NAME: GRADE & STRAND:

Business Finance

Lesson 7: The definition, purpose, kinds, advantages, and disadvantages and the risks of investment

WHAT I NEED TO KNOW?

At the end of this lesson, you will able to:

1. Compare and contrast the different types of investments.
2. Differentiate investment according to its type and features.
3. Enumerate advantages and disadvantages of the different types of investments.

WHAT I KNOW?
True or False: Write True if the statement is correct and False if it is wrong. Your answer must
written on the answer sheet.
1. The decision to establish an investment plan is an important first step to accomplishing your
financial goals.
2. There are two types of stocks – common stocks and preferred stocks.
3. A short-term investment objective is defined as one that will be be accomplished within a period
of two to five years.
4. An emergency fund is a certain amount of money that can be obtained quickly in case of immediate
need.
5. Stock prices fluctuate due to competition and movements in market prices.
6. Liquidity is the ease with which an asset can be converted to cash without substantial loss in peso
value.
7. Preferred stock represents the most basic form of corporate ownership.
8. A line of credit is a short-term loan that is approved before the money is actually needed.
9. One of the major assumptions in investment is that investors base their decisions strictly on
expected return and risk factors.
10. Bondholders generally receive interest payments every six months.

WHAT’S NEW?
FINDING WORDS:
Let’s raise your level of investment skills. Draw a line connecting the letters to form words suggested in
the box.

Preferred - use red pen

Securities – use blue pen
Investments – use black
pen
Bonds – use green pen
Funds – use violet

WHAT IS IT?

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The Different Types of Investments

An investment is any type of asset that is acquired by an investor with the intent to utilize it to
generate income and eventually accumulate wealth. Finance professionals view investment as a monetary
asset, like a bond, a stock or any type of financial instrument which is purchased and in due time will be
sold, hopefully at a higher price.

For instance, if the stocks were bought at P200 per share and after one year the investor was able
to sell them for P300 per share, then the investor would have earned P100 per share. If there is a total of
1,000 shares, then the profit would be P100,000.

Different Types of Investments and their Features:

Types of Investments Features

1. Investing in a Bank Earns minimal interest, easily withdrawable,

1.1 Savings account least risky, insured with PDIC up to P500,000.
1.2 Time deposit Higher interest, withdrawal after the fixed
time, i.e.
90days, one year, etc.,

2. Investment in Bonds Like an IOU (I owe you) issued by a

government or
company with fixed interest rate-called coupon.

3. Investment in Shares Like buying a small part of a company,

earnings
of Stocks
through dividends and capital gains as price
increases.
4. Managed funds An investment company, which pools the money
of various investors and invest that money in
bonds,
stocks or a combination of various investments.

5. Investment in Property Can either be real property (real estate) or

tangible
personal property (gold, precious metals,
artworks,etc.)

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Advantages and Disadvantages of the Different Types of Investments
Types of Advantages Disadvantages
Investments
1. Investing in aBank Security-insured by PDIC Lower returns – 1% or less for
Liquidity for savings account savings, 2-3% time deposits
Liquidity for time deposits

2. Investment inBonds Safest - with fixed interest With fixed term cannot be
Lending money to a company for withdrawn before maturity or at a
expansion of business, which lower amount.
contributes to
economic growth

3. Investment in Shares Share in profits in the form of Dividends dependent on

of Stocks dividends board declaration
Capital gains due to increase During liquidation, creditors
in market prices have first claim on assets

4. Managed funds Diversification, ease of entry, Fees, performance not

convenience, fund management guaranteed, lack of control,
and low taxation
investment amount.

5. Investment in Price appreciation for real Long term process for profits
Property property. Safest investment to be realized.

Where to Invest?
→ the amount of cash should be considered. The investor must invest within his means. Not all his extra
resources must be used to buy investment, because there will always be circumstances in which cash will
be needed in case of emergency.

→ the risk inherent in the investment should be considered. Higher risk entails higher return. Deposits are
the least risky investments, but they earn the least, too. Real Estate investments do earn a lot, but they are
so risky that they could even cause a national economy crash. We must not put all the money in one
investment, so as to spread or diversify risk. The good thing with managing risk or diversifying our
investment, is if ever we are not successful in one of the investment opportunities that we grabbed, we will
still have other investments left which would still help us earn.

→ We should consider our intent. We should ask ourselves if the intent is short term or long term because
that would greatly influence the kind of investment that he needs to buy. If we would like to earn for a shorter
term, maintaining a short-term deposit is enough. We could also purchase some stocks, and then
immediately sell them if the price increases. Stocks and bonds can also be held as long-term investments.
Bonds pay regular interest, and stocks do earn dividends.

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 WHAT’S MORE?

Types of Investments: As depicted by the image, choose which of the following is your investment option
and explain your answer by highlighting its features and advantages:

WHAT I CAN DO?

Figure 1 https://www.globalbankingandfinance.com/12-best-investment-options-in-india-for-everyone-in-their-20s/

Case Study
Your mother, who is an OFW, is coming home in six months. The last time you spoke to her via online video
call, she asked you to suggest three small businesses to invest in. She said that she has allotted P500,000
as capital that would be divided between the three businesses that you will recommend. You scribbled some
possible businesses and came up with the following options:

Possible Business Estimated Initial

Capitalization
1. Barbershop P 180,000
2. Beauty parlor 140,000
3. Buy and sell of ready-to-wear clothes 75,000
4. Carinderia 90,000
5. General merchandise store 150,000
6. Milkshake business 75,000
7. Pizza stand franchise 120,000
8. Siomai stand franchise 200,000
9. Small bakery 200,000
10. Small grocery store 100,000

Draft an answer or suggestion for your mother containing the following:

1. The top three recommended businesses that you would recommend to your mother.

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2. Give at least three reasons as to why you chose the business you have recommended, which include
your opinion on which you think would be most profitable, feel free to quantify your opinion if you wish but
this is not necessary.
3. Give at least two disadvantages for each business recommended.

ASSESSMENT

I. On your answer sheet write the correct letter of the correct answer.
1. What is a bond?
A. It is a security that represents partial ownership in a business.
B. It is a security that represents the debt of a government or a business that promises to pay a fixed
amount.
C. It is a security that represents the equity of a government or a business that promises to pay a fixed
interest.
D. None of the above
.
2. Which is TRUE of money market mutual funds?
A. Enable individuals and small businesses to invest indirectly in money- market instruments.
B. Are available only to high net-worth individual
C. Are involved in acquiring and placing mortgages
D. Are also known as finance companies

3. A business owned by two or more people and operated for profit.

A. Cooperative
B. Corporation
C. Partnership
D. Sole Proprietorship

4. An entity created by law owned by shareholders. Overall objective of a shareholder should be wealth
maximization
A. Cooperative C. Partnership
B. Corporation D. Sole Proprietorship

5. Rational investors will seek efficient portfolios because these portfolios are optimal based on:
A. Expected return C. Risk
B. Expected return and risk D. Transaction cost

6. Most investors are assumed .

A. Risk averse C. Risk moderators
B. Risk neutral D. Risk seekers

7. Based on recent history, an investor would probably have a lower risk level with portfolio consisting
of .
A. All bonds C. Impossible to tell
B. All stocks D. Some stocks and some bonds

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8. Who will decide on the declaration of dividends in a corporation?
A. The board of directors of the firm
B. The president of the company
C. The shareholders of the corporation
D. The stock exchange on which the stock is listed

9. What is the difference between shares and bonds?

A. Bonds represent ownership whereas shares do not.
B. Shares and bonds both represent equity.
C. Shares and bonds both represent liabilities.
D. Shares represent ownership whereas bonds do not.

10. How should one think of stocks?

A. One should not think of stocks as being synonymous with a good business
B. One should think of stocks as pieces of businesses.
C. One should think of stocks as chips in the casino
D. Both A and B.

II. True or False: Write True if the statement is correct and False if it is wrong. Your answer must written on
the answer sheet.
1. The decision to establish an investment plan is an important first step to accomplishing your
financial goals.
2. There are two types of stocks – common stocks and preferred stocks.
3. A short-term investment objective is defined as one that will be be accomplished within a period
of two to five years.
4. An emergency fund is a certain amount of money that can be obtained quickly in case of immediate
need.
5. Stock prices fluctuate due to competition and movements in market prices.
6. Liquidity is the ease with which an asset can be converted to cash without substantial loss in peso
value.
7. Preferred stock represents the most basic form of corporate ownership.
8. A line of credit is a short-term loan that is approved before the money is actually needed.
9. One of the major assumptions in investment is that investors base their decisions strictly on
expected return and risk factors.
10. Bondholders generally receive interest payments every six months.

References
Book
Gamatero, Albert N. (2017) Business Finance (1st edition) . Diwa Learning Systems Inc. De Guzman,
Angeles A (2019) Business Finance for Senior High School (1st edition), Lorimar Publishing Inc.

Unpublished References;
Esmeralda P. Zulueta , Business Finance – Grade 12 Alternative Delivery Mode, Quarter 3 – Module 4:
Working Capital Management First Edition, 2020
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 NAME: GRADE & STRAND:
Business Finance
Lesson 7 ANSWER SHEETS

General Instructions: This answer sheet is use for the answer and solutions purposes only. If the
answer sheet is not enough you can use another separate sheet (short bond paper) and please attached it
in this answer sheet.

WHAT I KNOW? ASSESSMENT

1. 6. I. 1. 6. II. 1. 6.
2. 7. 2. 7. 2. 7.
3. 8. 3. 8. 3. 8.
4. 9. 4. 9. 4. 9.
5. 10. 5. 10. 5. 10.

WHAT’S NEW?
M F R R Q S T S U D M A F R
O I I E U R Y N E E O L B U
C P M R E S F R O N T K O N
E R B V W O R U C P E B N D
K A C U P E T L N O W G D B
P P U X F S U M S D D U S I
I N V E S T M E N T S A N F
L M R L M A E O A P E L S K

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M P O A S E C U R I T I E S

WHAT’S MORE

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WHAT I CAN DO?

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