ALTERNATIVE INVESTMENT

What Is an Alternative Investment?

An alternative investment is a financial asset that does not fall into one of the conventional investment
categories. Conventional categories include stocks, bonds, and cash. Alternative investments can include
private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and
derivatives contracts. Real estate is also often classified as an alternative investment.
 An alternative investment is a financial asset that does not fit into the conventional
equity/income/cash categories.
 Private equity or venture capital, hedge funds, real property, commodities, and tangible assets are
all examples of alternative investments.
 Most alternative investments have fewer regulations from the Securities and Exchange
Commission (SEC) and tend to be somewhat illiquid.
 While traditionally aimed at institutional or accredited investors, alternative investments have
become feasible for retail investors via alternative funds.
 Common forms of alternative investments include real estate, commodities, cryptocurrency, and
collectibles.
Understanding Alternative Investments
Most alternative investment assets are held by institutional investors or accredited, high-net-worth
individuals because of their complex nature, lack of regulation, and degree of risk. Many alternative
investments have high minimum investments and fee structures, especially when compared to mutual
funds and exchange-traded funds (ETFs).
These investments also have less opportunity to publish verifiable performance data and advertise to
potential investors. Although alternative assets may have high initial minimums and upfront investment
fees, transaction costs are typically lower than those of conventional assets due to lower levels of
turnover.
Most alternative assets are fairly illiquid, especially compared to their conventional counterparts. For
example, investors are likely to find it considerably more difficult to sell an 80-year-old bottle of wine
compared to 1,000 shares of Apple Inc. due to a limited number of buyers.
1. Private Equity
Private equity is a broad category that refers to capital investment made into private companies, or those
not listed on a public exchange, such as the New York Stock Exchange. There are several subsets of
private equity, including:
 Venture capital, which focuses on startup and early-stage ventures
 Growth capital, which helps more mature companies expand or restructure
 Buyouts, when a company or one of its divisions is purchased outright
An important part of private equity is the relationship between the investing firm and the company
receiving capital. Private equity companies often provide more than capital to the firms they invest in;
they also provide benefits like industry expertise, talent sourcing assistance, and mentorship to founders.
2. Private Debt
Private debt refers to investments that are not financed by banks (i.e., a bank loan) or traded on an open
market. The “private” part of the term is important—it refers to the investment instrument itself, rather
than the borrower of the debt, as both public and private companies can borrow via private debt.
Private debt is leveraged when companies need additional capital to grow their businesses. The
companies that issue the capital are called private debt funds, and they typically make money in two
ways: through interest payments and the repayment of the initial loan.
3. Hedge Funds
A hedge fund is a limited partnership of private investors whose money is pooled and managed by
professional fund managers. These managers use a wide range of strategies, including leverage
(borrowed money) and the trading of nontraditional assets, to earn above-average investment returns..
4. Real Estate
Real estate as an investment includes investing in physical properties or property-based securities. It can
also include investing in real estate crowdfunding platforms, real estate investment trusts (REITs), and
real estate mutual funds. In addition to capital appreciation of tangible assets, investors strive for
operating income to potentially provide ongoing, stable cash flow.
In addition to its size, real estate is an interesting category because it has characteristics similar to bonds
—because property owners receive current cash flow from tenants paying rent—and equity, because the
goal is to increase the long-term value of the asset, which is called capital appreciation.
As with other real assets, valuation is a challenge in real estate investing. Real estate valuation methods
include income capitalization, discounted cash flow, and sales comparable, with each having both
benefits and shortcomings. To become a successful real estate investor, it’s crucial to develop strong
valuation skills and understand when and how to use various methods.
5. Commodities
Commodities are raw materials such as gold, silver, oil, or agricultural products. Investors can invest in
these tangible goods that have real-world uses and often perpetual demand due to the underlying
characteristics of what they are. For example, gold's price is arguably more stable because it is used in a
variety of industries and is considered a store of value.
6. Collectibles
Collectibles include a wide range of items such as:
 Rare wines
 Vintage cars
 Fine art
 Mint-condition toys
 Stamps
 Coins
 Baseball cards
Investing in collectibles means purchasing and maintaining physical items with the hope the value of the
assets will appreciate over time.
These investments may sound more fun and interesting than other types but can be risky due to the high
costs of acquisition, a lack of dividends or other income until they're sold, and potential destruction of the
assets if not stored or cared for properly. The key skill required in collectibles investment is experience;
you have to be a true expert to expect any return on your investment.
7. Structured Products
Structured products are investments that provide a return based on the performance of an asset. This
asset can cover the equity, index, fund, interest rate, currency, commodity, or property markets. The
payoff and level of capital at risk can be pre-defined.
Structured products are pre-packaged investments that normally include assets linked to interest plus
one or more derivatives. They are generally tied to an index or basket of securities and are designed to
facilitate highly customized risk-return objectives. This is accomplished by taking a traditional security
such as a conventional investment-grade bond and replacing the usual payment features—periodic
coupons and final principal—with non-traditional payoffs derived from the performance of one or more
underlying assets rather than the issuer's own cash flow.
A derivative is a financial contract that derives its value from the performance of an underlying asset,
index, currency, or interest rate. Derivatives are traded between two or more parties and can be bought
or sold on an exchange or over the counter.
Here are some ways derivatives work:
 Hedging
Investors can use derivatives to protect against price movements. For example, a farmer might enter into
a futures contract to sell their wheat at a set price in the future, regardless of the market price.
 Speculation
Investors can use derivatives to increase their exposure to price movements in the expectation of a
reward. For example, an investor might buy a call option on a stock, which gives them the right to buy
shares at a specific price within a certain time frame.
 Access to markets
Derivatives can give investors access to markets or assets that are otherwise difficult to trade.
 Swapping
Investors can swap a variable-rate loan for a fixed-rate loan, or vice versa.
 Currency swaps
Two parties can agree to pay each other's loan repayments in different currencies.
 Commodity swaps
A company can agree to sell a certain amount of their production to a buyer at a set price over a period of
time.
Derivatives are usually leveraged instruments, which means they have increased potential risks and
rewards. Some risks associated with derivatives include market risk, liquidity risk, and leverage risk.
SECURITIES MARKET
Securities markets help household savings be effectively and efficiently channeled into productive
investments like shares, debentures, precious metals (through gold and silver ETFs), and real estate
(through REITs).
Understanding the Philippine stock market
The stock market is a crucial component of a country’s economy, serving as a barometer for its financial
health and a platform for businesses to raise capital.
In the Philippines, the stock market operates through the Philippine Stock Exchange (PSE), which is
one of the oldest stock exchanges in Asia. Understanding how the stock market works in the Philippines
can provide valuable insights into investment opportunities, economic trends and the overall financial
landscape of the country.
The functions of securities market
It is a marketplace for securities. While it offers an opportunity to investors to benefit from investing in
securities issued by companies, governments, etc., it also offers liquidity or an exit route to existing
investors of the same securities.
It is a marketplace for securities. While it offers an opportunity for investors to benefit from investing in
securities issued by companies, governments, etc., it also offers liquidity or an exit route to existing
investors in the same securities.
Segments within the securities market
Securities markets have two distinct segments, known as the primary market and the secondary market

Primary market
One of the main objectives of the primary market is to allow companies to raise capital through the
issuance of securities like shares and debentures. When a company raises money for the first time from
the public through the primary market, the process is known as an initial public offering (IPO). If the
company is raising funds again, the process is only slightly different and is known as the follow-on public
offering (FPO).

Sometimes, a company could be operating as a private limited company with funding from promoters or
even outside investors like venture capitalists and angel investors. When such investors offload the
shares, allowing the public to subscribe to them, it is called an “offer for sale” (OFS).

In the case of both an IPO and an OFS, retail investors get the opportunity to invest in the shares of the
company for the first time.

Secondary market
Once the shares are offered to the public through the primary market, they must be listed on a recognized
stock exchange to offer liquidity to the investors who subscribed to the offer. This is the market where
public shareholders can buy or sell their shares and is known as the “secondary market.

The secondary market offers an opportunity for investors to sell their shares to other buyers when they
need money, when they spot another investible opportunity, or when they want to reduce their
investment exposure to certain securities or certain types of securities.
STOCK EXCHANGE
Stock exchange definition
What is a stock exchange?
A stock exchange is a centralized location where the shares of publicly traded companies are bought and
sold. Stock exchanges differ from other exchanges because the tradable assets are limited to stocks,
bonds and exchange traded products (ETPs).
The main difference between using a stock exchange and over-the-counter (OTC) methods of trading
stocks is that, on an exchange, transactions are mediated rather than taking place directly between two
parties. This means that there are stricter regulations on investors and speculators, as well as on the
companies listed.
Companies often need to meet specific standards before they can be listed on a stock exchange – these
standards can vary depending on the stock exchange. For example, the NASDAQ requires companies to
have a market value of $70 million before they can be listed, whereas the New York Stock Exchange
requires a company’s value to be $100 million.
Pros and cons of stock exchanges
Stock exchanges have a range of pros and cons for both the companies that are listed on them, and for the
individuals seeking to trade on them.
Pros of stock exchanges
For a company, being listed on a stock exchange comes with a certain level of prestige. This is particularly
true for older exchanges, such as Amsterdam, London and New York. Being listed on an exchange also
means investors can buy shares in the company, which helps the company expand by raising funds.
By trading on a stock exchange, it is likely traders will be at less risk of counterparty default. This is due
to the high levels of regulation on stock exchanges, which is something that OTC methods of trading lack.
Additionally, online brokerage firms have made it even easier for traders to access stock exchanges and
gain the opportunity to profit from any short-term market movements.
Cons of stock exchanges
For a company, listing on a stock exchange can be time consuming and expensive. And once the company
has listed, it will have to consider its responsibility to shareholders, who now have a stake in the
company.
Trading on a stock exchange does not guarantee stability. Stock markets are susceptible to market
volatility, which means that there can be dramatic swings in the price of stock, usually in response to
political and economic events around the world.
Stock exchanges can also experience crashes. Although they are rare, stock market crashes can
significantly reduce the value of stocks and lead to economic depressions that last for years.
Traders and investors can manage their exposure to stock market volatility by implementing a risk
management strategy.
Explaining listed and unlisted shares
Shares can broadly be categorized into listed and unlisted shares. Listed shares are those that are traded
on a recognized stock exchange, offering high
liquidity, transparency, and regulatory oversight. On the other hand, unlisted shares are not available for
trading on public exchanges, resulting in lower liquidity.
Understanding these categories is essential for making informed investment decisions.

What are listed shares?

Listed shares refer to the stocks of companies that are publicly traded on recognised stock exchanges.
These shares are subject to stringent regulatory
requirements and provide high transparency and liquidity. Investors can buy and sell listed shares with
ease, benefiting from the established market
mechanisms that ensure fair pricing and efficient transactions.

PROS AND CONS OF LISTED SHARES

Here are the pros and cons of listed shares-
Pros
 Access to capital: Listed companies can raise capital by issuing shares to a wide range of investors,
enabling them to fund expansion, research, and other strategic initiatives.
 Liquidity: Shares of listed companies can be easily bought and sold on the stock exchange,
providing liquidity for shareholders. This makes it easier for investors to enter or exit their
positions.
 Market visibility: Listing on a stock exchange increases a company's visibility and credibility,
attracting the attention of analysts, institutional investors, and the media.
 Employee benefits: Listed companies can offer stock options and share purchase plans to
employees, aligning their interests with those of shareholders.
Cons
. Market volatility: The share prices of listed companies can fluctuate due to factors beyond the
company's control, such as economic conditions and geopolitical events.
· Short-term pressures: Publicly traded companies may face pressure to meet short-term earnings
expectations, potentially compromising long-term strategic goals.
· Increased regulatory burden: Listed companies are subject to more stringent regulatory requirements
and reporting standards, which can be time- consuming and costly.
What are unlisted shares?
Unlisted shares refer to shares of a company that are not traded on a public stock exchange. These shares
are typically traded privately, often over-the-counter,
between specific individuals or institutions. While a company may be a public limited company, it doesn't
necessarily need to be listed on a stock exchange. This
means that its shares can be traded privately, making them unlisted.

Pros and cons of unlisted shares

Here are the pros and cons of unlisted shares-
Pros
 Access to Capital: Listed companies can raise capital by issuing shares to a wide range of investors,
enabling them to fund expansion, research, and other strategic initiatives.
 Liquidity: Shares of listed companies can be easily bought and sold on the stock exchange,
providing liquidity for shareholders. This makes it easier for investors to enter or exit their
positions.
 Market Visibility: Listing on a stock exchange increases a company's visibility and credibility,
attracting the attention of analysts, institutional investors, and the media.
 Employee Benefits: Listed companies can offer stock options and share purchase plans to
employees, aligning their interests with those of shareholders.
Cons
 Market Volatility: The share prices of listed companies can fluctuate due to factors beyond the
company's control, such as economic conditions and geopolitical events.
 Short-Term Pressures: Publicly traded companies may face pressure to meet short-term earnings
expectations, potentially compromising long-term strategic goals.\
 Increased Regulatory Burden: Listed companies are subject to more stringent regulatory
requirements and reporting standards, which can be time- consuming and costly.
How unlisted shares differ from listed ones
Unlisted shares belong to companies that are not publicly listed on stock exchanges. These shares are
typically held by a small group of investors, including
founders, employees, and private equity investors. Unlisted shares offer limited liquidity as they cannot
be easily bought or sold on public markets. Valuation of
unlisted shares is often more challenging and less transparent compared to listed shares, making them a
riskier investment option.

Key differences between listed and unlisted shares

1. Liquidity: Listed shares offer high liquidity due to their availability on public exchanges, whereas
unlisted shares have limited liquidity.
2. Transparency: Listed shares provide greater transparency with regular financial disclosures, while
unlisted shares lack this level of transparency.
3. Regulation: Listed shares are subject to stringent regulatory review, whereas unlisted shares face less
rigorous regulations.
4. Valuation: Valuation of listed shares is straightforward and market-driven, while unlisted shares can
be challenging to value accurately.
5. Accessibility: Listed shares are accessible to the general public, whereas unlisted shares are typically
restricted to private investors.