In this post, I would like to share a guest post by Ryan Cokieng from The Morning Eclipse regarding various financial investment instruments that we can use to have our money generate more money for us without having to work harder. After reading this introduction, what are your impressions and thoughts about his ideas and experiences.
Bonds, Mutual funds, UITF's and Equity markets
Here's an explanation on the various investment instruments that a person can use. I draw these explanations from my experience with them.
These are generally pooled money handled by an individual, fund manager, group, bank, or company. What the company does is to pool small tranches of investments and make a big pool of cash amounting to maybe tens of millions of Pesos. The money is then invested in the highly volatile stock market. This is an exciting investment for those in their 20s and 30s.
How small then is one tranche?
These institutions usually have a minimum investment value of 25,000 to 50,000 Pesos. BPI has the 50,000 minimum investment requirement.
Why pool them together?
There are two reasons for pooling money together. First, to buy stocks or equities (These are synonyms by the way.) In the stock market, you'll have to meet the minimum quantity. Sometimes these minimum quantities reach 10,000 Pesos just for a certain stock. Your 50,000 Pesos then will not really get to be exposed to all the good stocks and if you're unfortunate, you may have bought a stock that will plunge way way down in price.
Second reason. With the pooled money, the institution can hire professional, experienced portfolio managers. They are the insiders in the industry. They know the trend of the stock prices, and the expected outcomes of good news and bad news. Sometimes, they may also know of some inside information that may help the manager choose the correct stock to buy. At least here, the expensive pay of the managers is spread over hundreds of investors.
Portfolio is the term we call for a set of stocks that a person is tracking, or investing in.
Insider trading which uses privileged information is illegal. This privileged information is so helpful that knowing this will surely push an investor to buy or sell a certain stock. Martha Stewart did this and earned millions but she got to work and had to pay and serve a sentence.
How volatile is the stock market?
The stock market is very volatile. With 50,000 Pesos, you may earn or lose 4,000 Pesos in a matter of 3 hours.
Is there a guaranteed return?
NO. This is not a bank deposit. You may earn or lose money. Just learn when to cash out and when to reinvest into the fund. It is all about timing. Buy when the market is down and sell when the market is up.
II. Equity funds, balanced funds, bond funds, mutual funds
These are different kinds of fund categories. When you invest in the stock market, it is called equity funds. When you invest in a basekt of government securities and stocks, this is balanced fund. When you invest in funds subordinated to government bonds and other bonds, this is bond fund.
These funds are usually handled by private companies. The SEC monitors these privately managed funds.
III. Unit Investment Trust Funds (UITF)
This is a kind of Fund. This is handled purely by banks and is monitored by the Bangko Sentral ng Pilipinas. As of three years ago, the Bangko Sentral has implemented international standards in fund management. Before that, it was up to the bank's portfolio managers to systemize their investing.
UITF's are previously called common trust funds (CTF).
Bonds are loans from an institution. Bonds usually range from 6 months to a few years. Governments and big companies issue this bonds to raise cash. They will pay interest for the duration of the bond period. Returns here are usually better than bank deposits.
Typically, an individual will not have direct access to the bond market. Bond offerings are worth tens of millions of Pesos and the small investor can not afford this. The way to get access to this is through the UITFs or Funds.
V. Treasury bills
Treasury bills work similar to bonds but they are more short term. They range from 3 months to 12 months. Returns here are smaller compared to bonds but are better than bank deposits.
Again, the easiest way to invest in treasury bills is through UITFs or Funds. Treasury bills are also worth tens of millions of Pesos and the government usually sells wholesale. However the Bangko Sentral, from time to time, does offer Retail Treasury Bills (RTB) worth 5,000 Pesos each. You'll have to look for specific banks that sell these RTBs. Not all banks offer this instrument.