Last Updated on January 15, 2021 by Rat Race Running
Whenever someone finds out that I am investing in the stock market, they always ask questions about how I started or how they can invest in it.
A lot of people want to invest in the stock market. Mainly because of the many success stories they read over the Internet.
Unfortunately, fear often hinders them from starting. Some other times, they think that it is too expensive to start. To add, many people also heard stories of failure and how they lost money in the stock market.
Spoiler alert: With as low as P5,000, you can start.
It’s also been proven that many people are loss averse. It means that their desire not to lose is far greater than their desire to gain. This principle is also applicable to why only about 1% of the population participates in the stock market.
But the funny thing is that sometimes these very same people buy low-probability lottery tickets using the money that could have been invested in the stock market or could have been saved instead.
The Philippine Stock Market has a lot to offer to anyone willing to learn. To help ordinary people know more about the market, here is a simple guide before plunging into the world of the stock market.
Note: This is a long post because I tried to include as many inquiries as I can. Please comment if I missed something or made a mistake so I can edit it.
What is a Stock?
A stock is a share of ownership to publicly-listed corporations like Jollibee, Meralco, PLDT, Robinsons, SM, and many more. So if you own a stock of Jollibee, you are considered part-owner of it.
What is the Stock Market?
The stock market, also known as the stock exchange, is where people buy and sell stocks. Our country has the Philippine Stock Exchange (PSE). There are around 300 publicly-listed companies in the PSE.
What is the PSEi?
The Philippine Stock Exchange Index (PSEi) comprises 30 companies from different industries in the stock market. They are usually re-evaluated once or twice a year. Here is the list of the current companies in the PSEi.
You probably saw it on business news. It is the number that is usually shown to determine the stock market performance. As of writing, the PSEi is at 6,538.61. Far from the all-time high of 9078.37 back in January 2018.
Why should I invest in the stock market?
The reason why you want to invest in the stock market holds absolute importance. You should be clear on your goal or the purpose of your investments and not just earn money. This is where time-horizon comes in.
There are three time-horizons when investing. Time-horizon is the length of time you’re willing to hold onto your investments. They are long-term, medium-term, and short term.
Long-term – you invest for more than 10 years. Long-term goals include houses, college education of your kids, or retirement. The stock market is an excellent place to invest for the long-term.
Short-term – you invest for less than 2 years. Short-term goals include travel, weddings, and cars. Savings and bond funds are better investment instruments for these.
Medium-term – you invest in-between 2 to 10 years. You may have a combination of stocks and bond funds for medium-term goals.
How do I earn from the Stock Market?
There are two ways of earning in the stock market. They are capital or price appreciation and earning dividends.
Capital or price appreciation happens when the price of the stock you own increases in value. For example, if you bought 100 shares of Jollibee (JFC) for P100/share. Then two months later, it increased to P120/share. Then your P10,000 became P12,000. You gained P2,000.
The other way is through dividends. Dividends can be cash or additional shares paid by companies to shareholders after they made a profit. Companies like GMA7 and PLDT regularly pays its shareholders dividends.
I bought an insurance policy, does that count?
Like variable universal life (VULs), many insurance policies have a portion invested in the stock market by fund managers. However, because other people are managing your money, you pay them certain fees for that service. Investing directly in the stock market, on the other hand, will give you a higher earning potential.
Also, remember that the purpose of insurance is different from investments.
Are there risks when investing in the Stock Market?
Absolutely! The higher the risk, the higher the reward, and vice versa. So you need to have an emergency fund first. And invest only the amount you are comfortable with not touching over a long time.
We also have recessions and market crashes that happen every few decades, like the 2020 Coronavirus Recession and the 2008 Financial Crisis.
But if you are a long-term investor, these stock market crashes are an excellent time to buy more stocks.
Why does the stock market go up and down?
The stock market also follows the law of supply and demand. So here is an oversimplified explanation:
If more people want to buy a particular stock, then the price goes up.
If more people want to sell a particular stock, then the price goes down.
But there are so many reasons for the market movement like macro and microeconomics.
How do I start?
First, you need a stockbroker. They are accredited individuals or firms by the Philippine Stock Exchange (PSE) to buy and sell stocks on your behalf.
As of 2020, there are about 130 of them, 30 of which are online stockbrokers. You can see the list here.
Individuals or retailers should choose an online broker since they offer a lower price when opening an account. Some banks also offer their own stock trading platforms like BDO – Nomura, BPI Trade, and Metrobank’s’ First Metro Sec.
How much do I need to start?
The amount needed to start varies between different brokerage firms. They can be as low as P5,000.
I am in the province, do I need to personally go to their office to apply?
No. Online brokers usually offer online applications. Your initial payment can be paid via online transfer. The general requirements are government-issued IDs, Tax Identification Number (TIN) if you’re employed, and a filled-out form.
I am abroad. Can I still invest in the Philippine Stock Exchange?
Yes. Most online brokers allow Filipinos abroad to invest in the PSE.
What is the trading schedule on the Philippine Stock Exchange?
In normal conditions, the market’s schedule is from Monday to Friday, from 9:30AM to 3:30PM. With the first 30mins as pre-open. 3:15-3:20PM is the pre-close. 3:20-3:30 as the run-off or the end of trading.
Okay, so now I have a trading account, what’s next?
Congratulations on completing the first step. Now, you need to buy your first shares. Depending on the brokerage you selected, they usually have a how-to guide on buying and selling stocks.
As the rule of thumb, we have the 8K Rule. It says that when buying a stock, you need to spend at least P8,000 to minimize the effect of the brokerage fees and other taxes.
So if you have P5,000 on your account and plan on adding P1,000 every month, you will need to wait three more months before buying your first stock.
What is a board lot?
A board lot is the minimum number of shares you can buy or sell per company for a specific price range. Here is the board lot table from PSE.
What are blue-chip stocks?
Blue-chip stocks are companies that have the highest market capitalization. Or they are the BIG reputable companies. Companies like Jollibee (JFC), Ayala Corporation (AC), PLDT (TEL), and BDO are some of the blue-chip stocks.
Should I buy blue-chip stocks?
Depending on your goal, you can buy blue-chip stocks. They are the companies that have a long track record of earnings. Look at it this way, do you think companies like SM, Meralco, Jollibee, or Robinsons will close down in the next 10 or 20 years? Most likely not. But we can never tell what the future holds. That is why you should diversify.
What is diversification?
Diversification is when you buy companies coming from different industries. This will help you avoid losses when specific industries are on a down-trend or not doing well. Always remember, do not put all your eggs in one basket. Diversify!
For example, you bought BDO, BPI, Metrobank (MBT), and Eastwest Bank (EW). Though you purchased four different companies, they all belong to the banking and finance industry. A sudden negative monetary policy can bring all your stocks down – at the same time.
Okay, so what does a well-diversified portfolio look like?
A well-diversified portfolio should include companies from different sectors.
Jollibee – Consumer Sector
BPI – Banking and Finance Sector
MPI – Conglomerate
Ayala Land (ALI) – Property Sector
These four companies came from four different sectors. So unless there is a recession, these four are not likely to go downtrend at the same time.
I am afraid and don’t want to invest directly in the stock market. Is there a way to invest indirectly?
Yes, there is. There are mutual funds, Unit Investment Trust Fund (UITFs), and even Variable Universal Life Insurance (VULs) which are managed by a fund manager.
What is Peso Cost Averaging?
Peso Cost Averaging (PCA) is a common investment strategy in the stock market. Every month or whenever you have P8,000, you buy a stock regardless of the price. The goal is to average the stock price.
Disclaimer: This is only for simplicity. We haven’t factored in the board lot and fees.
Here is an example, let’s say you plan on buying BPI for P8,000 every quarter.
Q1 – P80/share = 100 shares
Q2 – P70/share = 110 shares
Q3 – P90/share = 90 shares
Q4 – P100/share = 80 shares
Total – 380 shares
Over a year, you accumulated 380 shares of BPI and spent P32,000. Assuming you didn’t buy additional shares and the price per share the next quarter becomes P120. You will then have P45,600 which gained you P13,600.
However, the stock market is a roller coaster ride. It is volatile and has its ups and downs. So, assuming the price per share became P70 instead of P120. Your portfolio amount will then be P26,600 which is P5,400 lower than your initial investment.
So for longer-term investors, consistently investing is a way to ride the ups and downs of the market because, in the long-term, the market is in an uptrend.
I am losing money in my portfolio, should I sell it?
Technically, as long as you don’t sell your shares, you are not yet losing money. It is what we call paper losses. Depending on your goal and your strategy, you can buy, hold, or sell. But for long-term investors, not selling is the most viable option.
What is paper loss?
A paper loss happens when your shares’ current price is lower than the price you paid for it. However, it will not be realized as long as you don’t sell your shares.
Paper losses are simulated amount of your portfolio if ever sell your stocks. You only lose (or gain) money after you sell.
How will I know if I should sell?
There are two main schools of thought in the stock market, fundamental analysis, and technical analysis.
Fundamental analysis uses company earnings, assets, debts, and other company information to determine the prospective price of a share.
Technical analysis uses graphs, charts, and patterns to determine if a stock is an uptrend (gaining), downtrend (losing), or sideways. Depending on which school of thought, you are more inclined to will determine when you will sell.
Fundamentalist investors sell when the price of a stock reaches its fair value or the amount that researchers think is the right price for the stock.
On the other hand, technical investors sell stocks when it falls below their cut-off point or reaches their sell-price.
What other tools do I need to learn?
You should try Investagrams. it is a one-stop-shop for tools in the stock market. They offer stock charts, stock calculators, and a virtual trading platform to try out the stock market. The only thing they don’t provide at the moment is an actual trading platform, but they are on the process of being one.
A stock market is a great tool to earn, and learning about it will pay more in the long run, provided you apply what you learn. Many people study how the stock market works or the different investing and trading strategies, unfortunately, they don’t apply it.
Knowledge without action is useless, but knowledge with action is wisdom.
The stock market never loses. It reveals more about human nature and how greed, envy, anger, and other negative emotions can change a person.
Remember that money is neutral. It is only a tool. It can be bad or good, depending on how you use it. Don’t love money (I Timothy 6:10).