It always seems so scary and overwhelming for someone who doesn't understand how the stock market works. The difference between losing all your money and being afraid of the stock market versus growing wealth and learning from it is understanding how it works and studying it. It's not a get-rich-quick scheme and if you are ready to learn, let's get on to it!
How does the Stock Market work?
Okay, so before understanding how the stock market works, we first need to understand what stocks are. Stocks are called shares or equity, which is your ownership of a particular company. Say, for example, Ayala Corporation has 1,000 shares, and you buy one share. Hence, you own 1/1000 of a share of Ayala. Take the idea, but instead of thousands, there are millions of shares in a single publicly-traded company.
Types of Stocks
There are two types of stocks or shares: common and preferred.
Both types of stocks are pretty similar, but the main difference is that they get voting rights for common shares. In other words, common shareholders can choose the members of the board. Eventually, these board members are going to select the CEO and managers who will run the company.
On the other hand, preferred shares or stocks have no voting rights, but they receive more regular dividends than the same company's common stock at the maturity date, selected by the board of directors.
Why Do Companies Sell Their Shares
The main reason companies sell their shares to the public is to raise funds or capital for asset acquisition, business expansion and research and development. Therefore, the money they have received from shareholders and investors is mainly geared towards making their companies and products/services better.
When a company decides to sell its stocks or shares to the public, it transitions from privately held to publicly traded. The process of listing a company in a secondary market is called IPO or initial public offering through an exchange. These stock exchanges (NYSE, NASDAQ, Philippine Stock Exchange) facilitates the buying, selling and trading of the shares on the stock market.
The Stock Market
Let us now talk about the stock market. The stock market serves as a market for all companies who want to sell their shares and their stocks to the public.
In the Philippines, we have one stock exchange: the PSE or the Philippine Stock Exchange. Today, in the Philippine Stock Exchange, we have approximately 330 public companies listed.
How Do You Earn Money?
As an investor, you might be thinking, what's in it for me? How do I earn from the stock market?
There are two ways to earn money from the stock market:
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Dividends: Recall that I mentioned dividends earlier when we were talking about preferred shares. Dividends are when the board members of a company decide to give a portion of their earnings to the investors, quarterly or annually.
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Capital Gains: Another way to earn aside from the dividends is from capital gains. Capital gains are the profit that you have made from holding a stock for the long term. For example, you bought ten shares of a company at $100. Over time, the future value of those ten shares became $110. Hence, the $10 you gained from holding your stocks is what we call capital gains.
How and why do stock prices fluctuate?
Price fluctuation is a term used to describe a stock or share that moves up and down. Some investors believed that the news and public opinion are a more concrete basis for the daily stock price movements. However, a decisive factor that affects a stock price is the company's quarterly earnings and operating fund.
Hence, it is vital to have a long-term mindset when investing in the stock market. Some of the questions you should ask yourself when investing are:
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Do these companies are going to be around for a while?; or
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Will these companies outperform the market indices (e.g., SP500, NASDAQ, DJI)?
Be mindful that there are so many investors in a particular stock market or exchange. Most of these companies are open to foreign trade, so there are millions of investors, and all of them don't think and interpret the market's movement in the same way. They all interpret the stock market differently and, depending on their decision to buy or sell at specific prices, will dictate the current price of a particular stock.
The Law of Supply and Demand, and the Stock's Price Movement
As the value of the company increases, so does its stock price.
As the value of the company decreases, so does its stock price.
In other words, if the buying pressure of the stock goes up, the stock price increases.
If the selling pressure of the stock goes up, the stock price decreases.
We can illustrate the stock market as a fish market by relating these concepts to the law of supply and demand.
If there's a typhoon, the fish supply is low, but many want to buy fish. When the supply has slowed with constant or higher demand from buyers, then the tendency of the price of the fish per kilo will go up.
The same way if there's so much fish and nobody is buying them. The price tends to go low because they want to sell off their inventory at discounted prices.
Therefore, thousands, if not millions, of trades happened every second. That's when buyers and sellers come in.
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Buyers bid at the price that they're willing to pay for; while
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Sellers ask for a price they want for the stock that they currently have
Once that ask and bid prices match up, then trades will be executed.
How to Trade?
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Get a Broker: A broker is a person or the middleman that manages and invests your money in a publicly traded company (Traditional Investing).
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Register on an Online Brokerage Platform: This is online, self-directed trading where you can freely choose which companies to invest in, given the money you currently have on hand. In the Philippines, we have 130 registered brokers, but only 33 of these are online. Some examples of online brokers in the Philippines are:
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COL Financial
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BDO Nomura
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FirstMetroSec of Metrobank
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BPI Trade
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AAA Equities
NOTE: You do NOT need millions to invest. Most of these brokerages allow you to invest a minimum of P1000 - P5000 in opening your account.
Choose and Buy Stocks
Some investors say that this is the most challenging part if you're new to investing in the stock market; therefore, it is recommended that you start your investing journey with the blue-chip companies.
Blue Chip companies are the 30 top-performing companies in the Philippine Stock Market Exchange (PSE). These companies have been running in the Philippines for a while, with immense success. Therefore, your rewards are higher with medium to minimal risks if you choose to invest in them.
Conclusion:
Always do your research and due diligence. Do not listen to people on Facebook or people on YouTube when buying certain stocks. Also, a word of caution is that the stock market is one of the riskiest investment forms. That is why in Finance, asset classes with higher risks tend to give higher rates of returns.