For future financial analysts and accountants

Five Basic Investments Types
from the book Learn to Earn by Peter Lynch

1. Savings Accounts, Money-Market Funds, Treasury Bills and Certificates of Deposits. – All of the above are known as short-term investments. They pay you interest while getting your money back in a relatively short time. In savings accounts, T-Bills and CDs , your money is insured against losses , so you’re guaranteed to get it back. But short term investments pay you a low rate of interest. Sometimes the interest can’t keep up with inflation. Inflation is a fancy way of saying that prices of things are going up and your buying power is going down.

The first goal of savings and investment is to keep ahead of inflation. If your bank savings account is paying you 2% interest per year and you see in the newspaper that inflation rate now is 3% , this means your savings account is not a good investment and maybe a losing proposition. Then you have to pay the government taxes for 20% of your earned interest per year. Meaning if your savings account earned you Php 100.00 per year, the government will take Php 20.00 as tax payment. This is the problem with leaving money in a bank or savings account. The money is safe in the short run, because it is insured , but in the long run, it’s likely to lose ground against taxes and inflation. Here’s a tip – when the inflation rate is higher than the interest rate your’re getting , you’re investing in a lost cause.

Savings accounts are great places to park your money so you can get at it quickly, whenever you need to pay bills. They are great to store cash until you’ve got a big enough pile to invest elsewhere. But over long periods of time, they won’t do you much good.

2. Collectibles – Can be anything from antique cars to stamps, old coins, baseball cards, paintings, furnitures, vase, or Barbie dolls. When you invest your money in such things, you are hoping to sell them at a profit in the future. The trouble with investing in things is they can get lost, stolen, warped, stained, ripped or damaged by fire, water, wind. There is insurance for some of this, but is expensive.

Collecting is a very specialized business, and successful collectors are experts not only in the items they collect , but also in the market and the prices. There’s a lot to learn. Some of it you can pick up from books or the internet and the rest you get the hard way , by experience.

3. Houses or Apartments - Buying a house or an apartment is the most profitable purchase most people ever make. A house has two big advantages over other types of investments. You can live in it while you wait for the price to go up, and you buy it on borrowed money. Houses have a habit of increasing in value at the same rate as inflation. On that score, you’re breaking even. Buy you don’t pay for the house all at once. Usually you pay only the 20% downpayment and the borrow the 80% from the bank. You can then sell the house later , usually on a 3 or 4 times the original value after your loan has been fully paid.

4. Bonds – A bond is a glorified IOU ( I owe you ). It’s printed on fancy paper with doodles around the border and artwork at the top, but its purpose is no different from the purpose of the IOU that’s written on a piece of table napkin. It’s a record of the fact that you’ve loaned your money to somebody else. It shows the amount of the loan and when you should pay it back plus the fixed interest the borrower has to pay.

The seller of the bond , also called the issuer, is borrowing your money, and the bond is the proof that the deal happened. The government is usually the seller of bonds, but other businesses can sell as well. T-bills and CD’s are similar to bonds, the only difference is the length of time to get the payment. Usually bonds take longer times or has longer maturity periods than T-bills or CD’s. There are risks in buying bonds because if the company or business who issued the bond went bankrupt, you won’t know if you can still get your money back. It is safer to buy bonds issued by the government, because the government will never go bankrupt, it can print more money whenever it wants to pay you.

5. Stocks – are shares sold by a company that goes public. A “public”company is owned by the shareholders while a “private” company is usually owned by a small number of individuals or a family owned company. Stocks are used to increase the company capitalization to be able to produce more services and products . You don’t have to be millionaires to invest in one. Anybody can be a shareholder as long as you have the money to buy the stocks: teachers, bus drivers, doctors, carpenters, students etc. They don’t care about your religion, race, nationality , social status, academic achievements , etc. The playing field is levelled here for all those who have the capacity to buy.

Stocks are likely to be the best investment you’ll ever make, outside of a house. You don’t have to feed stock, the way you do if you invest in horses or prize cats. It does not break down the way a car does, nor does it leak the way a house can. You don’t have to keep it moved the way you do it with real state. You can lose a baseball card collection to fire or theft but you can’t lose a stock. You can lose the certificate that proves you own a stock but the company will send you another one.

When you buy a bond, you are making a loan, but if you invest in a stock, you are buying a piece of the company. If the company prospers, you will share in the prosperity. If it pays dividends, you will receive it and if it raises the dividends, you will reap the benefits.

Buying stocks is not similar to gambling . When people consistently lose money in stocks, it’s not the fault of the stocks. You just need to do your homework and have a plan if you want to invest in stocks. Due diligence is needed, to study the financial status of the company you want to invest in and because they are a public company, financial records are publicly available , in the internet in publications, in company offices. You don’t need to be a math wiz to be a successful investor in stocks. You don’t need to be an accountant although the basics of accounting may help.

If you want to have a better financial future , long term stock investment is the best thing to do. Ten, fifteen or twenty years is a good time frame. Buy shares in solid companies with earning power and don’t let go of them without a good reason. The stock market usually goes up and down , but stocks in general goes up in value over time. You would be surprised to know that your P10,000 stocks investment now will have multiplied in a much higher value 10,15, 20 years from now.