How can you you invest in the stock market?
It was in 2018 when I bought my first ever stock from the Philippine Stock Exchange. Here’s how that experience went and why I will continue to buy more in the future. This is also a beginner’s guide to everyone who may want to start investing in companies that they like.
Several years back, I wanted to learn more about investing. This was after I’ve invested in UITF and mutual fund. I focused mainly on mutual funds. Not only that, I also wanted to own direct stocks of companies. I was told that it’s not going to be easy. I started seeking out financial seminars on stock trading.
Good thing the Securities Exchange Commission and a stock broker located locally were offering them free of charge. I attended several of them, including the paid ones. And it’s been a wild ride since.
A review: what is a stock?
A stock is a proof or evidence of your interest, ownership, or participation in a business. It indicates that you’ve invested in a company and in turn you get to enjoy the rights as a stockholder such as getting invited to the annual meeting, earning dividends, or voting the board of directors that would manage the everyday operations of the enterprise. Owning a stock means that you are part of the business’ growth story. You gain when it grows and lose when it stalls.
The number of stocks you can own depends on the amount you invested, the company’s worth, and number of owners. Imagine that an entire company is a pie owned by many people called stockholders, and that each is entitled to a slice that represents their investment.
If the corporate pie (worth) is worth P1 million pesos and there are 100,000 owners (stockholders), then each slice (stock) is worth P10 (P1 million ÷ 100K).
And if you owned say 1,000 stocks, then your investment is P10,000 (1,000 x P10). It can also be said that you own 1% of the company (P10K ÷ P10 million). This is what is called your part-ownership, which is also formally known as equity.
Types of stock in the Philippines
There are two types of stocks that are available in the Philippines:
- common stocks
- preferred shares
1. Common stock
A common stock is a stock that represents equity. It gives you the right to share in the profits, get dividends, and the ability to vote. Most of the shares that are available for trade in the exchange are common stocks.
As of today, there are a little less than 300 companies whose common stocks are up for grabs.
2. Preferred shares
Owners of preferred stock are prioritized to receive dividends. When the company goes bankrupt, their claim on the assets comes first before common stocks (of course, after all the debts are paid).
However, they mostly don’t have any voting rights. There are very few preferred stocks available in the market. They are also traded very infrequently.
For a more in-depth discussion, see the article on investing in preferred shares.
Blue chip stocks
Now, there are companies of established profitability and stable earnings through the years. These companies are called blue chip stocks, which is borrowed from poker chips of the highest value.
In the Philippines, we have the 30 top companies that are considered blue chip. They are part of the Philippine Stock Exchange index or simply stock index. Aside from buying them directly, you may also invest in index funds.
The stock exchange is a marketplace where stocks can be bought or sold. In our country, the Philippine Stock Exchange is the the only stock exchange. But not all corporations can be part of the exchange.
Going public. When a private company wants its stocks to be part of the exchange, it is said that it is going public. That’s because the company would need to disclose all of its financial records to attract investors.
Why would companies need to go public? Companies need capital in order to sustain or expand operations. They can actually raise capital by borrowing or by issuing shares to private investors, called venture capitalists.
However, they may reach a point where they’d need more capital than what lending institutions or venture capitalists can provide. By going public, they can raise more as they let more investors to be part of the company without having to increase their debt obligations.
Also, by inviting the investing public to trade its shares, early investors can cash in on their investments.
Listing. Companies have to go through a process called listing with the Securities and Exchange Commission (SEC). SEC has set down varied rules and regulations that companies must follow such as disclosure of its operations, management, and finances.
Underwrite. The company chooses underwriters, which are investment companies, who would buy the shares and then sell them to the public hopefully with a profit.
Initial public offering (IPO). Once the SEC gives the green light, then the company debuts on the stock exchange in an initial public offering. It is the first day that the company is listed on the exchange and its shares traded.
Why buy stocks?
What are the advantages of owning stocks?
Historically, the returns of the stock market have been increasing. One way to know this is through the stock index, which is a collection of the top 30 companies in the Philippines that are called blue chip stocks.
According to the historical performance of the stock index, it’s been growing at a compounding rate of at least 11% for the past 10 years. See below actual chart.
So even when there are dips in the past, especially during time of economic slowdown, the general trend is going up. Of course, past data does not guarantee future returns.
The stock market is ideal for long-term investing. As you can see from the chart, the longer that you invest, the more opportunity that you can earn.
That’s because long-term investing can actually make up for volatility and market corrections. The effects of global recession in 2008 for example actually was a springboard for years of recovery that followed.
Investors can receive dividends. Dividends are part of the company’s earnings that they decide to pay out to all their shareholders.
It’s really up to the board of directors how much dividend to give away or whether they pay one at all. That’s because earnings may be reinvested back to the business, whereas dividends are subject to tax of 10%.
It’s also up to the directors if they pay out in cash or in the form of stocks. If it’s in cash, you may determine the yield which tells you how much is the dividend compared to its price.
For example, the Salcon Power Corporation (SPC) paid out ₱0.40 last December 19, 2018 and again in April 16, 2019. With the stock valued at ₱7.17, the yield is 11.16% (0.80 ÷ 7.17).
To be part of company’s growth story
When you acquire shares of companies, you become part of its growth story. If its business expands and gains profits, you can be part of its increased valuation as it is going to be priced higher.
What’s more, corporations such as banks (BPI, BDO, Metrobank, Security Bank), telecommunications (PLDT, Globe), retail (SM, Ayala, Puregold), and real estate companies (DMCI, Ayala Land) are household names. And it’s great to be one of its shareholders.
Influence on company’s direction
People who own shares actually have voting rights. Their rights depend on their equity; the larger the investment, the larger the equity and the more weight their votes count.
With voting rights, even investors who own small equity may form minority blocs to influence the company’s direction. You may have a voice on decisions such as choice of directors, acquisitions, and other big-ticket items.
What are the risks in owning stocks?
As an investor, everything is not all peachy all the time. There are risks involved when you start trading in the stock market.
The only way you can buy stocks is when someone else is willing to sell them. The converse is true, you can only sell when someone else is willing to buy. On top of that, you and the seller/buyer would need to agree on a price that you’re both comfortable walking away with.
This is situation is called liquidity. It’s a measure of how easy it is to buy or sell stocks. Some may not have difficulty at all, but very unpopular stocks may have challenges in being traded.
The returns, that is the increase or decrease of stock prices, are not guaranteed. This is what’s called volatility. There’s no telling which way the price goes.
If you’re hoping to earn from dividends, they may not be guaranteed when you hold common stocks unlike, say, Pag-ibig MP2. Preferred stocks may even face unpredictable yield from time to time even when these are prioritized upon distribution of dividends.
If you only hold one stock, you might run into insurmountable losses. This risk can be mitigated by diversifying, i.e. purchasing shares of companies belonging to different industry, business, or market.
Because of unmet expectations, the entire worth of your investments might be eroded due to inflation. That is, the value of your portfolio may rise to meet or exceed the general price increase of goods and services.
How to buy stocks
So how do you buy stocks?
If you think that you’re willing to take the risks, and understand the dynamics of supply and demand on the stock exchange, and have already chosen shares of companies to acquire, then purchasing the stocks can be very easy.
I’m going to share my own experience, and this is no way an endorsement. I am also not paid to feature a specific company. Freely choose any broker
1. Get a stock broker
A stock broker is a company that receives your buy and sell instructions, and execute them on your behalf. Needless to say, as an individual investor, you are not allowed to acquire stocks directly from the stock exchange.
In my case, I chose to open with UTrade by Unicapital Securities, Inc. The reason was that they offered free financial seminar that I was lucky to attend, and they had a branch near where I’m at.
Again, freely choose any broker you like such as First Metro Securities, BPI Trade, COL Financial, BDO Nomura, etc. Here’s a complete list of PSE-approved stock brokerage companies.
2. Prepare required documents.
Check with your chosen broker on the files that you need. They will require that you submit a photocopy of at least one government-issued valid identification card and tax identification number.
For foreigners trading in the domestic equities, a valid passport needs to be presented. An Alien Certification Registration (ACR) or Work Permit from the Department of Labor and Employment (DOLE) will also be required from foreigners working in the country.
3. Deposit your investment
Check with your broker how much is the minimum initial deposit. Some may allow you to start an account for as low as ₱1,000.
And there are also varied instructions on how and where you can deposit. Others allow you deposit in a bank, and you just need to send the slip through email to your broker. Others have online arrangement with banks, payment centers, and online fund transfer transactions.
4. Log-in to the trading platform
Once you have a broker, you would be given login credentials to access the trading platform. It is where you actually see the shares that you can acquire.
Now, don’t get intimidated by what you see. You will eventually learn how to navigate around this.
5. Determine minimum board lot.
It is also important to remember that there is a minimum board lot set by PSE. The board lot requires a purchase of the least number of shares depending on the price.
So for Jollibee whose price falls between 200 and 499.9, then you are required to buy at least 10 shares.
6. Indicate the stock ticker, price, and number of shares.
Depending on the platform that you’re using, you should have a way to order new shares. In this case, there is an order pad.
Here’s the breakdown of this order pad.
- Stock. The company whose shares you want to purchase. In this example, we’re buying JFC or Jollibee Foods Corporation.
- Action. The instruction you want your broker to do, which is to buy.
- Order type. We selected up to the limit.
- Qtyx1. The number of shares you’re acquiring. In this example, we’re buying 50 shares.
- Price. This is “bid” price for each shares.
- Validity. There are four choices you can select. Day means you wait for any sellers for the entire trading day to agree to your “bid” price. FAK means fill and kill; the broker must execute the trade or cancel when it’s not fulfilled. GTC means good ’till cancelled, so there is no expiry date unless you cancel the trade. GTD means good ’till date, where you establish the the expiry of the trade.
In our example, the minimum number of shares for Jollibee, whose price is at about 220 pesos, is 10 shares.
7. Pay the order
As you can see on the picture, the due amount is ₱11,230 with transaction fee of ₱33.12 for a total of P11,263.12. The breakdown of the fees when trading stocks is as follows.
|Broker’s Commission||₱20 or 0.25%|
|VAT||12% of Commission|
|PSE Transaction Fee||0.005%|
- *SCCP is Securities Clearing Corporation of The Philippines
- **When you sell, you will have the same fees plus the tax of 0.6%
The next question then is, what stocks to buy?
That is a rather easy question to answer. There are about 270 actively-traded companies in the exchange. You can see the complete company list on the PSE website.
The only times that this list is modified is when companies decide to take their business back to become a private entity. Or they may be removed from the listing due to some SEC or PSE rulings, such as failure to submit quarterly or annual reports accurately and in a timely manner.
However, the tough question that can be asked is what stocks to purchase that can give the most gains? Some people go by buying well-known brands, such as retail giants and utility companies.
And there are others who like to make decisions based on these two:
- Fundamental analysis
- Technical analysis
Fundamental analysis: the value of stocks
In fundamental analysis, the price of a stock is compared with the value of the business. It tries to answer whether the current price that investors are paying for a stock makes sense with the nature of its business, its profitability, etc.
This strategy takes advantage of the fact that investors sometimes are excited about the prospect of a company that the demand for its stock is high and its price goes up. And at times the opposite is true. Investors may have missed looking into a really good business of a company that its price is low because of weak demand.
People who use fundamental analysis try to look for stocks that are undervalued; meaning, its price is low compared to what the business is worth. This is called value investing.
There are tools and methods available that can help investors know this. Of course, one can use the price-to-earnings ratio, shareholder’s equity, etc. It also requires reading financial statements, checking the historical data on cash flow and past cash dividends, etc.
Technical analysis: the price momentum of a stock
On the other hand, technical analysis is about timing the market. What people do is to look at trends on the price, and this is done through a graph of its movement through time either within the trading day (called intraday), weeks, or months.
As you can see in the image below, the price does not move in a straight line. When it trends downward, it does not go down in a neat slope. Instead, it goes through a series of ups and downs. And surely, when it goes high, it does not do so in a neat slope either. It experiences ups and downs along the way.
Investors who use technical analysis would try to predict that a stock price is about to soar, so they anticipate such trend by buying low. When the price does go up, they then can choose to sell and they can gain in the process.
Indicators and signals are used to see which way the price moves. These can include average price for the past few weeks, the volume of trading, etc.
Frequently asked questions
1. How much initial capital can I start?
It really depends on you and the initial requirement set by the broker.
2. What is the recommended amount when buying stocks?
It’s a good practice to buy stocks with at least ₱8,000 (₱20 ÷ 0.25%). That’s because there’s a ₱20 minimum broker’s fee or 0.25%, whichever is higher. Less than 8k, and you’re paying more fees in relation to the amount you invested.
See the illustration below. For more information, check a discussion on minimum board lot.
3. What time of day can I buy stocks
You can actually trade on the exchange on weekdays. Trading hours is between 9:30am to 12:00 noon, and then it resumes in the afternoon from 1:30pm to 3:30pm. The market is closed on weekends and holidays.
However due to the coronavirus pandemic, the Philippine Stock Exchange has shortened the trading hours. Here’s the new schedule starting June 1, 2020. This is in effect until further notice.
|9:30 am||Market open|
|12:50 pm||Run-off/Trading at Last|
|1:00 pm||Market Close|
4. I still want to learn more. Are there any seminars I can attend?
Yes. The Philippine Stock Exchange offers regular seminars free of charge for anyone who wants to learn more about stock investing. You may check the PSE Facebook page for schedules.
You may also want to inquire at any brokerage companies. They also offer free seminars. Some of them offer paid sessions on technical analysis (which gives you idea on the price momentum of a stock in order to maximize gains through careful entry and exit price points) and fundamental analysis (which teaches you how to appraise the value of a business and if its current share price is over/undervalued).Tags