Stock Market 101 (part 1)

Thursday, April 16, 2009

This post goes out to all the guys who keep on asking me about trading stocks here in the Philippines. I won't claim to be an authority, and I'm relatively new to this whole stocks thing, but I can give you some of the things that I learned in my experiences of playing with stocks. I'm not very learned in the terms too, but I'll try to make things as clear as possible. Feel free to correct me if you know better.

What is Stock Trading?
Basically, stock trading is just buying company ownership in piecemeal manner. Partial company ownership is represented in stocks. The more stocks you have, the bigger part you own in the company. As a company owner, you are entitled to attend stockholder meetings where you elect officers that run the company, cast votes on company decisions, and partake in free doughnuts and coffee while pretending your small share actually matters.

Earnings of the company are also given to you depending on the percentage of your ownership. (more on this later). Values of stocks increase or decrease depending on the value people think of the company and the actual "fundamental" value of the company.

Why Stocks Trading?
The stock trading is one of the highest yielding investments out there, just below selling drugs and kidnap for ransom. I'd like to point out that among these three, only stock trading will not put you in a wanted dead or alive poster, or in presidential races - both of which are unfavorable to your reputation.

Trading Stocks is a good way to make your existing money grow. Compared to other legal methods, mutual funds earn about 20% per year on a good year, government bonds get about 7%-15% per year, and time deposits give about less than 5% per year. In stocks, you can get that 20% in a matter of days.

Other legal alternatives that can par up to this kind of earning is Forex trading, which is somewhat like a more brutal form of Stocks trading. There are of course commodities trading, futures trading and many others, but we won't cover those. I'm just saying if stocks isn't your thing, there are other things you can trade.

One good thing about it is even Muslims can do it without breaking the Islamic laws, since it does not work on the prohibited concept of interests earned from debt. Although there are a few regulations. (no joke)

There are, of course risks involved and I'm not fucking around when I say risks. The reason why time deposits, bonds and bills, have low interest rates is partially because these are very secure investments. You can sleep at night knowing that unless your bank or the Philippine government gets annihilated overnight, your money will still be around when you wake up.

Stock market on the other hand, is often compared to gambling. The value of your investments have no certainty, even for stocks of big corporations (referred to as Blue Chips). If a company closes, your money is gone. If tomorrow, the company is found out to be satan spawn, and the investors lose confidence on the company, your stocks values may turn from gold to goop overnight.

Of course unlike gambling, you can try to predict how a company will perform and you can try to catch trends by reading the news or analyzing the price graphs. If you do those things, that lessens risks and makes stock trading more of an intelligent guessing game. You can make the odds favor your side, but of course odds are still odds and there's no real certainty (and you can still end up homeless)

Big yields, big risks. That's the name of the game.

So how exactly do you earn money?
You earn money in two primary ways - buy and sell, and dividends.

First, after buying a stock of a company at a certain price, it's possible that the company will become more valuable or at least sound more valuable. Because of that, the price of ownership of the company may rise as well. If you sell your stocks after the price of each stock rises, you earn money. For example, if I bought 10,000 shares of Megaworld (MEG) a few weeks back at 0.54 pesos a piece at a total cost of 5,400 pesos and then one week later the share price rose to 0.61 pesos, my 10,000 shares now has a value of 6,100 and I'd have earned 700 pesos (enough to pay for cable)

Second, as I mentioned earlier, companies share profits with their stockholders on a periodic basis. These are called dividends. Dividends be either stock dividends or cash dividends.

Stock dividends are earnings in the form of additional stocks. For example, a few years back, Meralco declared a 10% stock dividend. That means for every 10 stocks you have of Meralco, you get an additional 1 stock. If you bought 100 shares of Meralco at 100 pesos each, that means you end up with 10 new shares worth 100 pesos each (a 10% profit) (enough to pay for premium porn channels). It should be noted, however, that stock dividends often alter the value of a company, causing the worth to plummet just after the dividends are released so you have to wait for prices to restabilize before you can cash out.

Cash dividends are a more direct approach, which give you cash directly for every share you own. If Meralco announces a 5 peso cash dividend, that means for every stock you have, you get 5 pesos. So as with the previous example, if you have 100 shares, you get 500 pesos (yay).

There are other ways to make money, such as short selling, but we can cover those in some other post.

So how exactly do you get into the game?

To buy, sell, and trade stocks, you have to have a stock broker, or a brokerage firm. They act as the middlemen for any trades. In movies, theyre the ones running around the stock trading floor with paper and phones on their hands shouting jibberish. They should not be confused with elves.

There are two types of brokerages in terms of investor-broker communication: Online and offline.

Traditional brokerages let you trade stocks by calling your broker or faxing him during trading hours. Brokers are people who do your trading for you. One good thing you can get from this sort of arrangement is that you can get the advice of your broker which you may or may not follow. (Warning: Some brokers are natural assholes who are just out for comissions and will force you to trade as much, even though it's not to your advantage)

Online brokerages can let you manage your own stocks online, where you can place orders for buys and sells. These online firms are now more favored since they give you direct control of your own stocks, minimizing the time wasted between you thinking of selling/buying and actually issuing the order to do so.

Stock brokers require you to go to their office to sign up and give a minimum investment amount. Trading firms like Ackerman require high minimum initial investment amounts while citiseconline requires 25k. Still others require only 5k minimum, which is good for starters.

Any sort of trade, be it buying or selling is charged a certain amount of commission, which is lessened to the amount you should be getting or added to the amount you will be paying. Rates vary from 0.2-1%.


Zack said...

Hey Red,

Great post. Thanks. I'm also interested in investing in the near future, since I think the stock market is a far less scary place when you're investing for the long term. People need to start doing things like this.

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