People often talk about stocks, shares, equity, the stock market, etc. and how they have either made money from stocks or how stocks trading can make one wealthy, meaning stocks trading could be a vehicle to wealth.
But what are stocks? How do they work? And how can they affect or help the economy or investors?
What Are Stocks?
A share of stock is, basically, a share of the company's ownership. Buying a stock or share entitles you to a small portion of a company's assets and profits/earnings. Assets have to do with all the company owns (buildings, equipment, brands), while earnings involve all the money the company makes from the sales of their products and services.
The Philippine Stock Exchange
The Philippine Stock Exchange (or PSE) is the only stock exchange that can be found in the Philippines and is one of the oldest stock exchanges in Asia. This stock exchange is made possible by its 15 Board of Directors spearheaded by its Chairman, Jose T. Pardo. But before this stock exchange has been put in the hands of these people, do you know how PSE actually started?
Prior to PSE’s establishment, the Manila Stock Exchange (or MSE), a stock exchange established on August 8, 1927, was first trusted by Filipinos. On May 27, 1963, another stock exchange, the Makati Stock Exchange (or MkSE), was established. Both the MSE and the MkSE continued in trading the same stocks of the same companies for almost 30 years until these two bourses were finally combined and became the Philippine Stock Exchange.
PSE was granted a “Self-Regulatory Organization (SRO)” status by the Securities and Exchange Commission (SEC) in June 1998. This status gave PSE the right to implement its own rules and to penalize errors of trading participants (TPs) and listed companies under it.
PSE was a non-profit, non-stock, member-governed organization at first. But a year after it was given the SRO status, it turned into a shareholder-based, revenue-earning corporation, and started to be led by a president and board of directors. PSE eventually introduced the list of its own shares on the exchange on December 15, 2003.
The Philippine Stock Exchange has been taking several steps to ensure the welfare of its stakeholders. It has an agency that coordinates settlements and manages risk for broker transactions and administrates trade guaranty fund, the Securities Clearing Corporation of the Philippines (SCCP). It also adopted an Online Daily Disclosure System (ODiSy) that provides 24/7 online system access for disclosure submissions. Aside from these steps, PSE improved its trading system with PSEtrade, a system designed for a trading wide range of cash, debt, and derivative instruments.
In 2011, the market regulation division of PSE has been turned into a separate company named Capital Markets Integrity Corporation (CMIC) for a better corporate governance. In 2013, PSE’s strategic plan focused on introducing more products and services to the market. The stock exchange eventually launched its online service bureau, and continuously strived until it was listed in Singapore Exchange and finally forayed into Islamic Finance. PSE continued its several initiatives and its awareness campaign of products. Not only this, but PSE did not stop addressing the need of its stakeholders as it began embracing technology-related projects. With all of these efforts, PSE’s goal to have a unified local capital market was achieved.
Now that you already know about PSE, you might have some concerns, but don’t worry because you can visit them at their trading floors located in PSE Centre (Tektite), Ortigas Center in Pasig, or at their principal office at Ayala Tower One in Makati City’s Central Business District. PSE has daily continuous trading sessions from 9:30 AM to 3:30 PM, and a break from 12:00 PM to 1:30 PM. You can also visit the PSE website @ www.pse.com.ph
How Stock Market Works?
Companies need money and to get more, they would have to, at some point, share their earnings and assets with the public. Companies basically have two ways of raising funds to cover the start-up or expansion costs of their businesses: they could borrow money (known as debt financing) or sell stocks (also called equity financing).
Borrowing money or debt financing means a company must repay the loan with interest. Whereas stock sales imply, the company raises more money with fewer strings attached – no interest to pay and no demand to pay back at all. Better still, for the owners of the company, equity financing spreads the risks of the business among a larger group of investors (shareholders). In the event of failure, the owners of the company only get to lose a fraction of their money, as well as, smaller amounts invested by their several thousands of stockholders.
How The Stock Market Helps The Economy
In general, the stock market is a reflection of a country’s economic condition. When the economy develops, production increases and most companies should be experiencing an increase in profitability resulting in the company's shares becoming more attractive as they can give higher dividends to shareholders.
But the market also plays an essential role in the economy. It provides liquidity and is a good source of financing for companies that need it. And, in general, the growth, blossoming and prosperity of the businesses in a country result in economic growth and prosperity of the economy. Let me explain a little more in the simplest way possible:
A startup raises funds from venture capitalists or family and friends. Then growing to an extent they finance their growth with some other venture capitalists or from private equity, resulting in a larger company. At this point, venture capitalists and private equity investors cannot provide sufficient funds for this size of business. But since the stock market has many investors, it can provide the necessary resources to help the company grow even more and create jobs. So without a stock market, there will be difficulty providing some of the resources needed to help businesses grow on a larger scale, thereby resulting in a loss of all the benefits that would have come to the economy and individuals. Benefits like employment, improved standard of living, progress, etc.
So fundamentally, so financing growth on a very scale is difficult without the stock market.
How Investors Profit in the Stock Market
Investing is one of the surefire ways to make your money grow. While there are economic downturns every now and then, and volatile stock prices are constantly affected by these events, the long-term financial trend when it comes to investing is upward. That means your money can only grow bigger, so if you are already investing, or are thinking of investing, you are definitely on the right track.
Individual investors in stocks benefit from an increase in the value or prices of the stocks they purchased and the dividends that accrue from those stocks, especially when the value of the company whose stocks or shares were purchased is increasing. They also can benefit from selling these stocks when they appreciate in value and as a result selling them will help one recover both the initial capital (funds) invested in the purchase of these shares and some profit from the sales of the stock. Hence, it is a vehicle of accumulating wealth for some people.
Steps to Invest in the Stock Market
If you fully understand now what is the stock market and how it works, the best next thing to do is to start investing on it.
Below are the basic steps to follow how to invest in the Philippine Stock Market.
1. Open an account
In order for you to buy and sell company shares/stocks, the first thing to do is to open an account in any PSE-accredited online stock brokers. You can see the list of online stock brokers in the Philippines here. You can open as many accounts you want but only one account is needed for you to trade. The main role of the stockbroker is to provide a platform for clients to buy and sell stocks of the company. Aside from that, brokers offer different features and benefits for their clients, so carefully choose a broker that suits your needs.
2. Know the company before you buy
This is the most important and critical thing to do as an investor because it will be the basis for your investment decisions. There are two known methods of analyzing companies: Fundamental Analysis and Technical Analysis. Fundamental Analysis is a method of evaluating a security in an attempt to measure its intrinsic value, by examining related economic, financial and other qualitative and quantitative factors, while Technical Analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, business cycles, stock market cycles or, classically, through recognition of chart patterns (wiki).
The good thing is, your stockbroker provides you analysis to most, if not all, companies in the PSE. But it will be much better if you're also knowledgeable in analyzing the company you are looking to buy. It takes hard work. Be a responsible investor and treat stock investing as a business. You may attend seminars that can give you knowledge on how to analyze and choose the stocks to buy. Click here to view.
Warning: Beware of people or groups giving stock tips and recommendations especially in the social media. Most (but not all) of them are fake and can cause you to blow up your account.
3. Execute your trades.
After you finally decide what company shares to buy, the next thing to do is execute your trade. As mentioned earlier, the main role of your stock broker is to provide you a platform to buy and sell shares of companies. They act as the middlemen between you and the corporations listed on the stock exchange. Every online broker has a unique trading platform. The image below is the 'Trading' window of COL Financial. All you have to do is to enter the stock code of the company you want to buy, enter the number of shares, at what price you want to buy, review and confirm your order.
4. Monitor your company.
Purchasing a stock of a corporation means becoming its official part-OWNER, regardless how many stocks or percentages of the company you own. You invested your hard-earned money in them and the worst thing to do next is to forget it. Treat stock investing as a business. Always be informed about the company you bought, the market, and factors that affect it through your PSE website, PSE Edge, your broker and different forms of media (newspaper, the internet, etc.).
FAQ (Frequently Asked Questions)
- When is the best time to start investing in the stock market?
- As always, the best time to start investing is now.
- Do I need large sum of money to invest in the stocks market?
- No. You can start investing and owning company shares with just Php5000. For most stock brokers, that is the required minimum starting amount.
- Do I need to regularly deposit in my trading account?
- That is up to you. Most, if not all, stock brokers have no maintaining balance. You have no obligation to regularly fund your account. It is not a mortgage or loan. You can also deposit or withdraw your money anytime you want.
- Is it possible to lost all my capital in the stock market?
- Yes, it's possible. That's why we mentioned in step no. 2 above, you should analyze and know the company very well before you purchase their stocks.
If you have more questions about stock market investing in the Philippines, simply put those in the comments section below. We will answer your questions to the best of our knowledge.
Want to learn more about the stock market? Click here to see the complete details and schedules of seminars you can attend.