There are many reasons why a person should start investing in the stock market. Aside from sounding smart while humble-bragging about your market shares to your friends who should know better, you’ll be able to park your excess cash while earning. And that’s how you fight inflation.
Investing is really boring if you think about it, especially if finance is not even remotely related to your background. It involves research and price speculation. Will Jollibee still continue to produce trend-worthy heart-wrenching commercials while subconsciously selling Chicken Joy five years from now? Who knows, right? But why do you need to care?
What is the stock market?
It’s where you can invest your money in other people’s publicly listed companies. These companies sell shares of stocks through an Initial Public Offering (IPO) to raise money. Investing or buying a stock makes you part owner or a shareholder of that particular company. The Philippine Stock Exchange is the corporation that governs our local stock market. It’s an intimidating concept where you think executives would scoff at the amount your going to invest to their company. But think of it this way: they need your money.
Begin with an emergency fund
Before anything else, your bank account should have an emergency fund. Consider this amount as your untouchable money. It’s strictly for emergencies like accidents, death, job loss, or any serious unexpected situation where you need to shell out cash fast.
What’s the best amount for this fund? Six month’s worth of your salary. This should keep you afloat and your bills at bay.
And why should your emergency fund exist? There’s always that risk in putting your money out there in the market since no one can really predict the future—especially a company’s worth a few years from now. Basically, the money you’re going to invest should be forgotten and monitored maybe once a month, but it should be money you’re also prepared to lose when hell breaks lose in the economy.
Invest in knowledge first
Sounds cheesy and cliché, but fundamental and technical analysis of the stock market cannot be learned overnight via article on a men’s website or even YouTube or WikiHow. Before handing over that P10,000 initial investment, check out banks, online forums, financial blogs, and seminars for starters. There are plenty of online quizzes to assess your risk hunger and recommend the type of investments that fit you and your lifestyle. Ready To Be Rich provides relatable analogies to shed light to complex business and investment terms and processes. The blog also has a helpful quiz if you want to know if you’re an investor or a trader (we’ll get to the difference in a bit). COL Financial also regularly holds free seminars on topics related to stock market investing on weekdays.
Read the business section of websites and newspapers. You might not have the least bit idea of what that box with company codes and numbers mean, but news on the latest takeovers, buyouts and success reports will help you. And an even better idea, consume any type of news you can get.
But how can one make money from the stock market?
Two ways: price appreciation and dividends. Price appreciation is pretty self-explanatory. Picture this: Shell Philippines recently opened their company to the public last October 2016 with an initial price of P67.00 per share. Say, you bought 100 shares last October 2016, that’s P6,700 total price. As of writing, the current price per share of Shell is P78.75, selling all of your shares now will earn you P7,875. That’s P1,175 money made in a matter of months without doing anything. Now imagine how much money the people who bought thousands of shares last year earned.
Also, investors earn dividends. These are profits decided and distributed by the board of directors of the companies you’ve invested in. Dividends may come in as cash or stock shares.
Know whether you’re an investor or a trader
The main factor that differentiates an investor between a trader is duration for which the person holds the asset. If you’re an investor, think long-term commitment to a company/companies, cost averaging, buying stocks and then holding on to them. Going back to Jollibee, will they still produce commercial that will set trends in 5 years? Will the #hugot-driven commercials be still relevant in the market then? Who knows.
For you to get a clearer picture of the trader, think The Wolf of Wall Street with people screaming in front of the stock ticker sans Margot Robbie and instantaneous cash. But that’s the Hollywood version of course. For traders, time is of the essence in the exhilarating game. Buy, hold the shares for a few day or even hours, and the moment the price goes up the target price, sell.
Long-term and short-term investments
Know your goals. A new car next year? A condo two years from now? Or maybe an early retirement? Set a target date on when you’re going to withdraw your investments so that you know what type of companies you’re going to put them in and the risk you’re willing to take. If you haven’t realized it yet, the market is unpredictable. It’s driven by supply, demand, and people’s emotions. Have money to set aside that you can afford to forget for five years or more? (Long-term) Price appreciation will be your new BFF. Invest in blue chip companies (Investopedia: blue chip companies are “nationally recognized, well-established, and financially sound companies”).
But what if you need the cash in three years or less? You can also try time deposits, savings accounts, and low-risk UITFS (to be discussed later). Better not put your money in the market if you won’t be giving your cash (or your company) ample time to appreciate in value.
When investing in the stock market, there are days when you even have less than what you initially invested, with thousands of pesos lost even. Brace yourself when checking.
Now, where to begin, and what are some of the options?
Savings account and time deposits
Believe it or not, our money stashed away in commercial banks are put to good use in the economy. Remember interest rates? Same with time deposits. One has to maintain a specific amount for a length of time and once withdrawn, an interest will be included. These are safe investments, low-risk yet low-yield. The only difference is that you won’t be able to touch money from time deposit accounts for a specified number of months or years.
UITF and Mutual funds
The concepts of Unit Investment Trust Fund (UITF) and Mutual Funds are the same. Both are pooled money from people given to banks or institutions. Fund manages are then tasked to invest these money into companies. Don’t worry, you’ll be given a risk assessment form before you hand over your cash, the form will give them insight on the type of companies that would suit your financial habits and risk-hunger.
What’s the difference between the two? UITF are invested through commercial banks (check out BDO and BPI’s trust fund products) and regulated by the Bangko Sentral ng Pilipinas. Mutual Funds on the other hand are sold by licensed mutual fund agents (the likes of Sun Life and Philam Life) and are regulated by the Securities and Exchange Commission (SEC). There’s also a minor difference in investment and redemption fees between these two.
Stock broker firms
If you think you can make your money grow faster than fund managers of these banks and firms, by all means, open an account in a stock broker firm of your choice (COL Financial and BPI Trade, for example). Some of these firms need just a minimum of P5,000 from you to be able to participate in the market. You’ll have to do your own research, your own buying, and portfolio diversifying. Good thing most of these firms have the materials you need online like reports of the companies and even market speculations.