What is a stock?
How does the stock market work?
What makes stock prices rise or fall?
Is there a way to know when the stock price will rise or fall?
What to do before entering the PH stock market
Requirements in entering the PH stock market
From time to time we hear stories of our friends and colleagues talk about their recently bought shares, or discuss how ideal is it to enter the Philippine stock market during the "bull" or "bear" season. Newspapers also flash table of numbers showing stock market prices of various Philippine companies.
Yes, every day we are exposed to the dynamics of stock market. And yet, many of us are afraid to invest in the market because of horror stories we hear on how someone lost all their money in it. If we are only quipped with the right understanding of how stock market works, then it will widen our choices on investment.
What is a stock?
A stock is a share of the business of a public company. Buying a share of a company makes you a shareholder or stockholder, or simply part-owner of the business. The stock market is a place where you can buy or sell shares of public companies (in the Philippines, it is the Philippine Stock Exchange or PSE).
How does the stock market work?
Simply put, if you want a stock of a company that is worth P50, you would have to spend P50 for every share you want. Thus, for 100 shares you need to spend P5,000. You can make money from these shares by two basic ways:
1. Selling the stocks at a higher price. If after six months the worth of the stocks you bought rose to P100 per share, the total worth of your stocks would have doubled to P10,000. Selling them will give you gains of P5,000. This is the concept of "buying low and selling high."
2. Getting dividends. When the company profits they may choose to share the income to stockholders in the form of cash or additional stocks.
What makes stock prices rise or fall?
Stock prices go up or down depending on how people want to buy them. When people want to buy the stocks of a company, stock price goes up. Conversely, stock price goes down when people want to sell them.
Is there a way to know when the stock price will rise or fall?
Short-term movement of the stock market is difficult to predict. However, you can evaluate the company's current financial condition and future plans as well as the industry condition of the company. Other investors rely on technical analysis such as identifying trends in price charts to determine the direction of stock price. Market analysts refer to stock behavior as "bull" season for uptrend because of the bull's aggressive horns up while "bear" for downtrend due to bear's paws swiping down.
What to do before entering the stock market
Now that we have a basic understanding of the flow of stock market, we must now evaluate our current and potential financial position in order to determine viability in making the investment.
Purpose, amount of capital, and timeline. First, we must determine the purpose of the investment. What do we plan to achieve? Is it to generate cash immediately or build capital? Write down a personal investment mission statement that you can read every day to help you focus on your objective. This may include the amount you are willing to invest now, the return you are willing to accept, and the time you are willing to commit to track the investment.
Be realistic. While it is true that there are bigger returns on bigger investment, note that stock investment carries risk as stock movement can vary day to day with the economy also affecting fluctuation. Therefore, the return expected on the investment should be realistic.
Diversify. To lower risk, investments may be spread into products with various levels of risks. This follows the rule "maximize return by minimizing risk." You may further refer to books for the ideal medium of investment on your lifestyle and financial position or you may discuss this with a certified broker.
Be informed. Should you find yourself short of capital or have not decided yet which financial instrument to invest into, consider investing on reading books to improve your financial literacy. This is the no-risk highest investment you can give yourself today.
Requirements in entering the Philippine stock market
1. Choose a stockbroker. List of authorized and qualified brokers (person or corporation) can be found in the PSE website and various Government and Business listings. Services of member-broker include access to market reports/studies, on-time delivery of important documents, and advise on investments.
2. Open an account. The investor will need to fill out a Customer Account Information Form and submit identification papers for verification. The broker then assigns a trader or agent to assist the investor in either buying or selling.
3. Place the order to the trader and ask for confirmation receipt. Details of the order include:
- Buy or sell order
- Which stock to buy or sell
- Number of shares
- Bid price (buying) or asked price (selling)
4. Pay before settlement date. Payment should be made before settlement date of T+3 (three working days after transaction date) for traditional stockbrokers. Online stockbrokers settle transactions on the same day of the transaction date.
Note that there are transaction fees and taxes for the trading of stocks, as well as brokerage commission from buying or selling stocks. Further details on investing procedure and company listings are in the website of the Philippine Stock Exchange.