodities and derivatives are generally
FM MC 6 – Investment & Portfolio Management
Lea Andrelei Banasig
Lecture Notes #1 2
MT. CARMEL COLLEGE OF SAN FRANCISCO, INC.
San Francisco, Agusan del Sur
considered to be among the riskiest investments. One can also invest in something practical, such as land
or real estate, or delicate items, such as fine art and antiques.
The returns generated by an asset depend on the type of asset. For instance, many stocks pay quarterly
dividends, whereas bonds generally pay interest every quarter. In many jurisdictions, different types of
income are taxed at different rates.
In addition to regular income, such as a dividend or interest, price appreciation is an important
component of return. Total return from an investment can thus be regarded as the sum of income and
capital appreciation.
Economists view investing and saving to be two sides of the same coin. This is because
when you save money by depositing in a bank, the bank then lends that money to
individuals or companies that want to borrow that money to put it to good use.
Therefore your savings is often someone else's investment.
TYPES of INVESTMENTS
Today, investment is mostly associated with financial instruments that allow individuals or businesses to
raise and deploy capital to firms. These firms then rake that capital and use it for growth or profit-
generating activities.
While the universe of investments is a vast one, here are the most common types of investments:
STOCKS
A stock is a general term used to describe the ownership certificates of any company.
A buyer of a company's stock becomes a fractional owner of that company. Owners of a company's
stock are known as its shareholders and can participate in its growth and success through appreciation in
the stock price and regular dividends paid out of the company's profits.
FM MC 6 – Investment & Portfolio Management
Lea Andrelei Banasig
Lecture Notes #1 3
MT. CARMEL COLLEGE OF SAN FRANCISCO, INC.
San Francisco, Agusan del Sur
BONDS
A bond is loan from an investor to a borrower such as a company or government. The borrower uses the
money to fund its operations, and the investor receives interest on the investment. It represents a promise
by a borrower to pay a lender their principal and usually interest on a loan.
Buying a bond implies that you hold a share of an entity's debt and are entitled to receive periodic
interest payments and the return of the bond's face value when it matures.
FUNDS
Funds are pooled instruments managed by investment managers that enable investors to invest in stocks,
bonds, preferred shares, commodities, etc.
Two of the most common types of funds are mutual funds and exchange-traded funds (ETFs). Mutual
funds do not trade on an exchange and are valued at the end of the trading day; ETFs trade on stock
exchanges and, like stocks, are valued constantly throughout the trading day. Mutual funds and ETFs
can either passively track indices or can be actively managed by fund managers.
INVESTMENT TRUSTS
Trusts are another type of pooled investment. Real Estate Investment Trusts (REITs) are one of the most
popular in this category. REITs invest in commercial or residential properties and pay regular
distributions to their investors from the rental income received from these properties . REITs trade on
stock exchanges and thus offer their investors the advantage of instant liquidity.
ALTERNATIVE INVESTMENTS
Alternative investments is a catch-all category that includes hedge funds and private equity.
A hedge fund is a limited partnership of private investors whose money is managed by
professional fund managers who use a wide range of strategies, including leveraging or trading of
non-traditional assets, to earn above-average investment returns.
Hedging is a strategy that tries to limit risks in financial assets . It uses financial instruments or
market strategies to offset the risk of any adverse price movements.
Private equity enables companies to raise capital without going public.
Hedge funds and private equity were typically only available to affluent investors deemed " accredited
investors" who met certain income and net worth requirements.
FM MC 6 – Investment & Portfolio Management
Lea Andrelei Banasig
Lecture Notes #1 4
MT. CARMEL COLLEGE OF SAN FRANCISCO, INC.
San Francisco, Agusan del Sur
COMMODITIES
Commodities include metals, oil, grain, and animal products, as well as financial instruments and
currencies. They can either be traded through commodity futures—which are agreements to buy or sell a
specific quantity of a commodity at a specified price on a particular future date.
Comparing Investing Styles
Let's compare a couple of the most common investing styles:
Active versus passive investing: The goal of active investing is to "beat the index" by actively
managing the investment portfolio. It is a form of investment strategy that involves actively
buying and selling assets in the hope of making profits and outperforming a benchmark or index.
An example of an active investor is a hedge fund manager, who constantly monitors the market
and trades when they see an opportunity to make money.
Passive investing, on the other hand, advocates a passive approach, such as buying an index
fund, in tacit recognition of the fact that it is difficult to beat the market consistently. While there
are pros and cons to both approaches, in reality, few fund managers beat their benchmarks
consistently enough to justify the higher costs of active management.
Active investing requires a hands-on approach, typically by a portfolio manager or other so-called active
participant. Passive investing involves less buying and selling and often results in investors buying index
funds or other mutual funds.
Growth versus value: Growth investors prefer to invest in high-growth companies, which
typically have higher valuation ratios such as Price-Earnings (P/E) than value companies. Value
investors look for companies that have significantly lower Price-Earnings (P/E) and higher
dividend yields than growth companies because they may be out of favor with investors, either
temporarily or for a prolonged period of time.
HOW TO INVEST
Do-It-Yourself Investing
The question of "how to invest" boils down to whether you are a Do-It-Yourself (DIY) kind of investor
or would prefer to have your money managed by a professional. Many investors who prefer to manage
their money themselves have accounts at discount or online brokerages because of their low
commissions and the ease of executing trades on their platforms.
DIY investing is sometimes called self-directed investing, and requires a fair amount of education,
skill, time commitment, and the ability to control one's emotions. If these attributes do not describe you
well, it may be smarter to let a professional help manage your investments.
Professionally-Managed Investing
FM MC 6 – Investment & Portfolio Management
Lea Andrelei Banasig
Lecture Notes #1 5
MT. CARMEL COLLEGE OF SAN FRANCISCO, INC.
San Francisco, Agusan del Sur
Investors who prefer professional money management generally have wealth managers looking after
their investments. Wealth managers usually charge their clients a percentage of Assets Under
Management (AUM) as their fees. While professional money management is more expensive than
managing money by oneself, such investors don't mind paying for the convenience of delegating the
research, investment decision-making, and trading to an expert.
Roboadvisor Investing
Some investors opt to invest based on suggestions from automated financial advisors. Powered by
algorithms and artificial intelligence, roboadvisors gather critical information about the investor and
their risk profile to make suitable recommendations. With little to no human interference, roboadvisors
offer a cost-effective way of investing with services similar to what a human investment advisor offers.
With advancements in technology, roboadvisors are capable of more than selecting investments. They
can also help people develop retirement plans and manage trusts and other retirement accounts.
Investing vs. Speculation
Whether buying a security qualifies as investing or speculation depends on three factors:
The amount of risk taken on: Investing usually involves a lower amount of risk compared with
speculation.
The holding period of the investment: Investing typically involves a longer holding period,
measured quite frequently in years; speculation involves much shorter holding periods.
Source of returns: Price appreciation may be a relatively less important part of returns from
investing, while dividends or distributions may be a major part. In speculation, price
appreciation is generally the main source of returns.
As price volatility is a common measure of risk, it stands to reason that a staid blue-chip is much less
risky than a cryptocurrency. Thus, buying a dividend-paying blue chip with the expectation of holding it
for several years would qualify as investing. On the other hand, a trader who buys a cryptocurrency to
flip it for a quick profit in a couple of days is clearly speculating.
How Can I Start Investing?
You can choose the do-it-yourself route, selecting investments based on your investing style, or enlist
the help of an investment professional, such as an advisor or broker. Before investing, it's important to
determine what your preferences and risk tolerance are. If risk-averse, choosing stocks and options, may
not be the best choice. Develop a strategy, outlining how much to invest, how often to invest, and what
to invest in based on goals and preferences. Before allocating your resources, research the target
FM MC 6 – Investment & Portfolio Management
Lea Andrelei Banasig
Lecture Notes #1 6
MT. CARMEL COLLEGE OF SAN FRANCISCO, INC.
San Francisco, Agusan del Sur
investment to make sure it aligns with your strategy and has the potential to deliver desired results.
Remember, you don't need a lot of money to begin, and you can modify as your needs change.
What Are Some Types of Investments?
Other types of investments to consider are real estate, CDs, annuities, cryptocurrencies, commodities,
collectibles, and precious metals.
Is Investing the Same as Gambling?
No, gambling and investing differ greatly. With investing you put your money to work in projects or
activities that are expected to produce a positive return over time - they have positive expected returns.
Gambling is to place bets on the outcomes of events or games. Your money is not being put to work at
all.
Often, gambling has a negative expected return. While an investment may lose money, it will do so
because the project involved fails to deliver. The outcome of gambling, on the other hand, is due purely
to chance.
Conclusion
Investing is the act of distributing resources into something to generate income or gain profits. The type
of investment you choose might likely depend on you what you seek to gain and how sensitive you are
to risk. Assuming little risk generally yields lower returns and vice versa for assuming high risk.
Investments can be made in stocks, bonds, real estate, precious metals, and more. Investing can be made
with money, assets, cryptocurrency, or other mediums of exchange.
There are different types of investment vehicles, such as stocks, bonds, mutual funds, and real estate,
each carrying different levels of risks and rewards.
Investors can independently invest without the help of an investment professional or enlist the services
of a licensed and registered investment advisor. Technology has also afforded investors the option of
receiving automated investment solutions by way of roboadvisors.
The amount of consideration, or money, needed to invest depends largely on the type of investment and
the investor's financial position, needs, and goals. However, many vehicles have lowered their minimum
investment requirements, allowing more people to participate.
Despite how you choose to invest or what you choose to invest in, research your target, as well as your
investment manager or platform. Possibly one of the best nuggets of wisdom is from veteran a nd
accomplished investor Warren Buffet, "Never invest in a business you cannot understand ."
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Lea Andrelei Banasig
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