Module 3: Credit Cards & Consumer Loans

Vehicle and other Major Purchases

Buying Your Home

Objectives:
Identify different types of consumer credit
Identify the different credit card accounts
Develop a plan to establish a strong credit history
Implement a plan to research and select new or used automobile
Decide whether to buy or lease a car
Identify housing alternatives, assess the rental option, and perform a rent-or-buy
analysis
Evaluate benefits and costs of homeownership and estimate how much you can afford
for a home
Describe the home buying process

TYPES OF CONSUMER CREDIT

Consumer Credit
is non business debt use by consumers for expenditures other than home
mortgages. There are two type of consumer credit: instalment credit and non
instalment credit.

With instalment credit, (also called close-end credit) the borrower must
repay the mount owed plus interest in specific interest in a specific number of
equal payments, usually monthly.

Non instalment credit, includes single-payment open-ended credit, and

service credit. Single payment loans are the easiest of the three to
understand.

With open-ended credit (also called revolving credit), credit is extended in advance
of any transactions so that the borrower doesn’t need to reapply each time credit is
desired.
The borrower can use the account as long as the total owed does not exceed his or
her credit limit.

Personal line
A personal line of credit is a form of open-ended credit that allows the borrower
access to the prearranged revolving line of credit provided by the lender (usually
a commercial bank, savings bank, credit union, or brokerage firm).

Several Reasons for Using Credit:

1. To avoid paying cash for large outlays
2. To meet a financial emergency
3. For convenience
4. For investment purposes

Building a Strong Credit History

5 Cs of Credit:
1. Character – key factor in defining borrower’s willingness to live up to the terms of
the loan.
2. Capacity – the ability of the borrower to service the loan in a timely fashion.
3. Collateral – something of value that’s used to secure loan and that lender can
claim in case of default.
4. Capital – the amount of unencumbered assets owned by the borrower, used as
another indicator of the borrower’s ability to repay the loan.
5. Condition – the extent of which prevailing economic conditions could affect the
borrower’s ability to service a loan.

CREDIT CARD ACCOUNTS PROVIDE INSTANT ACCESS TO CREDIT

Once a credit card is opened, it can be used at any time. If a balance is carried over,
a minimum payment must be made each month to cover interest and a small
payment of the amount owed ( the principal). If at least the minimum account is not
received by the due date, the cardholder must pay a late payment fee and may be
declared in default.

TYPES OF CREDIT CARD ACCOUNTS

Bank Credit Cards
A bank credit card account is an open-ended credit accounts at a financial
institution allowing the holder to make purchases on a credit card in almost
anywhere. These companies contract with Visa, MasterCard, and a bank to offer
these cobranded credit cards.

Travel and Entertainment Cards (T&E) cards

Are similar to bank credit cards in that the allow holders to make purchases at
numerous businesses.

● Some Credit Card Offers Come Preapproved

● Annual and Transactions Fees Can Be Avoided
● Liability for Lost or Stolen Cards is Limited
● Late-Payment, Bounced-Checked, and Over-the-Limit Fees Are Very Costly
● Teaser Interest May Be Appealing
● Default Rates Are Extremely High
● Variable Interest Can Extremely Go Up
● Credit Card Insurance Are Overpriced

Credit Statements
Active charge account holders receive a monthly credit statement (also called a
periodic statement) that summarizes the charges, the payments, finance
charges, and other activity on the account.

Transaction and Posting Dates

The date on which a credit cardholder makes purchase (or receives a credit) is
known as the transaction date.

Transaction Fees
Credit card companies usually charge transaction fees whenever the card is
used for a balance transfer of cash advance.
How to Correct Errors on Your Credit Billing Statement

Your Time Limits

You must make your billing error complaint within 60 days after the date on which
the first bill containing the error was mailed to you.

Your Action Steps

Take several action when disputing an item on a billing statement.
● Notify the merchant
● Send a written notice
● Provide photocopies
● Withhold payment for disputed items
● Review your credit bureau file

Understanding Consumer Installment Loans

With a cash loan, the borrower receives cash and uses it to make purchases, pay off
other loans, or make investments
.
With a purchase loan (also called sales credit), the consumer makes a purchase on
credit with no cash transferring from the lender to the borrower. Instead, the funds go
directly from the lender to the seller.

For all consumer loans, the borrower will sign a formal promissory note (a written
installment loan contract) that spells out the terms of the loan.
Installment Loans Can Be Unsecured or Secured

An unsecured loan is granted solely based on the good credit character of the
borrower. Sometimes unsecured loans are called signature loans because they are
backed up by only the borrower’s signature.

A secured loan requires cosigner or collateral. A cosigner agrees to pay the debt if
the original borrower fails to do so.
Using the simple interest method, find the monthly payments on a P3,000 installment loan if
the fund borrowed for 24 months at an annual interest rate of 6%

P = 3,000
I = 6+6 12% P360
Monthly Payment up to 24 months = P140

Buying an Automobile
1. Research your purchase thoroughly, considering not only the market but also your
personal needs.
2. Select the best item for your needs.
3. Buy the item after negotiating the best practice and arranging financing on favorable
terms.
4. Maintain your purchase and make necessary repairs promptly.

10 Steps to Buying a New Car:

1. Research which car best meets your needs and determine how much you can afford to
spend on it.
2. Check websites, TV and Newspaper for incentives and rebates on the car you would
like to buy.
3. Decide on a price based on dealer’s cost for the car and options, plus a mark up for the
dealer’s profit, minus rebates and incentives.
4. Find the exact car for you in terms of size, performance, safety and styling.
5. Test-drive the car.
6. If you are trading your old car, you will not likely get as high a price as if you sold it
yourself.
7. Negotiate the lowest price by getting bids from at least three dealers.
8. Close the deal after looking not just at the cost of the car but also, the related
expenses.
9. Review and sign the paperwork.
[Link] the car for scratches and dents.

Affordability
You’ll need to calculate two numbers – unless you plan to pay cash for the entire cost of the
car.
1. Amount of down payment
2. Size of the monthly loan payment you can afford

Gas, Diesel or Hybrid

If you’re green who’s concerned with the environmental impact of the fuel car your car uses,
you may be interested only in a hybrid car. In this case, price difference may not matter.

Although you’ll want to consider fuel economy when car shopping, comparable gas fueled,
international combustion engines and diesel-powered cars tend to have similar fuel economy.
Hybrids which blend gas and battery power, have experienced rapid sales growth due to high
gas prices, improved technology and availability, and greater public awareness of
environmental issues.

Finding the Best Car for You

Start your examination of a car with an inspection of key points.

How easy is it to get people and things into and out of the car?
Do the doors open easily?
Is the trunk large enough for your needs?
Does the car offer a pass through?

Comfort and visibility:

Are the seats comfortable?
Can you adjust the driver’s seat and steering wheel properly?
What are the car’s blind spots for a person of your height?
Can you see all the gauges clearly?
Can you reach the control for the radio, CD Player, heater, air conditioner, and other
features easily while driving?
Does it have the options you want?

Then take the car for a test drive:

Set aside at least 20 minutes and drive it on highways and local roads.
To test acceleration, merge into traffic getting onto the freeway and try passing another
car.

If possible, drive home and make sure the car fits into your garage – especially if you’re
interested in a larger SUV or truck

For a used car, test the heater and air conditioner. Then turn the fan off and listen for
any unusual engine noises.
Check out overall handling. Parallel park, make a U-turn, brake hard and so on. Do the
gears shifts smoothly? If testing a standard transmission, try to determine if the clutch
is engaging too high or too low, which might indicate excessive wear or a problem.

Should you Buy or Lease Your Next Car?

Advantages of Leasing
1. Better car for less money
2. A new car every few years
3. No trade-in hassles at the end of the lease

Advantages of Buying
1. When interest rates are low, owning makes more financial sense than leasing
2. No mileage penalty
3. Increase flexibility

Shiela has just graduated from college and needs to buy a car to continue to commute to
work. She estimates that she can afford to pay about $450 per month for a loan or lease and
has about $2,000 in savings to use for a down payment. Develop a plan to guide her through
her first car-buying experience, including research car type, deciding whether to buy a new or
used car, negotiating the price and terms, and financing the transaction.

Important purchase considerations include affordability; operating costs; whether to buy a

gas, diesel, or hybrid fueled car; whether buy a new versus a used or nearly new car; the type
of car and its features; and its reliability and warranties. Knowing the dealer’s cost is the type
to negotiating a good price.

Home Buying Tips

1. Say no to “no money down” seminars.
2. Stay away from bad agents
3. Don’t wipe out your savings
4. Rely on professional advice
5. Avoid exotic financing
6. Pick the right neighborhood.
7. Stay away from the most expensive home in the neighborhood.
8. Don’t pass up the home inspection
9. Don’t change the financial picture before closing
[Link] into debt after closing.

Housing Loan offered by PAG IBIG

The Pag-IBIG Fund Housing Loan allows you borrow up to Php6 million to purchase a
residential lot, a house and lot or a condominium unit. You may also secure a loan for house
construction, home improvement or renovation or even to refinance an existing housing loan.

Here are the type of properties you may purchase and the various purposes where you can use
your Pag-IBIG Fund Housing Loan:
● Purchase of fully-developed residential lot or adjoining residential lots not exceeding one
thousand square meters (1,000 sqm);
● Purchase of a residential house and lot, townhouse, or condominium unit;
● Construction or completion of a relative of the borrowers;
● Home improvement on the house owned by the borrower or a relative of the borrower, or
on a property currently secured under Contract-to-Sell (CTS) or Deed of Conditional
Sale (DCS) between Pag-IBIG Fund and the buyer.
● Refinancing of an existing housing loan;
● Purchase of residential lot or unit plus cost of transfer of title.

How to Qualify
The Pag-IBIG Fund Housing Loan Program is available to all active Pag-IBIG Fund members,
who have satisfied the following requirements:
● At least 24 monthly savings. Lump sum payment of the required 24 months savings is
allowed;
● Not more than 65 years old, and not more than 70 years old maturity of the date of loan
application;
● Has the legal capacity to acquired and encumber real property;
● Passed satisfactory background/credit and employment/business checks of Pag-IBIG
Fund;
● Has no outstanding Pag-IBIG Fund Short-Term Loan (STL) in arrears at the time of loan
application;
● Has no Pag-IBIG Fund Housing Loan that was foreclosed, cancelled, bought back due
to default, or subjected to dacion en pago. If with existing Pag-IBIG Fund Housing Loan
account, either as principal borrower or co-borrower, it must be updated.

Amount you can borrow

● You may borrow up to Six Million Pesos (P6,000,000.00). However, the loan amount you
will receive shall still depend on either the actual amount you need, your loan entitlement
based on capacity to pay or loan-to-appraised value ratio – whichever is lowest.
● Now, more than ever, is the best time to apply for a Pag-IBIG Fund Housing Loan as it
carries its lowest-ever interest rates! The interest rate shall be based on your chosen
repricing period under our Full Risk-Based Pricing Framework.
UNIT III. INCOME AND ASSET PROTECTION

MODULE 4
1. Managing property and Liability Risk

Income and Asset Protection

Income (business dictionary)
[Link] flow of cash or cash-equivalents received from work (wage or salary), capital
(interest or profit), or land(rent).
2. Accounting: (1) An excess of revenue over expenses for an accounting period.
Also called earnings or gross profit. (2) An amount by which total assets increase
in an accounting period.
3. Economics: Consumption that, at the end of a period, will leave an individual with the
same amount of goods (and the expectations of future goods) as at the beginning of that
period. Therefore, income means the maximum amount an individual can spend during a
period without being any worse off. Income (and not the GDP) is the engine that drives
an economy because only it can create demand

Definition(accounting-simplified)
Income is increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in
equity, other than those relating to contributions from equity participants (IASB
Framework).

Types
There are two types of income:
Sale Revenue: Income earned in the ordinary course of business activities of the entity.

Gains: Income that does not arise from the core operations of the entity.

According to Fisher, income is a flow of services based on period of time. It can only be
viewed as its owned (shelter or money rentals), music instruments (music) and food
(nourishment).

Asset protection (the balance) means keeping your property safe from being taken by
someone who wins a lawsuit against you. It can range from a lawsuit related to a negligent
act that you performed, such as causing a car accident, to a lawsuit related to the
foreclosure of property for which you have stopped paying the mortgage.

Asset Protection Planning (asset protection planners) is proactive legal action that protects your
assets from threats such as creditors, divorce,
lawsuits and judgments.
Income &
Asset Protection (karen chisholm)
A serious injury can affect your family, finances and future.
A financial security plan that includes critical illness and income replacement insurance
can help financially protect you and your loved ones, and help realize your long-term
goals.

Managing Property and Liability Risk Managing Health Expense Life Insurance Planning
Chen (2018) stated that property management is the overseeing of residential,
commercial and/or industrial real estate, including apartments, detached houses,
condominium units, and shopping centers. It typically involves the managing of property
that is owned by another party or entity.

6 Common Property Management Responsibilities Malcolm (2018)

1. Rent Responsibilities
Property managers are often responsible for dealing with rent issues. They often
set the initial rent level tenants agree to. This requires an understanding of the
market where the property is located and the type of clientele they would like to
attract.

2. Attracting Tenants
Any vacancies are expected to be filled by the property manager, and it’s their role
to find new tenants who are a good fit for the building. They should be prepared to
advertise the space effectively and meet with potential tenants, showing them the
features of the apartment.

3. Screening Tenants
Property managers should be screening tenants as they apply for a place in their
building. The screening process can differ but often includes running credit
checks and checking references and/or proof of employment.

4. Maintenance and Repairs

The property manager is responsible for keeping the property in a safe and
habitable condition. This includes maintenance, repairs, and the updating of
facilities like laundry and parking.

5. Knowledge of Landlord-Tenant Laws

Property managers are often the first line of contact in an eviction or dispute, as well as
in the general legal functioning of a rental property. In this role, property managers need
to know the legal processes for screening a tenant, handling security deposits,
terminating leases, eviction, safety compliance, and more. A good property manager will
have an in-depth understanding of the landlord-tenant laws and be able to carry out their
responsibilities in the way these laws dictate.
6. Managing the Budget and Maintaining Financial Records
As the supervisor of day-to-day activities, property managers are also responsible
for maintaining the budget for the building and keeping detailed records. Managers
are often given a set budget for the building they need to operate within, and it is
up to them to use their discretion to make improvements, order repairs, and keep
an emergency fund. The property manager may also be asked to file taxes for the
property or help the owner during tax season.

Liability Risk to a company arising from the possibility of liability for damages resulting
from the purchase, ownership, or use of a good or service offered by that company.
Liability risk can be identified and mitigated through careful product design and testing,
but may also be inherent in the nature of the product to some extent, as in the case of
automobiles or pharmaceutical supplies.

Liability risk is the risk that we may hurt a third party and will be sued for bodily injury
or other damages. Most of us have heard about auto liability; pollution liability; product
liability; medical malpractice; and the professional liability of lawyers, accountants,
company directors and officers, and more.

Professional Liability - Risk Management

Professional liability coverage – also known as errors and omissions, or
malpractice when it relates to bodily harm – responds to claims that arise from acts
of professional negligence. Professional negligence may arise for example from:

Financial Loss. Your corporation provides engineering advice. One of your certified
professional engineers designs the structural support system for balconies in a new
condominium. Shortly after construction, glass from balconies falls to the ground. Your
client and the construction firm that followed your engineer’s advice demand
compensation from your organization to cover the cost of reconstructing the support
system.

Bodily Injury. Your clinic employs licensed professionals – including registered nurses,
therapists and physicians. An individual sues a chiropractor who works in your facility
after a treatment. The injured person names your clinic and employees in a medical
malpractice lawsuit.

WHAT IS THE INCIDENTAL HEALTH EXPENSE BENEFIT? Incidental Health

Expense (IHE), is an optional component that provides Employers with choices in
the health care needs of their employees and the flexibility to use benefit dollars
where they most need them.

A life insurance policy is a contract with an insurance company. In exchange for

premium payments, the insurance company provides a lump-sum payment, known
as a death benefit, to beneficiaries upon the insured's death.
Typically, life insurance is chosen based on the needs and goals of the owner.
Term life insurance generally provides protection for a set period of time, while
permanent insurance, such as whole and universal life, provides lifetime coverage.

Financial planning is an integral step to attaining peace of mind. When it comes

to life insurance, an all-important cog in your financial plan, your needs may differ
depending on where you stand in your personal and professional life at a given
point of time. There are various life events and stages that may affect your life
insurance needs. It’s important to consider these stages to understand how life
insurance planning plays a role in your financial plan.

The right level of coverage

When buying a life insurance policy, it's important to choose the right amount of
coverage. You don't want too much, paying for protection you don't need. Nor do
you want to have too little, leaving your loved ones under-protected.

Determine how much life insurance you need

There are two common methods for calculating the amount of life insurance
coverage you should carry.

1. The “lump sum needs” method calculates the amount needed to pay:
● Outstanding debts
● Funeral expenses
● Taxes
● Household expenses
● Emergency needs

2. The “income replacement” method calculates the amount needed to replace a

percentage of your income for a specific number of years, usually until your
youngest child is out of college or until your mortgage is paid off.
MODULE 5
Lesson 1. INVESTMENT FUNDAMENTAL

"An investment in knowledge pays the best interest."

- Benjamin Franklin

"It's not how much money you make, but how much money you keep, how hard it
works for you, and how many generations you keep it for."
- Robert Kiyosaki

INVESTMENT

An investment is an asset or item acquired with the goal of generating income or

appreciation. In an economic sense, an investment is the purchase of goods that are not
consumed today but are used in the future to create wealth. In finance, an investment is
a monetary asset purchased with the idea that the asset will provide income in the future
or will later be sold at a higher price for a profit.

To help secure a desirable future lifestyle, you cannot spend every dollar that you
earn today. Instead, you must sacrifice by setting aside some of your current income and
investing it. You postpone the pleasure of using money for here-and-now consumption so
you can have more in the future. To be financially successful, it is wise to start investing
early in life, invest regularly, and stay invested. Why? Because, for every five years you
delay investing, you will have to double your monthly investment amount to achieve the
same goals. Remember: You—and no one else—are responsible for your own financial
success.

Investing Is More Than Saving

Savings is the accumulation of excess funds by intentionally spending less than
you earn. Investing is more. Investing is taking some of the money you are saving and
putting it to work so that it makes you even more money. Your goals and the time it will
take to reach those goals dictate the investment strategies you follow and the investment
alternatives you choose.

The most common ways that people invest are by putting money into assets called
securities, such as stocks, bonds, and mutual funds (often through their employer�sponsored
retirement accounts), and by buying real estate. Stocks are shares of
ownership in a corporation, and bonds represent loans to companies and governments.
All of your investment assets make up your portfolio, the collection of multiple
investments in different assets chosen to meet your investment goals.

Are You Ready to Invest?

Here are signs you are ready to begin an investment program:
You live within your income.
You are able to save regularly.
You use credit wisely.
You carry adequate insurance.

Decide Why You Want to Invest

People invest for four reasons:
To achieve financial goals, such as taking a vacation, purchasing a new car,
making a down payment on a home, financing a child’s education, or starting a
business
To gain wealth and a feeling of financial security
To increase current income
To meet retirement income needs

Where Can You Get the Money to Invest?

You must save money to have it for investing.
Pay yourself first.
Save—don’t spend—extra funds.
Participate in your employer’s retirement plan..
Make saving automatic.
Continue to make installment payments to yourself.
Break a habit.
Get a part-time job.
Scrimp for one month.

INVESTMENT TERMINOLOGIES
Investable Cash refers to the amount of the money that an organization or an individual
can afford to keep in some forms of investment for a definite length of period w/o
hampering his day-to- day operations.

Liquidity Buffer refers to the amount of cash that an entity or an individual must have
taken care of unexpected cash requirements. (Extra funds)

CREDIT RATING is an opinion on the financial soundness of an enterprise and its

capability to pay its debts & the corresponding Interest.

Risk may refer to non- realization of expected earnings or less of capital

Risk Tolerance refers to the degree of risk that a person can afford to be exposed to and
still sleep soundly.

Diversification refers to spreading Investable funds to different investment Items, to

minimize risk from over exposure to only one kind of asset.

Over diversification refers to the extreme of spreading the investable funds to so many
items of investment.

What Investment Returns Are Possible?

Current income is money received while you own an investment. It is usually received
on aregular basis as interest, rent, or dividends.

Capital gain occurs only when you actually sell the investment; it results from an
increase in the value of the initial investment. It is calculated by subtracting the total amount
paid for the investment (including purchase transaction costs) from the
higher price at which it is sold (minus any sales transaction costs).

Capital losses can occur as well. For most investments, a tradeoff arises between capital
gains and current income. Investments with potential for high capital gains often pay little
current income, and investments that pay substantial current income generally have little
or no potential for capital gains. Long-term investors are usually willing to forgo current
income in favor of possibly earning substantial future capital gains.

DISCOVER YOUR INVESTMENT PHILOSOPHY

Keep in mind the advice offered by investment guru Warren Buffett, “The first rule
of investing is don’t lose money; the second rule is don’t forget Rule No. 1.”

What Is Your Investment Philosophy?

An investment philosophy is one’s general approach to tolerance for risk in
investments, whether it is conservative, moderate, or aggressive, given the financial goals
to be achieved. The more risk you take, within reason, the more you can expect to earn
and accumulate over the long term. Smart investors follow their investment philosophy
without wavering; they do not change course unless their basic objectives change.

Conservative investment philosophy, you accept very little risk and are generally
rewarded with relatively low rates of return for seeking the twin goals of a moderate
amount of current income and preservation of capital.

Preservation of capital means that you do not want to lose any of the money you
have invested. In short, you could be characterized as risk averse. Conservative
investors focus on protecting themselves. They do so by carefully avoiding losses and
trying to stay with investments that demonstrate gains, often for long time periods
(perhaps for five or ten years). Tactically, they rarely sell their investments.

Moderate investment philosophy seeks capital gains through slow and steady growth
in the value of their investments along with some current income. People seeking
moderate returns consider investing in dividend paying common stocks, growth and
income mutual funds, high-quality corporate bonds, government bonds, and real estate.

Aggressive investment philosophy chooses to strive for a very high return by accepting
a high level of risk. As such, you could be characterized as a risk seeker. Aggressive
investors primarily seek capital gains. People seeking exceptionally high returns consider
investing in common stocks of new or fast-growing companies, high-yielding junk bonds,
and aggressive-growth mutual funds.

Approaches to Investing
Another aspect of your personal investment philosophy is your level of involvement
in investing. That is, do you want to be an active or passive investor?

Active Investing An active investor carefully studies the economy, market

trends, and investment alternatives; regularly monitors these factors; and makes
decisions to buy and sell, perhaps three or four or more times a year, with or without the
advice of a professional.

Passive Investing A passive investor does not actively engage in trading of

securities or spend large amounts of time monitoring his or her investments.

Investment Types / Alternatives

Stocks. Shares of ownership in the assets and earnings of a business corporation.

Bonds. Interest-bearing negotiable certificates of long-term debt issued by a corporation,

a municipality (such as a city or state), or the federal government.

Mutual funds. An investment company that combines the funds of investors who have
purchased shares of ownership in it and then invests that money in a diversified portfolio
of stocks and bonds issued by other corporations or governments.

Real estate. Property consisting of land; all structures permanently attached to that
land; and accompanying rights and privileges, such as crop and mineral rights. Examples:
residential housing units, commercial properties, residential lots, raw land.
High-risk investments. Alternatives that have the potential for significant fluctuations in
return over short time periods, perhaps only days or weeks.

Types of Investment Risks

A number of investment risks affect investor returns:

Random risk (also called unsystematic risk) is the risk associated with owning only
one investment of a particular type (such as stock in one company) that, by chance, may
do very poorly in the future because of uncontrollable or random factors, such as labor
unrest, lawsuits, and product recalls. If you invest in only one stock, its value might rise
or fall.

Business failure risk. Business failure risk, also called financial risk, is the possibility
that the investment will fail, perhaps go bankrupt, and result in a massive or total loss of
one’s invested funds. Investigate thoroughly before investing.

Inflation risk. Inflation risk may be the most important concern for the long-term
investor. Inflation risk, also called purchasing power risk, is the danger that your
money will not grow as fast as inflation and therefore not be worth as much in the future
as it is today.

Time risk. The role of time affects all investments. The sooner your invested money is
supposed to be returned to you—the time horizon of an investment—the less the
likelihood that something could go wrong. The more time your money is invested, the
more it is at risk. For taking longer-term risks, investors expect and normally receive
higher returns.

Business-cycle risk. As we discussed in Chapter 1, economic growth usually does not

occur in a smooth and steady manner. Instead, periods of expansion lasting three or four
years are often followed by contractions in the economy, called recessions, that may last
a year or longer. The profits of most industries follow the business cycle. Some
businesses do not experience business-cycle risk because they continue to earn profits
during economic downturns. Examples are gasoline retailers, supermarkets, and utility
companies.
Instant Message

Market-volatility risk. All investments are subject to occasional sharp changes

in price as a result of events affecting a particular company or the overall market
for similar investments.

Liquidity risk. Liquidity is the speed and ease with which an asset can be converted to
cash. You can convert your savings into cash instantly. You can sell your stocks
and bonds in one day, although it may take four days to have the proceeds available in
cash. Real estate is illiquid because it may take weeks, months, or years to sell.

Reinvestment risk. Reinvestment risk is the risk that the return on a future investment
will not be the same as the return earned by the original investment.

Marketability risk. When you have to sell a certain asset quickly, it may not sell at
or near the market price. This possibility is referred to as marketability risk. Selling
real estate in a hurry, for example, may require the seller to substantially reduce the
price in order to sell to a willing buyer.

The Top 3 Financial Missteps in Investing

People slip up in investing fundamentals when they do the following:
1. Buy and sell more than they should
2. Diversify less than they should
3. Hold on to a bad investment long after evidence shows it was a bad decision
Lesson 2. INVESTMENT IN STOCKS AND BONDS

As an investor, you have a variety of options to choose from, including stocks and
bonds. The investment you select depends on your financial goals, your investment
preferences, and your tolerance for risk.

The Role of Stocks and Bonds in Investments

Individual investors provide the money corporations use to create sales and earn
profits. The investor shares in those profits.

A corporation’s financial needs will vary over time. To begin its operations, a new
corporation needs a start-up capital (funds initially invested in a business enterprise). During its
life, a corporation may need additional money grow. To raise capital and finance its goals, it may
issue three types of securities (negotiable instruments of ownership or debt): common stock,
preferred stock, and bonds.

STOCKS
Stocks are shares of ownership in a company. When you buy stocks of a publicly listed
company, you become a stockholder or shareholder of a company. In other words, you
become a part-owner of that company.

As a part-owner, you participate in the company’s growth and future profits.

Conversely, you may also lose if the company suffers a loss or performs
below market expectations.

The number of stocks you acquire will determine how big or small your
ownership is. As you acquire more stocks, your ownership stake in the
company becomes greater.

Other terms for stocks are “shares” or “equities”. In Filipino, stocks are called
“sapi”, which means to “join” or to “partake”.

Types of STOCKS
Stocks are classified according to types and classes, depending on the characteristics
and earnings potential.
According to RIGHTS

a. Common stock – It is a security usually purchased for participation in the profits and
control of ownership and management of the company.
Common stocks are also known as “ordinary shares.”

b. Preferred stock – It is a security whereby the holder has a higher claim on the assets
and earnings of the company. Preferred stocks are also known as “preference shares.”
COMMON SHARES VS PREFERRED SHARES

COMMON SHARES PREFERRED SHARES

Company Ownership yes Yes

Voting Rights yes no

Dividend Variable Fixed

Order of Claim to Earnings Second First

Returns based on Earnings Earnings

According to OWNERSHIP
Common shares may further be classified into:
a. Class A – These are stocks that can be exclusively traded by Filipino investors.
b. Class B – These are stocks that can be bought and sold by both Filipino and
foreign investors.

According to SECTORS
Stocks listed and traded on the PSE are classified into six (6) sectors:
1. Financial Sector – includes companies engaged in banking, investments, and
finance.

2. Industrial Sector – includes companies involved in the following:

a. Electricity, Energy, Power, and Water
b. Food, Beverage, and Tobacco
c. Construction, Infrastructure, and Allied Services
d. Chemicals
e. Diversified Industrials

3. Holding Firms Sector – includes companies or firms that control or manage partial
or complete interest in another company or other companies. Usually, these companies
do not produce goods or services itself; rather, its purpose is to own shares of other
companies.

4. Property Sector – includes companies involved in land and property development

5. Services Sector – includes companies involved in the following:

a. Media
b. Telecommunications
c. Information Technology
d. Transportation Services
e. Hotel and Leisure
f. Education
g. Diversified Services

6. Mining and Oil Sector – includes companies engaged in mineral extraction, oil
exploration, extraction and production

According to CHARACTERISTICS
Though there is no formal definition or criteria to classify a stock according to its
characteristics, analysts generally describe stocks as:

a. Blue Chip stocks – are shares of well-established and financially

sound companies that have demonstrated their ability to pay dividends in both good
and bad times. They also exhibit more modest but dependable returns and are
relatively of lower risk.

b. Income stocks – are shares of those companies with good dividend payment
history due to steady profits. Since they are stable, income stocks generally have a
lower level of volatility.

c. Growth stocks – also called “glamour stocks”, are shares of corporations whose
earnings are expected to grow at an above-average rate relative to the market. A
growth stock does not usually issue dividends as earnings are reinvested in capital
projects.

d. Defensive stocks – are shares that provide regular dividends and stable earnings,
regardless of the overall condition of the stock market. Defensive stocks remain stable
under difficult economic conditions. Generally, these are stocks of food, oil, and utilities
companies, which are characterized by steady demand amidst hard times.

e. Cyclical stocks – are those sensitive to business conditions or cycles strongly tied
with the economy’s performance. These companies produce or offer services that are
low in demand during slowdown and increase when business peaks.

f. Speculative stocks – are those that rise quickly when economic growth is strong
and falls rapidly when growth is slowing down. A speculative stock is considered very
risky because of its volatility. It increases or decreases rapidly depending on the
economic conditions.

What is Stock Market?

The stock market is where stocks are bought and sold to investors. Companies that need to
raise funds for business expansion to sell a minority part of its ownership—also called stocks or
shares—to the public.
In the Philippines, the PSE is the only corporation that runs the local stock market. Established
in 1927 (then called the Manila Stock Exchange), the PSE is also one of the oldest stock
exchanges in Asia.

Why Invest in Stocks?

Stocks are among the best types of assets to invest in. Here are the three major reasons
to start stock market investing.

1. Capital Growth/Price Appreciation

Once you own a stock of a company, you can make money through the increase in the
market price of a stock. You buy the stock at a low price and then sell it when its price
This makes stock market investing ideal for long-term financial goals such as retirement.
The earlier you start, the higher the returns you’ll get.

2. Dividend Income
Most PSE-listed companies, especially the profitable ones, distribute a portion of their
earnings to their shareholders by paying dividends in the form of cash or free additional
shares of stock. Stock market investors generally receive dividends once or up to four
times per year.

3. Rights of Being a Company’s Part-Owner

Being a stockholder of a corporation earns one the right to vote in the election of the
Board of Directors in its annual stockholders’ meeting. Stockholders also receive a share
of the company’s remaining assets once it closes down.

How to invest in STOCKS?

Getting started in the stock market is a simple process.
1. Choose your STOCKBROKER
You should remember that your stockbroker is your financial agent that will help
you make your invested money grow. Stockbrokers are also classified as
traditional or online based on the services that they offer.
Traditional brokers are those who assign a licensed salesman to handle your
account and take your orders via written instruction or through a phone call.
Online brokers, on the other hand, are those whose main interface with their
customer is through the Internet.
The full listing of stockbrokers is available in the PSE website [Link].

2. Open a TRADING ACCOUNT with your chosen stockbroker.

The next step is to formally open a trading account. Similar to the process in
opening a bank account, representatives of the chosen stockbrokerage company
will require you to fill out a Customer Account Information Form or CAIF.

Accomplish this along with the other requirements such as:

o Two (2) valid IDs;
o Specimen signature cards, and;
o Proof of billing.

3. Discuss with your stockbroker the stocks you wish to BUY or SELL.
After opening a trading account, you can now start discussing with your
stockbroker the stocks you wish to buy (or sell).

4. Give ORDERS to the stockbrokers.

Placing an order to buy or sell a stock can be done by making a telephone call or
sending an SMS to your stockbroker. Orders can also be placed directly online via
the Internet.

5. Get the CONFIRMATION RECEIPT.

Once your order has been carried out, your stockbroker will give you a confirmation
invoice showing the details of your transaction.

6. Deliver/Pay before SETTLEMENT DATE.

The delivery or payment should be before the settlement date. For traditional
stockbrokers, settlement of transactions is usually done after three (3) working
days from the transaction or T+3. For online stockbrokers, settlement of all
transactions is done on the transaction date.

7. Receive PAYMENT.
The Board Lot Table
How much is the minimum amount of investment?
Trading of stocks is done by board lot or round lot system. The Board Lot
Table determines the minimum number of shares one can purchase or sell at a specific
price range. Therefore, the minimum amount needed to invest in stocks varies and will
depend on the market price of the security as well as its corresponding board lot.
Bonds
In finance, a bond is an instrument of indebtedness of the bond issuer to theholders.
([Link])
A bond is a fixed income instrument that represents a loan made by an investor to
a borrower (typically corporate or governmental). ([Link])
Individuals who want to invest by loaning their money can do so by buying bonds and becoming
a creditor (again very small) of the business.

How to Invest in Bonds

Most of us are used to borrowing money in some capacity, whether it's mortgaging
our homes or bumming a few bucks off a friend. Similarly, companies, municipalities, and
the federal government borrow money, too. How? By issuing bonds.

How bonds work

Bonds are a way for an organization to raise money. Let's say your town asks
you for a certain investment of money. In exchange, your town promises to pay you
back that investment, plus interest, over a specified period of time.
For example, you might buy a 10-year, $10,000 bond paying 3% interest. Your
town, in exchange, will promise to pay you interest on that $10,000 every six months,
and then return your $10,000 after 10 years.

How to make money from bonds

There are two ways to make money by investing in bonds.

First, is to hold those bonds until their maturity date and collect interest
payments on them. Bond interest is usually paid twice a year.

Second, way to profit from bonds is to sell them at a price that's higher than what
you pay initially.
Bond prices can rise for two main reasons. If the borrower's credit risk profile
improves so that it's more likely to be able to repay the bond at maturity, then the price of the
bond typically rises. Also, if prevailing interest rates on newly issued bonds go down,
then the value of an existing bond at a higher rate goes up.

How to buy bonds

Unlike stocks, most bonds aren't traded publicly, but rather trade over the counter, which
means you must use a broker. Treasury bonds, however, are an exception -- you can buy
those directly from the U.S. government without going through a middleman.
The problem with this system is that, because bond transactions don't occur in a
centralized location, investors have a harder time knowing whether they're getting a fair
price. A broker, for example, might sell a certain bond at a premium (meaning, above its
face value). Thankfully, the Financial Industry Regulatory Authority (FINRA) regulates the
bond market to some extent by posting transaction prices as that data becomes available.
What are different types of bonds available in the Philippine market?
There are two general types of bonds that you can acquire: government bonds and
corporate bonds.
Government or treasury securities

Government bonds are issued by the Philippine government through the Bureau of the
Treasury, and that explains that they are also known as treasury bonds. They are offered
in two different ways: through auction and directly to the investing public. In auctions, the
bonds are held up for bidding commonly to institutional investors who would then have
the option to make it available to the general public.

On the other hand, the Bureau of the Treasury also sell directly to the public without going
through the bidding process. Examples are Premyo bonds that were issued in the last
quarter of 2019 and the RTB 2020 as mentioned earlier.

Government or treasury bonds are considered to have the least risks, and that is because
they are backed by taxpayers. The risk of default is relatively low.

Treasury bills are shorter in term, usually less than a year. Interest is not paid, instead the
bills are priced at a discount. Your income is derived from the difference between the
discounted price you paid and the full amount that the government pays back, which is
called “spread”.

Fixed Rate Treasury Notes (FXTN) pays semi-annual interest or as described during the
offer.

Retail treasury bonds (RTB) are longer than FXTNs. They usually carry quarterly interest
payments.

Republic of the Philippines (ROP) bonds are dollar-denominated debt instruments.

See below the different government securities.

Corporate retail bonds

Corporate bonds are issued by private corporations that are publicly listed on the stock
exchange. Announcements are made in major broadsheets and newspapers in the
country, inviting investors who may want to get them.
Advantages of bonds
Fixed income.
Less volatile.
Comparatively less risky.
Liquid.
Diversify risk portfolio.
Interest is better than banks. .

What are the risks in bond investing?

Taxable. Whatever you earn from them is subject to capital gains tax of 20%.
Risk of default, also called credit risk, is a situation where the company cannot pay
the interest on the due date or the principal amount on maturity.
Interest rate risks. When interest rate (which is set by the Bangko Sentral ng Pilipinas)
increases, the yield that you get from bonds decrease.
Liquidity risks.
Inflation risk. When inflation spikes, the purchasing power of the fixed income that
you get is lessened.
Reinvestment risks. When the central bank lowers the interest rate, your earnings
when you reinvest the fixed income derived from bonds may also be less.
Opportunity risk. Studies show that stocks outperforms bonds in the long term, and
yet during market volatility and recessions bond yields can be attractive.

What are the potential earnings of bonds?

Your potential earnings are limited to the interest that is set when you acquire them and
the taxes. Interest is higher the longer the maturity is, and it is generally lower when it the
maturity is shorter. Other factors that might also affect your income would be the
prevailing interest rate, inflation, credit-worthiness of the issuer, etc.
MODULE 6
REAL ESTATE AND HIGH-RISK INVESTMENT
Learning Objectives
After reading this chapter, the students should be able to:
1. Demonstrate how you can make money investing in real estate.
2. Recognize how to take advantage of beneficial tax treatments in real estate
investing.
3. Assess the disadvantages of investing in real estate.
4. Summarize the risk and challenge of investing in the alternative investments of
collectibles, precious metals, and gems.
5. Explain why options and futures are risky investments.

Understanding Real Estate

Real Estate is a tangible asset and a type of real property. Real Property examples
include land, buildings and other improvements, plus the rights of use and enjoyment of
that land and all its improvements. Renters and leaseholders may have rights to inhabit
land or buildings that are considered a part of their estate, but these rights themselves
are not strictly speaking, considered real estate.

Real property is not the same thing and should not to be confused with personal property,
Personal property includes intangible assets like investments, along with tangible assests
such as furniture and fixtures like a dishwasher. Also, even renters may claim parts of a
home as personal property, provided you bought and installed the property with the
lessor’s permission.

Types of Real Estate

1. Residential
2. Commercial
3. Industrial

Residential real estate includes undeveloped land, houses, condominiums, and

townhouses. The structures may be single-family or multifamily dwellings and may be
owner-occupied or rental properties.

Commercial real estate includes non-residential structures such as office buildings,

warehouses, and retail buildings. These buildings may be free-standing or in shopping
malls.

Industrial real estate includes factories, business parks, mines, and farms. These
properties are usually larger in size and locations may include access to transportation
hubs such as rail lines and harbors.

Real Estate is property made up of land and the buildings on it, as well as the
natural resources of the land including uncultivated flora and fauna, farmed crops and
livestock, water, and any additional mineral deposits.
Real Estate investing involves the purchase, ownership, management, rental
and/or sale of real estate for profit, improvement of realty property as part of a real estate
investment strategy is generally considered to be a sub specialty of real estate investing

FINANCING A REAL ESTATE INVESTMENT

Borrowing to finance a real estate investment is more expensive than borrowing to
buy one’s own home, often 0.5 to 1.5 percentage points above rate for customary
homebuyers. There is more risk because the investor does not live at the property. The
minimum down payment for investors is often 20 to 25percent. To make a smaller down
payment and perhaps get a lower mortgage rate, some real estate investors buy a home,
live in it for a year, and then rent it out as an investment.

A popular way to finance a real estate investment is through seller financing or

owner financing. This occurs when a seller is willing to self-finance a loan by accepting a
promissory note from buyer who makes monthly mortgage payments. No lending agency
is involved. Investing buyers pay higher interest rates for seller financing. The seller may
accept little or no down payment in exchange for an even higher interest rate, perhaps 1
½ to 2 ½ percent above conventional mortgage rates. Owner-financed deals can be
transacted very quickly for investors.

Another way to state in real estate investing is to purchase sweat equity property.
With this approach, you seek a property that needs repairs but has good underlying value.
You buy this fixer upper at a favourable price and sweat by spending many hours
cleaning, painting, and repairing it to rent or sell at a profit.

INVESTING IN COLLECTIBLES, PRECIOUS METALS, AND GEMS

Investors often think of assets as something they would like to own for the long
term. When investing in collectible, precious metals, and gems, the investors owns illiquid
real assets, not intangible items represented by pieces of paper. While an asset may be
bought for its long term investment potential, profits might be earned in the short term.

A speculator buys in the hope that someone else will pay more for an asset in the
not too distant future. Speculator often buy or sell in expectations of profiting from market
fluctuations. If you put money into these illiquid assets, limit your speculative investing to
no more than 5 to 10 percent of your total investment portfolio, and buy only what you
really adore. Don’t consider collectibles, precious metals, and gems as part of your
savings plan for retirement.

Collectibles are cultural artifacts that have value because of their beauty, age,
scarcity, or popularity. They include baseball cards, posters, sports memorabilia, guns,
photographs, paintings, prints, ceramics, comic books, watches, lunchboxes and so on.
DISADVANTAGES OF REAL ESTATE INVESTING
Real Estate investing can be profitable. But it does have some significant
disadvantages:
1. Business Risk
2. Foreclosures
3. Illiquidity
4. Complex Assumptions
5. Large Initial Investment
6. Lack of diversification
7. Dealing with tenants
8. Time-consuming management demands
9. Low current income
[Link] costs
[Link] rate risk
[Link] fees
[Link] transfer cost

Evaluation
1, Differentiate the type of Real Estate
2, Enumerate the disadvantages of Real Estate Investing
[Link] three ways to finance real estate investment