In Part I, I talked about the need to start saving money and investing early. Because the value of money grows not only with earnings (compounding interest) but also with respect with time, we found out that there is cost in waiting. The longer that you delay saving and having it invested, the lower your chances of letting your money grow for you.
And in this article, I am going to discuss one type of investment: securities. Also called paper assets, securities are anything that give you a claim or ownership in a business, such as stocks. They are also about any written form of indebtedness, such as bonds.
Stocks are what represents your claim to a business. Each stock (or share) is an ownership to a fraction of a company. For example, if you acquire 10 shares in a company that has 100 outstanding shares, then you have 10/100 or one-tenth interest in the company.
And you are entitled to the corresponding part in whatever its loss or profit, either in the form of dividend or capital gains.
There are different stocks: common and preferred. If you want to know more, read this post on stocks.
How is investing in stocks possible?
Buying stocks is made possible by Securities and Exchange Commission (SEC). It is the government agency that regulates the marketplace of stocks, the Philippine Stocks Exchange.
SEC makes it possible for anyone, including you and me, to directly purchase and sell shares of companies from the stock market.
Bonds are different. They are proof that you are lending money to an institution. In this case, the biggest borrower there is in the market is the Republic of the Philippines, and the bonds it issues are called government bonds.
The government borrows money by issuing bonds for many reasons. It might want to address budget deficit, or it needs to borrow to finance a large infrastructure project.
When you acquire bonds, what you get are periodic payment of interest. That’s why they are also generally called fixed income. They would pay you interest regularly each year up until maturity, which is the date that the government is going to pay back what it borrowed from you.
There is also another reason that they are called fixed income. They offer relatively safer way of earning passive income. The government is rated to be a good borrower, and is sure to pay back both the interest and the amount borrowed.
How to buy bonds
The bonds the government issue are not directly offered to the people who wish to buy them. They are traded first with the banks, and then offered on retail to the investing public.
The disadvantages of buying direct shares and bonds
While it may sound easy at first to buy either stocks or fixed income securities, you will soon find out that there is a lot to learn. Not only do you need to learn how to buy and sell, you have to deal with brokers, fees, minimum number of shares (called board lot) and other things.
You will also need to check what companies to invest, as well as make decisions on when is the best to buy and to sell to maximize your returns.
It takes a great deal of work, thinking and time. That’s what the managed funds are for.
Managed funds are offered by financial companies, like First Metro Asset Management Inc (FAMI) or AXA Philippines through its investment-linked policy, that pool money from investors like you, trade securities on your behalf, and expertly takes care of the day-to-day management to maximize returns.
In the process, you will be freed from having to do the huge task of watching over your investments. Of course, it is important that you know what the fund’s objectives are, the sort of assets it is acquiring, its time horizon and historical performance.