Are you interested to invest in the stock market but don’t know how it works?
You hear people talk about stock picks or that the market went up or down but you don’t want to ask them what is it all about because you don’t want to look ignorant.
You search the web about the stock market but everything is so complicated to understand.
This article will try to discuss the stock market as simple as possible.
Simplest Definition of the Stock Market
The stock market is where you can buy and sell shares of stocks of publicly listed companies.
Publicly listed companies are companies that are listed in the stock exchange. Meaning, a portion of their company can be owned by the general public.
Examples of publicly listed companies are Ayala Corp, BPI, SM Corp, San Miguel Corp, PLDT, Globe, Smart, and many more million to billion peso companies.
The stock market is where ordinary people like you and me can be part of growth of these humongous companies.
When you buy a share, you become a part-owner of the company based on the number of shares you have.
In the stock market, you don’t need to have millions of pesos to invest in SM or Ayala, P3,000 can already buy you shares of their company which makes you a part owner of the company and a partner of the Sy’s or Ayala’s.
For the list of companies listed in the stock market, click this link: PSE Listing Directory.
So How Do I Earn?
There are two ways to earn in the stock market:
- One is through capital appreciation (capital gains),
- and the other is through dividends.
1. Simple Explanation of Capital Appreciation
Capital appreciation is basically buying a stock at a lower price and selling it at a higher price.
Let’s take Jollibee Food Corporation (JFC) for example.
JFC’s stock price last March 22, 2013 is at P115/share.
If you invested P3,460. You get P3,460 ÷ P115/share = 30 shares.
On February 16, 2018 the stock price is at P286/share.
Your 30 shares is now worth 30 shares × 286/share = P8,580.
So in 5 years, your money almost tripled.
That’s almost a 20% compounded return every year.
If you placed your P3,460 in the bank, it is still P3,460 after 5 years.
Or you have already spent it for things you can’t even remember.
And the example above is just P3,460 one-time investment.
What if you are investing P3,000/month?
2. What are Dividends?
You may look at dividends like rental income.
You buy a stock and then the company gives you interest (dividends) for owning that stock.
Let’s take PLDT (TEL) as an example:
You bought the stock last August 18, 2017 worth P8,660.
The price per share that time is at P1,732/share.
Hence, you get P8,660 ÷ P1,732/share = 5 shares.
The company declared a P48/share dividend to be paid on September 8, 2017. Link: PLDT 2017 Dividend Info.
Your gross dividend income is 5 shares × P48/share = P240.
That is a 2.77% return in less than a month.
Caveat Emptor: “Let the Buyer Beware”
In investing or in buying anything, always remember the term caveat emptor which is latin for “Let the Buyer Beware.”
You can also lose money in the stock market especially if you do trading without educating yourself.
People lose money when instead of investing in stocks, they gamble.
They use their emotions and not their logic.
They buy “unknown” small capitalized companies instead of big, stable, and profitable ones to chase unrealistic returns for a very short period of time.
To avoid compulsive decisions, educate yourself in analyzing stocks.
You can use fundamental analysis which is basically looking at who runs the company, how is it being managed, and looking at their financial statements.
Another is through technical analysis which is done through charting.
But this is for another topic.
The point here is to never stop learning.
Continuously educate yourself because as the saying goes knowledge is power.
But I Don’t Have the Time to Study and Track the Market.
Let’s face it: not everyone has the time and expertise to trade in the stock market.
There are a lot of reasons such as you have a job, you are a professional who prefers to devote your time honing your craft, you have kids, or you hate numbers.
We all have our reasons but it doesn’t mean we can’t invest in the stock market and be part of the growth of these companies.
Take note that trading is different from investing.
Trading is when you buy and sell within the day or week.
Investing is long term. Meaning, you are willing to hold to a stock or group of stocks for a minimum of 5 to 10 years.
The solution: Peso-Cost Averaging.
Peso-Cost Averaging: The Secret Technique of Investing in the Stock Market for Those Who Does Not Have the Time and Expertise.
The concept of Peso-Cost averaging is you buy the same stock or group of stocks every month with a fixed amount.
You don’t care whether the price is high or low.
Take note that these stocks should be a blue-chip stock or big companies that are profitable and you see will still be around for the next 30-50 years.
You don’t buy small “unknown” company. You buy big, stable, and profitable companies.
Let’s take Bank of the Philippine Islands (BPI) as an example.
I decided that I will buy P3,000 worth of stocks every month starting Jan 2007 for 10 years (until Dec 2016) regardless if the price is high or low.
Prices are based on marketwatch.com.
Based on the table, you can see two things:
- If the stock price is high, I buy less shares.
- If the stock price is low, I buy more shares.
On Dec 2016, my total investment is P360,000 and I have 5,914 shares of BPI.
After Dec 2016, I no longer place P3,000 per month. I forget about the investment I made and chose to hold the stock.
Last January 31, 2018, the stock price of BPI is at 119.20/share.
Hence my investment of P360,000 which I save for only 10 years is now:
5,914 shares × P119.20/share = P704,948.80
From 2007 to 2017 a lot happened in the financial market: US Real Estate Bubble, Global Financial Crisis, European Debt Crisis, Brexit, and a lot of ups and downs in the market.
But as you can see: if you invest consistently with a long-term mindset, that P360,000 saved and invested for only 10 years almost doubled a year after I stop investing P3,000 per month.
The key here is investing consistently and having a long-term mindset.
Investing in the Stock Market is not as Complicated as it seems.
People lose money in the stock market because they over-complicate things.
The formula is simple: invest consistently a fixed amount for a long period of time.
Do Peso-Cost Averaging.
Disclaimer: All stocks mentioned above are for illustration purposes only. It is not the intention of the author to recommend the buying, selling, or holding of the examples above. Like all investment opinions, the actual trading of stocks and other investment vehicles involves varying degrees of risk and volatility. Always be cautious in investing and only invest an amount you can afford to lose. Caveat Emptor.
Although every effort has been made to provide complete and accurate information, CommonCentsPH.com makes no warranties, express or implied or representations as to the accuracy of content on this website.
You can also read the article I wrote entitled “Am I Too Late to Invest in the Stock Market?“
Your Millennial Wealth Planner,
Harold Q. Gardon, CWP, CEPP
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