Investing 101

One little known fact about me is that I worked for an IT firm before that specializes in financial technology.  My job description then was to train clients in the use of the software and I guess there are times they ask more than what I am supposed to train them on and the definition of  the types of financial instruments that people can invest in has somehow always cropped up.

Anyway, recently a couple of people (who know of my background) have approached me and asked me  what would be the best financial instrument  to invest in.  It has often been said that the best way to earn money is by making the money do the work for you.   Well, in all honesty, that's just another description of the word "Investment". There are quite a number of instruments available out there in the market most of them are rewarding in different magnitudes, some of them are pure scams.  Thus it is important to identify which is which. 

Recently, while doing my round of blog hopping, I stumbled upon Grace's Blog which has somehow inspired me to write this list.  I would assume that a lot of people would like to know what these instruments are.  Now, I'm not saying I'm a financial guru ok?  It just so happens that I move around in a circle of friends that are into financial instruments and I have seen success stories as well as sob stories. At one time or another, I have dipped my hand in investing so in a way, have a slight idea of how it goes.  So I will try to make this list I am about to present as clear as possible.  Also, take note, that the measure of profit that you will make will follow your type of behavior as an investor.   If you are risk averse, then know that your profit margin will be substantially lower as compared to a risk takers margin.  But looking at it from other side of the spectrum, your losses would also be substantially lower.

Anyway, I will present this in the order of what I think is the safest to  the most volatile of all the instruments, and end with what I think is the most prudent, so here goes. 

1.  Insurance:  A friend of mine once told me that if I have a hard time saving my money then Insurance would be the best instrument for me.  Why because it offers returns after you pay your premiums and at the same time, if something unfortunate happens to you while you are in the process of paying your premiums that you are covered and the insurance company will pay an agreed upon amount (depending on your plan of course) if this unfortunate event should happen.  I've heard though that people should take a second look at the Riders (subplans that can be attached to the original insurance policy to give it a little more oooomph!) as some of them are really worth the extra buck. 

2. Regular Savings Account:  Well, what can I say?  Most of you guys probably have savings in one bank or another.  Personally, I wouldn't waste my time with this.  How much interest rates do the banks give you? Assuming it's 2% a year, that's roughly what a month? 0.00166.  Meaning every 10 pesos that you will put in the bank will earn you 0.01666 centavos a month.  Wow, how enticing!  NOT!

3. Time Deposits:  So the banks know that their interest rates for regular savings accounts are pathetic so they offer another type of instrument.  The Time Deposit.   Another form of savings account but this time can only be withdrawn after the agreed upon term expires.  Rates differ depending on the amount to be deposited.  A 10k deposit would have 2.5 percent in a year, whereas a deposit of 5M would have a 3.5 percent interest rate.   It will earn a higher return, but who can afford to tie up funds that long, unless of course it is clearly disposable income then leaving it in a bank that long will do an ultra conservative investor a lot of good.  

4. Bonds:  Debt obligations.  Meaning when you purchase bonds, you are entering an agreement with a corporation or government that you are lending them x amount of money and will be paid by them at this date with this much interest .  Simply put an IOU.  Now these are good investments and payments are normally as sure and as timely as the sun rising each day.  However, interest rates again are not that high.  Maybe a little more than just enough to cover inflation rates.  Terms vary depending on who is offering the bond.  In the Philippines, we have the Treasury Bills or T-Bills for short.  

5.  Equities:  Yes the stock market.  It has made millionaires of middle class citizens but also has made paupers out of millionaires.   A dear friend of mine, once had a folder in his computer entitled "From Rags to Riches to Rags"  In it were his trades since the start of 1997.  His spectacular triumphs in beating the market and ultimately, his downfall.  Leading him to incur 3M in debt. But this guy, is a risk taker, well a gambler is more like it.  But now, I think he has learned his lesson because he is back on his feet and is in the black once again.  Another friend, started with almost nothing and now in a span of 10 years of constant trading has made 10M already.  Money that he could've probably earned in a span of 20 years. Luck? Nope, just serious trading and knowing how the market flows.  

Equities are shares of stock that companies sell to the general public through the stock market.  The market is the most volatile, as prices are influenced from the recent global wars to Bush passing gas in a National Security Meeting.  If you ask me, it is prone to so much rumour mongering but hell, trading is still fun.  

6.  Mutual Funds:  I'm sure I'm gong to get a lot of flak from broker friends for what I am about say but I believe that this instrument is the most prudent among all.  Why? Cause these funds are combinations of corporate bonds, government bonds and equities. Meaning it has spread the risk of trading by investing in some blue chip stocks (stocks from tried and tested companies) then some very promising ones.  Take note the word promising.  Whether it holds true to such promises will remain to be seen.  There are some companies that specialize in these funds and some banks have come up with their own.  Check out Sunlife of Canada and Philam Asset Management, Inc.  Don't hesitate to ask questions and let them define terms such as Net Asset Value and Book Value or whatever…… I would define them myself but now, I have gotten sleepy and seem lazy to do anymore definitions.  Hahahahaha

There are other instruments in the market, like options, futures and debentures but I don't think these are offered in our country I may be wrong though. In the end, every investor's goal should be that their money will earn more just enough to cover the existing inflation rate.  Now, if you're the gambler type, I would suggest the equities market.  However, a word of caution, I have seen people whose lives were destroyed because of this, so I really suggest that you play with disposable income.  In the end, I advise discretion when investing in the market.  Know the company and business before you give it a go.   In effect, don't take my word for it, but ask your broker or financial planner on what would be the best instruments suited for you.  

With that I would like to end this entry with a list of links that I think might help the newbie investor.  

Some interesting links:

Tsupitero.com 

BPI Time Deposit Rates 

PinoyFinance.com

Citiseconline.com