How well do you know the Philippine Stock Market?
Here is a quick test: When you own a share of stock in a company, you are entitled to:
- Buy its products at wholesale price or at 40% discount
- Get an assurance that your son gets a job there anytime.
- Vote on some of the decisions being made by the company.
- All of the above
If your answer is (c), congratulations! The Right To Vote is one of the coolest things an investor gets for owning shares of stock in a company.
While it is true that you don’t have to know anything about the Stock Market before you can start investing, having a sound foundation of the basic concepts would at least help you understand how money is made and lost this way and you can act accordingly.
This article is intended to be a short and gentle introduction to the fundamentals of the stock market, specifically as it applies locally in the Philippines.
Enough for the introduction, let’s get to the meat.
What Is A Stock and What Does It Mean To Own Some?
Quite simply, a stock represents an ownership interest in a company. When you own stocks, you effectively own a piece of the company. Stocks are sometimes called shares, or equities – they mean the same thing. And stock owners are sometimes called stockholders or shareholders.
Say, a company has 100,000 shares outstanding and you happen to buy 1,000 shares. That means, you own 1% of the company’s net worth.
The Two Kinds of Stocks
Corporations may issue two kinds of stocks and each has the following characteristics.
- Don’t carry voting privileges.
- Pay guaranteed dividends (or interest)
- Income is predictable. Actually, it belong to the fixed-income investment category, just like other debt instruments.
- In case of bankruptcy, preferred shareholders take precedence than common shareholders in claims over the company’s assets.
- Have voting rights.
- Exposed to greater risk and volatility.
- Rewarded the most, if the company does well.
Unless otherwise specified, from now on when we say stocks, it should mean common stocks.
How to Earn Money In Common Stocks
Stock Investors have basically two ways of earning money in stocks.
1. Through Dividends. Dividend is simply a portion of the company’s profits distributed by the company to its stockholders. Dividend payouts are usually cash, but may also be in non-cash forms such as property, scrip or another stock.
Unlike company debts which must be paid, dividends are optional and must be voted on by the company’s board of directors before they are distributed.
Some companies prefer to re-invest the money back into the company instead of giving it out as dividend. This increases the value of the company’s stocks.
2. Through Capital Gains. This is the fancy term which means price appreciation. If you sell stocks at a price higher than when you purchase them, then you realize a so called capital gain.
“Learn to Earn: A Beginner’s Guide to the Basics of Investing and Business” is a good introduction to the basics of investing, with emphasis on Stock Market Investing. It is co-authored by Peter Lynch — one of the most successful Mutual Fund Managers in history. Click the image on the left to buy an e-book (Kindle) copy straight from the Amazon website.
What Determines the Value of a Stock?
The price of a particular company’s stock has a lot to do with its financial success or failure.
That’s why savvy investors will have to look at the company’s financial statements and other records before deciding to buy its stock. Some of the factors they have to research include the following:
- The company’s cash flow statement
- Net and gross earnings
- Ratio of profit to total assets
- The competitiveness of the company’s products
- Changes in the preceding factors from year to year
However, there are other independent factors that also affect its stock price but are completely outside the company’s sphere of influence. Some of the most important ones include:
- The national and global economy.
- Fiscal and Monetary policies
- Consumer demand for that particular stock
- The Business Cycle
- The Interest Rate Cycle
- Exogenous shocks such as national calamities, wars and terrorism, etc.
- Collective emotions of investors
As you can guess, buying or investing in stocks is simple, but it’s not as easy as the financial gurus on TV would want you to believe.
Deciding to pick which companies to buy is really full-time job that is better left to the professionals. Plus, remember that stock values are much more volatile compared to fixed-income instruments like bonds and money market accounts. But with volatility, and therefore risk, comes the reward also.
If the idea of investing in stocks seems attractive to you, I would suggest that you start with Equities Mutual Fund, such as the FAMI Save and Learn Equity Fund, whose portfolio consists mostly of stocks from different companies listed in the Philippine Stock Exchange. That way, you benefit from automatic diversification and the expertise of professional managers. An Equities Mutual Fund frees you from the hard work and headache involved in studying companies, stock trading executions and managing your portfolio. It’s a smart move especially if you are a novice investor.