Investments Overview and Financial Instruments

Investments Overview

• Main objective of investing is to grow wealth over time while managing risk.
• Investing empowers individuals with financial security and independence.
• It involves allocating money into assets or ventures, expecting to generate income or profit.

Financial Instruments

• Contracts that establish financial assets for one party and financial liabilities or equity instruments for another.
• They are used to raise funds, manage risk, or speculate on market movements.
• Types include: 
  • Commercial Paper
  • Futures Contracts
  • Derivatives
  • Foreign Exchange
  • Commodities
  • Preferred Stock
  • Debt Instruments
• Debt instruments are loans made by investors to corporations, governments, or other entities.
• The borrower agrees to pay interest and repay the principal at a specified maturity date.
• Debt instruments include bonds and commercial papers.
• Bonds are long-term debt securities with fixed interest rates and low risk.
• Commercial papers are short-term unsecured promissory notes issued by companies for short-term borrowing needs.

Securities Markets

• Platforms where financial instruments like stocks, bonds, and securities are bought and sold.
• They facilitate capital flow from investors to companies and governments, enabling them to raise funds.
• There are two main types of markets:
  • Primary Market - new securities are issued and sold for the first time.
  • Secondary Market - securities that were previously issued are bought and sold among investors.

Electronic Trading

• Modern securities markets have shifted towards electronic trading platforms for faster and more efficient transactions.
• Example: the Philippine Stock Exchange (PSE) has an electronic trading system.

Market Efficiency

• Refers to how well prices in the market reflect all available information.
• In an efficient market, securities prices should always reflect their true value, making it difficult to consistently achieve higher returns without taking on additional risk.
• Forms of Market efficiency include:
  • Weak-form efficiency: Past trading information is reflected in current prices.
  • Semi-strong form efficiency: All publicly available information is reflected in current prices.

Key Regulatory Bodies

• Securities and Exchange Commission (SEC) oversees the securities markets in the Philippines.
• SEC enforces laws, ensures compliance, and monitors market activities to protect investors and maintain market integrity.
• The Philippine Stock Exchange (PSE) plays a regulatory role by enforcing listing requirements, monitoring trading activities, and ensuring listed companies adhere to disclosure requirements.

Regulatory Measures

• Disclosure Requirements - Companies must disclose financial information, material changes, and other relevant data to the public.

Investment Goals

• Investment goals drive individual investment strategies. 
• Understanding investment needs:
  • Risk Tolerance: Investors' comfort level with potential losses.
  • Investment Horizon: The length of time an investor plans to keep their money invested.
  • Previous Investing Experience: Prior investment knowledge and experience.
  • Investment Goals: What an investor wants to achieve with their investments.

Strategic vs. Tactical Asset Allocation

• Two main approaches to asset allocation:
  • Strategic Asset Allocation: Long-term approach focused on setting target percentages for various asset classes.
  • Tactical Asset Allocation: Short-term approach that allows for adjustments based on market conditions.

Portfolio Construction

• Involves creating a tailored investment strategy that aligns with a client's financial goals, risk tolerance, and time horizon. 
• Process involves:
  • Understanding the Client's Needs
  • Selecting Investments
  • Diversifying the Portfolio
  • Monitoring and Rebalancing

Diversification

• A key principle in portfolio construction aimed at reducing risk by spreading investments across different asset classes.

Active and Passive Management

• Active Management Involves actively buying, selling, and rebalancing investments to outperform the market.
  • Requires extensive research and market knowledge.
• Passive Management Involves investing in an asset class and holding it for a long period.
  • Allows investors to earn market returns with lower costs.

Core-Satellite Investing

• A blend of active and passive management, combining a core portfolio of assets with active satellite investments.