It's been a while since we’ve posted an article. I’ve noticed in these past few months, there have been recurring questions with regards to investing in the stock market for people that I have talked to.
Most of them would ask almost the same questions as:
Paano po ba magsimula sa pag-iinvest?
Ano po yung stock market? Totoo bang lalago ang pera ko diyan?
Paano ba ang kitaan sa stock market na iyan?
And so on.
So for those who still don’t know what and how the stock market works, here are some of the things you need to know and understand about the stock market.
To start off, before you even begin to venture in investing. You should ask these questions to yourself first.
1. What are my goals for investing? It’s better to define these early on, before starting to invest.
2. How long do you plan to invest? Is it short, medium or long term?
3. Where can I invest my money?
4. Am I ready emotionally and financially ready to start investing?
First is goals, you need to know why you’re investing in the first place. It can be for your retirement, college fund for your children, your dream house, or it can be for a dream vacation for the whole family. Write these down in a piece of paper and check them one by one.
Next, what is your time-frame? You may be in your 20’s and looking to retire when you reach 45. Are your children still young, then you still have enough time before they enter college? Knowing these things will keep your goals in line with your chosen investment vehicle.
Then, check where you can put your hard-earned money so it can grow properly. Should I put my money in bonds since my child will start college in 5 years? I’m 30 and plan to retire at age 50, then I still have 20 years to keep my money invested in equity funds.
After that check your current emotional and financial condition.
When I put my money in this investment and the market crashes, can I still sleep at night?
Am I financially ready to start investing? Have I paid my debts in full? Do I already have at least 3-6 months of savings as my emergency fund? Are my family and I properly protected in case an unexpected event happen?
Planning ahead can save you from stress and worries, in the long run, trust me we know.
Once you have these setup, your next step is to understand your investment vehicle of choice. There are a lot of investment products out there, the important thing is to understand the risk associated with these products and services. You have Savings and Time deposits, Money market accounts, Bond and balanced funds, Equity funds, Index funds, PERA, MP2 Pag-ibig fund, Cooperatives, Real estate or Property investments, etc.
Let’s start this series with the stock market. Why? Because the stock market is one of the most accessible places where you can start investing even with small capital.
So what is a stock market?
Well in layman’s term the stock market is a marketplace in which stocks are sold. A stock is an ownership portion of a company. For example, if there are 10 shares of stock in a company and 10 different people owns it including me, each one of us owns a tenth of that company. Of course, in reality, publicly traded companies which are traded in the stock market have usually hundreds of thousands of shares (at least tens of thousands of shares). You and I own one little percentage of that company.
So, since part owner na ako ng company, paano ako kikita ng pera? We’ll there’s two ways you can earn money. One is from actual profits that come into the company. When those are paid to the owners, in the stock market world, that’s called a dividend. The second way you make money if you have that company stock is when that company’s worth increases. A profitable company is worth more than an unprofitable one. The more profit it makes the better the business is, the more people are willing to pay for a share of that company.
If you want to sell a share of stock, you would go to a place to exchange your share of stock for some money. That's called the stock exchange. In the Philippines, it’s the PSE or the Philippine Stocks Exchange.
Companies like Ayala Land, Jollibee, BDO, SM, PLDT, and other big and small names are publicly traded on the PSE through online brokers. You can invest in these companies individually or diversify by investing in mutual funds.
Mutual funds are simply a grouping of stocks. There are at least 10 or more companies in one mutual fund. Some of these mutual funds also invest in other securities and commodities. You can choose from money market, bond, balanced, equity, and index funds.
Mutual funds are simply a co-op, if you will, where you and I mutually fund money and it's used to purchase whatever that fund is set up to purchase. Instead of putting ₱10,000 in one company like buying a Jollibee stock, you'd be better off to put ₱10,000 into a growth stock mutual fund that has 10 or more different stocks in it, one of which would probably be Jollibee. But then if Jollibee goes down, your money is still safe. You didn’t bet every cent in one horse. You diversify. You don't leave all your money in one place; you spread it around.
That's one of the advantages of mutual funds versus single stocks. Buying individual stocks is very risky especially if you don’t know how to deal with it. You can lose everything on them. It's like playing dice in Las Vegas or something. But when you spread it across to 10 or more different stocks, you have the least chance of losing your hard-earned money.
So, do you now have a better understanding of what the stock market is and how it works? Don’t worry these are just the basic stuff and there’s a lot more to learn before you can become profitable so keep learning and eventually you’ll achieve your goals financially in the near future. Until next time.