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Wednesday, April 10, 2019

Stock Market

What is the stock market? 


stock market


The stock market is a place where you can buy and sell shares of stock of a publicly listed company. There are four key terms in that definition, which I will elaborate : 

• A Place :

It’s a place called the Philippine Stock Exchange or PSE. They have two offices – one in Ortigas and one in Makati. But we don’t need to go there in order to transact with them. 

• Buy and Sell : 

That’s why it’s called a stock “market”. There are only select representatives called Trading Participants (or brokers) who can directly buy and sell shares of stock, though. For individual investors, we just transact with these brokers. 

• Shares of Stock : 

Stocks, shares of stock, or shares (all used in the same way) represent ownership of a company. In a sole-proprietorship there is just one share of stock owned by the founder of the company. In corporations, there are multiple shares which can be owned by many different people. These are the shares which are bought and sold in the stock market. 

• Publicly-Listed Company : 

Not all corporations are available in the stock market. The corporation must be a publicly listed company. A publicly-listed company is a business that offers its shares of stock to the public. This is usually done in order to finance its expanding operations. Now because the general public can invest, the company must first pass strict standards set by the PSE. 

stock market
  A picture of the trading floor of the Philippine StockExchange in Ayala, Makati City


So to recap on what the stock market is just 4 things: 

(1) It is a place where 
(2) you can buy and sell 
(3) shares of stock of 
(4) publicly listed companies.

How does the stock market work? 

There are three interactions between the four groups of people that make the stock market work. In the diagram below, we are the “Investors” and we only deal with the “Trading Participants”. 

However for a complete understanding of the market, I’ll briefly describe the other relationships.


• The Publicly Listed Company and the PSE  

The publicly listed company applies to the PSE so that they can be allowed to offer shares of stock to the public. The company must comply with very stringent requirements before the investments are opened to the public. The PSE protects you, the investor, and safeguards your interests. 

• The PSE and the Trading Participant (Broker)  

The PSE does not directly transact with us investors. Only Trading Participants licensed by the SEC are allowed to buy and sell shares of stock. This was done simply for control purposes and work simplification. The PSE prioritizes monitoring of Publicly Listed Companies while the Trading Participants deal with the investing public. 

• The Trading Participant and the Investor (You!) 

You will have to contact a trading participant or broker if you want to buy or sell shares of a particular company. For this, the broker will charge a very small fee for the buying or selling transaction. Brokers also provide you with information on which companies are good to buy in addition to their transaction services. 

So in summary, this is how the Stock Market Works: (1) The PSE monitors and screens companies who would want to become publicly listed. 
(2) The PSE assigns trading participants to interact with the public for the buying and selling of shares. (3) The trading participants become the middle man between the PSE and the investing public.

How do I make money in the Stock Market? 



Remember that in the stock market, you’re buying ownership of businesses. So you make money the same way its business owners make money. These are through dividends and capital gains. 

Dividends 

The dividends are your share of earnings in the company as an investor. For example, last May 2012, the company, FPH (First Philippine Holdings) declared a dividend to be distributed among its shareholders. Each shareholder was to receive PhP1 per share. At that time I had 1,340 shares of FPH. This means I earned PhP1, 340 from my investment in FPH.

A common question that is asked here is that “why would the company declare dividends?” The answer to that is simply because they are also shareholders of the company. So in effect, by declaring dividends they are also paying themselves. 

Capital Appreciation or Capital Gains 

The second way is through capital appreciation. This simply means that company you own is worth more than when you bought it. For example, in January 4, 2010a share of FPH costs P46.50. Two years later, the price of FPH was already P61.50 – a difference of P15 or 30%. So if you bought 100 shares of FPH, you could have made P1, 500.

How much money can I make in the stock market? 


The amount of money you can gain or lose in the stock market is always a percentage of the amount of money you put in. How high or low this percentage is dependent on how willing you are to learn and how disciplined you are in applying what you learn. Now, before I give you the numbers, it’s important that you understand that a high percentage and a low percentage is often compared to the market average. 

For instance, in the year 2011, I gained 30%. I personally think that this is just average given that 2011 was a very good year. In fact, in one of the seminars I was attending, the professor asked one of the audience members how much money he made in his stock trading, he answered 100%. He doubled his money in just a year! Amazing! 

However, if we were in the year 2008, during the time of the financial crisis, the average return was negative! So if an investor made a profit, his performance was already considered above average.



Here’s a graph of the Philippine Stock Exchange index (PSEi) for the past 5 years. This PSEi graph is useful because it is often used as a benchmark on how the market performed. As you can see, the PSEi was going down the whole year of 2008.