What do I need to know about the stock market?

screenboard of stocks

What will be discussed

 

What is the stock market?

Why invest in stock market?

The Philippines’ growing economy

Traditional vs. online stock marketing

What are the risks?

 

What is the stock market?

The Philippine Stocks Exchange defines the stock market as stocks being shares of ownership in a company. When you buy a stock of a publicly listed company, you become part owner of that company. As a part owner, you participate in the company’s growth and future profits. Conversely, you may also lose if the company suffers a loss or performs below market expectations.1

Simply put, you can be a part-owner for a company as big asCoke, McDonald’s, GAP, and other big brands that are known all-over the world. You don’t even need to be a multi-millionaire to be an official company owner. You only need to understand how it works, and that may require a lot. This article is to help you get started.

Why do I need to invest in the stock market?

Investing in stock is a good way to elevate your financial literacy. It does not only enhance what you know about saving your money for investing in a few shares, it only allows you to understand how external factors affect in a country’s economy and ultimately, that of the entire world.

Investing in stocks has shown that over a period of time, your money can grow. Although the time factor is not consistent as some stocks grow overnight, while others take months or even years. The other side of the coin is that some stocks that have boomed one day, can end up in the negative the following morning. Some people sleep with a big smile on their face seeing how their investment has multiplied more than five times only to wake up the following morning seeing their shares go down the drain as the company declares a financial shut down.

However, playing the odds is something that can be learned. Otherwise, this business will no longer be in operation. Here are a few big advantages in why you would like to consider investing in stocks:

Company ownership

As stated earlier, being a stock holder means you are legally a part-owner of a brand. Share-holders (which is what you are called when you buy a share) enables you to do the following:

1)      Vote for people managing the business. Yes, you heard it. You have a say as to whoever is going to be elected chair or VP and such.

2)      A share in the dividends that will be declared by the corporation. This is always a good thing.

3)      Share or shares if the company is to be sold.

When a company shuts down because of a transfer of ownership, you get a percentage of the income that they will get out of the corporate turnover. This, however, is not a guarantee as some companies declare bankruptcy. Always check with your stock broker what happens in the event that the company goes bankrupt.

Liquidity of funds

Unlike putting your money in banks in the form of time deposits or insurance, your investment with stocks can be pulled out at any time you like. Money put in the stock market can multiply your gains indefinitely, after the fact that most average savings bank accounts that give you very minimal and hardly-felt returns in interest rates. However, you must be knowledgeable on how to play your cards right, and be careful not to be too greedy that you leave your shares deflating in the hope that it goes up.

Inflation

The dynamics of investing in stocks start with the basic principle of buying and selling. Shares can be bought at a very minimal amount. Sometimes these shares belong to companies that have yet to establish their brand. These are the stocks that tend to be sold in cents only. What’s good is when the stock broker was able to sell the shares at a much higher price because they believed in the company’s ability to boost their products or services.

Stock brokers are also very sharp and bright individuals who have a ‘pulse’ in foreseeing which company is about to reach its climax while some are about to face extinction. This is the kind of skill that only years of experience can teach. Even still, there are limitations to one’s skills especially when the downfall of a company or industry is largely due to acts of God or nature, or if it too abrupt such as war.

In cash or kind

Your earnings can be had in two types: cash dividends or stock dividends. Cash dividends are earnings for every share of stock as declared by the company while stock dividends are additional shares given to you by the company at no extra cost.

The Growth of Philippine Economy

It is important to be able to appreciate and understand what goes on in your own country’s economy first, before daring to shell out some money in the stock market.

The good news is, the Philippine economy is seeing a steady growth at a 6.9% average rate which is a common trend since 2010. This is literally, a good place to start. With the new administration forging new alliances and redirecting boundaries, new businesses and investors are coming in.

Traditional vs. Online

The main difference between traditional stock marketing and online marketing are the tools that it uses. Traditional marketing engages the stock broker via landline or fax while online stock marketing uses online platforms where one can have easy access to the latest prevailing rates, influxes in prices and a general overview of past and present trends as well as future projections.

What are the ups and downs of traditional stocks?

Doing the traditional stocks with an actual broker is good for new and inexperienced players. You, as the trader, should be given sound advice by your broker on which share is the best to go for, when to add to the investment or when to pull out.

The disadvantage of this is that you are basically giving your money to someone you do not even know. Note that you are giving your money to someone who has full information on how and when your money will grow. Although it is a given that you are dealing with a licensed broker, it would be better if you would be able to learn as fast and as much as you can when it comes to stock market trends and principles.

However, if you do find yourself a broker with a sound reputation, then you have struck yourself a very good start in the business. Remember that part of the money you are investing goes to the stock broker watching your investment for you.

How about the ups and downs for online stocks?

Online stocks offer a wellspring of information whether you are a seasoned trader or a rookie. Ease of access is right at your fingertips and depending on the platform you are using; you should be able to have a general view of market trends and real time news in the global financial world.

While online news is easy for you to access, traditional brokers tend to provide you news from traditional channels – newspapers, broadcast TV, journals and fellow brokers. The disadvantage of this method is that they can be outdated in as little as hours, since stock prices change too frequently.

The downside to online stocks is that you could be chatting with a different broker from the one you were talking to just this morning. There is not one fixed or assigned broker for you. There’s also a chance that the conversations are in bits and pieces as they will tend to have a set template of scripts that are copy-pasted onto the conversation window.

On a general note, if you are looking for good customer-client relations, then you might be looking for the traditional way of stock marketing. Traditional brokers have long years under their belt to build their reputation and might even offer you their own portfolio to win your business.

What are the risks?

Any investment involves risk. Not knowing what the risks are in stock market is like saying you want to jump off a cliff to experience adrenalin high, but you don’t really want to know what could possibly go wrong. What’s important is to equip yourself with a good parachute and know the landscape from the cliff and down below the valleys before you take the plunge, if you would really like to experience crossing new heights in the financial industry. Knowing the enemy is always half the battle.

Here’s just a few of the risks in the doing stocks:

Commodity Price Risk

These belong to industries whose trade is in material goods. Oil, gas, sugar, rice are common examples. Their prices vary greatly on the law of supply and demand. Their prices are promising for investors, but the impact of a price surge is also proportionate to the loss.

Headline Risk

These are headline news across media that poses intimidating threats to global industries. For example, the news of the Fukushima nuclear spill in 2011 had caused for stock prices to drop, as many traders pulled out for fear of companies going bankrupt because of the disaster. Sometimes, it is irrelevant if the news is just a hoax or not. It does not even matter if traders pulling out believe it to be real. So long as they see many people pulling out their stocks, they will just follow and do the same.

Rating Risk

If people have credit ratings, so do companies. When one company or brand’s credit rating start to drop, so, too will the stability of its stock market value.

Obsolescence Risk

Not all businesses are meant to stay. As technology changes, so does the business and marketing strategies. In the turn of the wave for DSLR cameras for example, in January 2012, Kodak filed for bankruptcy protection as they had to figure out how to revamp their brand from being just an analog (film) photography provider to competing with digital cameras and focusing more on consumer products.

Although the company filed for bankruptcy, shares were at 50% higher upon closing.

Legislative Risk

This is a hot topic in the Philippines today as the new administration is under the lens, forging new alliances, looking more towards China and away from the US.

Legislative risks are those that could be influenced by government mandates or executive orders, such as the closing down of a powerplant, if it is determined that it poses grave health and environmental threat on a town’s peoples and landscape.

Inflationary Risk and Interest Rate Risk

Inflation rates or foreign exchange rates greatly affect prices in the stock market. This is especially true for businesses that need financing. For example, when a bank or a lending institution imposes frequent interest rate hikes, those affiliated with that bank would be directly affected.

With the many risks cited, it wouldn’t hurt if you could educate yourself on what your financial boundaries are. You might want to consider looking inward and ask yourself, what do I want to achieve in wanting to earn big or to achieve financial freedom? What am I willing to lose? Would I still be able to pick myself up if I have fallen down and simply charge it as learning experience?

Knowing what you know now of the stock market, is this something that you would still like to pursue? If your answer is still yes, then congratulations! You just might have the heart of a true trader, who’s not afraid to take risks and who’s more than willing and happy to learn as much as you can

 

sources: pseacademy.com.ph | investopedia.com