MANILA, Philippines – The stock market can deliver spectacular returns – if you get it right.
Consider this: From January 2010 to January 2022, the stock market rose nearly 150%, or an annual return of 12.44%. This means that if you invested P100,000 in January 2010, you would have nearly P250,000 after 12 years, basically waiting. Also keep in mind that this includes the huge fluctuations caused by the pandemic. Without it, you might have earned even more.
But for newbie investors, the market can be a daunting mess, filled with colorful candlesticks and mysterious percentages. It doesn’t have to be that way. The stock market can be a way for everyone to grow their wealth.
Let’s explain how it works.
What is the stock market?
First you need to understand what stocks are. Simply put, a stock represents ownership of a company. If you want to own shares of a company, you will buy shares, the unit in which the shares are denominated. Once you buy shares, your stake in a company depends on how much of the total shares you own.
For example, you might want to buy 300 shares of ABC Company. If the shares of ABC Company were divided into 1,000 shares, then you would own 30% of the company.
The stock market is actually made up of several parts, instead of being a central platform. In advanced economies like the United States, the stock market is made up of different exchanges, each with its own set of stocks to trade. These stock exchanges serve as an organized “place” where people buy and sell stocks.
In the Philippines however, the stock market is made up of a single stock exchange – the Philippine Stock Exchange (PSE). At the moment, it only houses 287 companies in 23 sub-sectors. If you want your business to go public, this is the place to go.
Now, if you want to participate in our local exchange, you can’t exactly deal directly with the PSE. Instead, you will have to go through an intermediary called a stockbroker. These companies host the online platforms that the average investor usually uses to buy and sell stocks.
Why participate in the stock market?
Now that we have the basics, it’s time to understand why companies and investors engage in the stock market. Let’s continue with our example of ABC Company.
Imagine things are going pretty well for ABC Company and they want to expand their business, maybe open new stores and hire new employees. They could raise that money by going into debt, like borrowing from a bank, but that comes with high interest costs and risk.
On the other hand, ABC Company could “go public” or have its shares listed on the stock exchange. This opens the company to investment from the general public, who can then buy their shares. (READ: Know your stock lingo)
In exchange for their funds, investors become partial owners of the business. Therefore, they get voting rights on important operational matters based on the number of shares they own. They also receive periodic updates from ABC Company on how the business is doing.
Of course, as an investor, you also expect some form of income. There are two main ways to profit from stocks: dividends and capital gains.
Let’s start with dividends. As ABC Company begins to make a profit, it may begin distributing a portion of its annual income to investors as dividends. Companies can pay dividends in cash or in shares, which are proportional to the number of shares held by an investor.
Yet, not all publicly traded companies declare dividends. Even for those who do, there is often no assurance of regular reporting.
Instead, most investors seek capital gains. Here’s how it works: Imagine ABC Company continues to grow and more and more investors want to buy shares of the company. The resulting demand would increase the stock price. As a first-time investor, you suddenly find that other investors would be willing to pay you a much higher price for your shares than you originally bought them for. This increase in stock value is called capital gains.
But remember that there is no secret formula for predicting whether a stock’s price will rise in value. A weak economy or events like the pandemic can affect the price of even seemingly successful businesses. Holding multiple stocks – called diversification of your stock portfolio – also helps reduce volatility risk.
How to invest in the stock market?
Still ready to invest in the stock market? Great! Here are some first steps:
- Make a plan. Decide whether you are looking to earn dividends or capital gains, and whether you want to invest for the long term or trade for the short term.
- Do your due diligence. Research the company or companies you are considering investing in. Study their financials, disclosures and strategies. If possible, perform fundamental and technical analysis.
- Assess the current price of the business. Good investing is as much about choosing a fundamentally sound company and knowing when prices offer a good entry or exit point.
- Open a brokerage account. Some banks have affiliate brokerage services linked to your bank account. Other independent brokers allow you to open an account online.
- Start investing. Once your brokerage account is created, you can already trade stocks through it. Make sure that whatever you invest is an amount you would be willing to risk, as the stock market offers no guaranteed return.
If investing in individual stocks seems too risky to you, you might consider investing in mutual funds or mutual funds instead. Rather than being tied to a single stock, these equity funds manage a collection of stocks tailored to your specific risk preference, whether aggressive, moderate or conservative.
And when in doubt, it’s best to consult an expert, such as a financial advisor. – Rappler.com