A Complete Idiot's Guide to the Stock Market

Investing in the Philippine Stock Market has become more prevalent nowadays, thanks to those few and exceptional individuals who keep on spreading financial literacy all throughout the country.

The stock market is now being actively thrown into discussions of many Filipinos when it comes to managing and growing their own finances.

I was once a complete idiot on the stock market myself. Even when I was already in college, I'd take pride of my self-formulated knowledge regarding the stock market: it's one big market that sells all kinds of stuffs, from A to Z! Almost nothing is wrong with that, really. Except that I'm thinking of it as the market I know - literally!

So there I was, a graduating student of a Bachelor degree, taught to solve complex computer algorithms...ignorant of the terror lies about the real world I'd soon be facing. I was dumb. I was an idiot. Why shouldn't I be?

No one ever taught me.

Today, I now invest in the Stock Market. I hope you will too! Why? Because investing in paper assets such as the stock market is one of the many vehicles that we can ride to our own path to success and wealth. Don't miss it! And may you soon enjoy the ride...

So, what's the “Stock Market”?

I'm sure you've heard it -- a lot. Many times, the stock market is in the news, in the business section of a magazine or newspaper, and even in the Internet. But like most Filipinos, we don't burn much calories trying to figure out what the heck is this thing called “Stock Market”. And mostly, we are taught to believe that the Stock Market is only for the “damn few rich”.

 

Simply put, the stock market is a place where portions of publicly listed companies are being traded. In the Philippines, the physical location of the trading actually takes place at Ayala Tower 1 in Ayala Avenue, Makati City.

 

Let me tell you what and how the stock market works in a simple narrative:
 

Jeff wanted to open a softdrinks delivery business. For this venture, he would need 10,000 pesos as initial capital. But he only has 9,000 on his savings account. So he asks his friend Kent if he could lend him his 1,000 and in return, he will own 10% of Jeff's business. After a month, the business did well and it earned 1,000 pesos in its opening month!

Since Kent owns 10% of the business, Jeff gave him 100 pesos (which is 10% of what the store earned). This is called dividend.

But that 's not all.

After a year, the business is thriving well. From softdrinks, it now sells beers and all kinds of popular sodas in the market. From 10,000 worth of initial capital, the business is now worth 20,000 pesos!

And so Jeff's other friends, Mark and Alex were now interested in joining the business as well. They learned that Kent actually owns 10% of it. So they asked Kent if one of them can buy his shares.

If Kent decided to sell it, he would now earn (10% of 20,000) 2,000 pesos! This is called Capital Appreciation based on market value. But then, Kent has a problem. There were 2 of his friends both asking to have his 10% share of the business.

So Kent simply decided to have them bid: he will award it to whoever among Mark and Alex is willing to pay more for the 10% share that is now worth 2,000 pesos.

Of course, Kent decided to sell the shares to Mark, who countered Alex's offer to pay 2,500 with 3,000. This is called Capital Appreciation based on perceived value (which is based on the demand from his two friends).

This is how simple the stock market works.

Now that you have been acquainted with the Stock Market in its simplest sense, the following nuggets will make more sense to you..

Do I need to go (personally) to Makati to buy or sell stocks?

No. You will do everything online - with the help from an online broker which I will tell you more about later.

 

What do you mean by “portions of listed companies”?

A company who wish to be listed or included in the Stock Market should have at least 12% of its total value available to the public. Meaning, if a company's total worth is 1 Million pesos, 120,000 should be owned by the public. This portion is what you call stock or share.

 

And who is this “public”?

This “public” is actually us - you and I included - normal people that do not even know who runs that company. So yes, even you can have a hand on these huge companies, because you are a member of the “public”.

 

But why would companies go public?

Let's go back to Jeff's softdrinks business above. If he wanted to open up another branch but don't have enough money, what's the best thing for him to do?

 

He has two options:

1. borrow interest-bearing money from the bank or
2. borrow money from his friends.

The same is true for the listed companies. Instead of borrowing money from the bank, they go public. So people would buy shares from them in return of their cash. Hence, the company will be able to collect funds from the public, which they can use to improve their business.

 

What do people get when they buy shares?

When you buy a share of a company, that basically means you own a small portion of that company. If the company grows, so as the value of your shares. And this is where you earn money in the long term.

 

How do I make money from buying stocks?

The logic is simple: Buy Low, Sell High. It's like buying an item with a lower price, and then selling it to others with a value higher that what you initially paid for. The good thing about investing in the stock market is that the company is more valued over time, unlike cellphones and cars, which decreases value over time. Stocks are like gold, the longer you hold it, the better its value is appreciated. This is called Capital Appreciation. Of course, the bigger the company you choose the better for you.

 

When you buy a share of a company, the price or value will change. Therefore, buying 100 shares for 4 pesos each will have a value of 6, 7, 8 or who knows in the long run? Eventually, you will sell these shares when you've profited already. That is how you will earn.

 

Is there a guarantee that I will earn?

There is no definite guarantee. There would be times that you might buy a price of 4, only to see its price drop in a matter of minutes, hours or days! But that's okay. Because it will eventually go up...even higher!

Your investment in the stock market can be compared to a hiker: 

He starts in the foot of the mountain, just like your investment. Eventually, he will start to climb the mountain and expects to struggle at times on his way up, including slippery rocks which may even cause him to fall!

But that's okay, since his goal is to reach the top of the mountain! So he'll just rest, gather some more strength and start climbing again.

During those falls, hikers have ropes that would save their lives in case such accidents happen. These ropes can be compared to the foundation of a company. Bigger companies have stronger ropes compared to weaker ropes the little ones have.

The difference of the hiker from the company you invested in is that, once the hiker reached the top of the mountain, his journey comes to halt. Not with the Stock Market. Because once it reached its peak, it will try to reach for new heights.

Sky is the limit!

Is this legal? Is this not some sort of a scam?

Of course it is legal. The stock market is being regulated by the Philippine Stocks Exchange (PSE). They set the rules and regulations on listing, trading, suspending and all activities involved in the process.

 

How regularly do they trade?

The stock market trades from 9:30 AM to 3:30 PM, Mondays thru Fridays, except during Holidays. Below is the complete daily schedule of the market:

But they say that the stock market is very risky!

Yes, that is very true. But as many mentors would say, it is trading that is dangerous and not investing. Trading means you buy and sell within the day or few days! Investing, on the other hand, is buying stocks and holding it for a longer period. Trading means you speculate on a particular stock if it will go up or down, and speculating, without due knowledge, can be simply coined as gambling!

 

Would anyone know if a stock will go Up or Down?

No. There is no imaginable way for anyone - not even geeks and billionaires combined (Tony Starks, anyone?) -- to determine if a stock will go Up or Down...nor will there ever be!

 

This is mainly because of the fact that there are thousands of people that are holding the stocks of a particular company! Say, how do you predict what's on the mind of these people? Would you know when exactly will they sell or buy another share? No! That's why it's impossible for anyone, including the company itself, to know the exact numbers of what will be the lowest and highest price/share for the day or in the future. 

 

What most investors do, however, is to “predict” the market mood or what is commonly known as “timing the market”. Timing the market is simply predicting when is the best time to buy and sell your stocks. However, just like any other “predictions”, this too can either be a make or break case. These predictions are just but “estimates” based on certain factors such as past performances (which is NOT a guarantee of any future performance), volume trades, speculations, news and rumors. Yeah, it's like showbiz at times.

  

Should I care about all these rumors and news?

Yes. Why? Since there is no way for us to predict the market, news (including rumors) will play a big role in the decisions of all investors.

 

All news and rumors about the company you invested will affect the price movement of its stocks. Good news such as acquisition, dividend declaration and earnings disclosures will have a positive impact on the decisions of investors because this will trigger their confidence on that company. Therefore, more investors will be persuaded to buy shares from this company. News such as a company being sued or facing legal battles or damage to one of its properties will have a negative impact on investors because they might lose confidence to the company. Eventually, if a company loses the trust of its stock holders, the shares will be sold, which will cause the price of the company's stocks to go down.

Let's make it a little graphic for you:

 

One day, after reading this great article (Says who? Me!), Jay decided to invest in the stock market.

He bought 100 shares of ABC Mining Corp. at 9/share. Excluding online broker's fee and taxes (more on this later), he paid a total of P900. After 3 months, the price/share for ABC Mining Corp.'s stocks were doing good. It now trades at 14/share. Hence, the total value of Jay's shares is now worth (14*100) 1,400. So Jay will already earn (1400-900) P500 if he decides to sell his shares.

But one day, news broke: “1 mining facility of ABC Mining Corp. in Benguet was closed down due to environmental issues...”

This news will surely have an immediate impact on many investors, including Jay.

From 14/share, the price dove down to 13.20/share on the first day when the news went public.

Should Jay sell his stocks?

Should he hold on?

We wouldn't know.

But since Jay has already earned on his investment, it is expected of him to sell his shares, rather than stick to it because of his fear that it might go as low as to 9/share again, or worse - lower than 9! If that happens, Jay would have a negative portfolio. And this too, would be a great time for other investors to buy shares from ABC Mining Corp., since they will be able to buy shares with relatively lower price! So if Jay sells, others will buy.

Someone sells, someone buys.

This is the reason why the market goes Up...and Down. So as an investor, it's your responsibility to also check any news, good or bad, about the company you invested your money in. It's all there - in the TV, internet and business section of a local newspaper. Please do yourself and your country a favor: Do not waste too much time on that Entertainment section!

Should I withdraw all my hard-earned money from the bank and buy stocks?

No! You should always have an emergency fund. The purpose of this is in case of unwanted expenses such as emergency, you will not be forced to withdraw your money from the Stock Market. This is critical because what if by the time you needed your money, the market is down? If you do that, you will lose a substantial amount and might give you butterflies flying around your stomach!

What would I need if I were to start investing in the market?

There are at least two important things you need to get you started: a broker and of course, money. A broker is either a person or an institution that will represent both sides: you and the company you wish to buy shares from.

 

Personally, I do not know a broker (person) and I am in no position to neither encourage nor discourage you to have one. But I'm pretty sure that requiring one means you have a lot of money to use for buying stocks. In that case, I suppose you don't have that much since you've gotten this far to my article. Ha-ha! So, what I'll introduce to you are the institutional ones or what we simply call online brokers.

 

Currently, there are a lot of certified online brokers in the Philippines, but I'll limit the list to 3 for you. 

• First Metro (Metrobank)
• BPI Trade (BPI)
• COL Financial (Citisec Online)

Both First Metro and BPI Trade are managed by the bank they represent, while COL Financial is a plain online broker. The good thing about First Metro and BPI Trade is their convenience, especially if you already have an existing account (i.e. regular savings account) with them. As for BPI Trade, there is a minimum daily balance requirement of 500 pesos, which earns interest just like a normal savings does.

For COL Financial, there is none. But the minimum initial investment for COL Financial is 5,000 pesos. As for BPI Trade, you can start investing for as low as 1,500 pesos provided that you maintain 500 as your ADB (Average Daily Balance). But what's great about COL Financial is their specialized service since they focus more on the trading. They even have a feature where they actually suggest good stocks to pick for their customers.

But all these online brokers have broker's fee. Meaning, you will have to pay them for every BUY and SELL transactions you do. The minimum fee (both for buying and selling) is 20 pesos. There is also tax whenever you sell a stock. Below is the breakdown of BUYING and SELLING fee, regardless of the broker you choose.

BUY Transaction
Commission: 0.25% on the gross value (minimum Php20.00)
Value Added Tax: 12% is levied on the commission charge
PSE Fee: Php0.00012 for every Php1.00 gross value traded
SCCP Fee: Php0.00011 for every Php1.00 gross value traded

SELL Transaction
Commission: 0.25% on the gross value (minimum Php20.00)
Value Added Tax: 12% is levied on the commission charge
PSE Fee: Php0.00012 for every Php1.00 gross value traded
SCCP Fee: Php0.00011 for every Php1.00 gross value traded
Sales Tax: 0.50% on the gross value

How do I know if it's a good company?
PSE (Philippine Stocks Exchange) has what they call an “index”. This index (PSEi) is a composition of 30 “Blue Chips” -- the country's biggest companies based on net assets that are actively traded (shares are bought and sold constantly in the market). The PSEi is usually considered a “barometer” of the Philippine economy where a rising PSEi typically denotes optimism in the country’s economic performance while a declining PSEi may suggest possible economic contraction.

So what makes these companies “blue chips”?

For companies to qualify in the PSEi, they must meet the following criteria:

 

Free Float — at least 12% of the total net worth of the company is held by public;

Liquidity – must belong to the top 25% by median daily value turnover per month for at least nine out of 12 months; and

Full Market Capitalization — one of the highest-ranked market capitalization, measured by the company’s stock price multiplied by the number of shares being publicly traded

What are these 30 companies, by the way?

As of today, the PSE index is composed of the following 30 companies: 

• AYALA CORPORATION (AC)
• ABOITIZ EQUITY VENTURES, INC. (AEV)
• ALLIANCE GLOBAL GROUP, INC. (AGI)
• AYALA LAND, INC. (ALI)
• ABOITIZ POWER CORP. (AP)
• BDO UNIBANK, INC. (BDO)
• DMCI HOLDINGS, INC. (DMC)
• FIRST GEN CORPORATION (FGEN)
• GLOBE TELECOM, INC. (GLO)
• GT CAPITAL HOLDINGS, INC. (GTCAP)
• INTERNAL CONTAINER TERMINAL SERVICES, INC. (ICT)
• JOLLIBEE FOODS CORPORATION (JFC)
• JG SUMMIT HOLDINGS, INC. (JGS)
• LT GROUP, INC. (LTG)
• METROPOLITAN BANK & TRUST COMPANY (MBT)
• MEGAWORLD CORPORATION (MEG)
• MANILA ELECTRIC COMPANY (MPI)
• METRO PACIFIC INVESTMENTS CORPORATION (MPI)
• PETRON CORPORATION (PCOR)
• PUREGOLD PRICE CLUB, INC. (PGOLD)
• ROBINSONS RETAIL HOLDINGS, INC. (RRHI)
• SEMIRARA MINING AND POWER CORPORATION (SCC)
• SECURITY BANK CORPORATION (SECB)
• SM INVESTMENTS CORPORATION (SM)
• SAN MIGUEL CORPORATION (SMC)
• SM PRIME HOLDINGS, INC. (SMPH)
• PLDT INC. (TEL)
• UNIVERSAL ROBINA CORPORATION (URC)

 

Has it always been like this? I mean, the list doesn't change?

No. The PSE conducts review of the index every six months based on the criteria I mentioned above. Hence, there will be an updated list, but not necessarily a change in the listings since it all depends on the performance of the companies if they maintain their edge among other companies outside the index.

 

What happens to a company if it's included in the index?

If a company outside of the index is included in the list, expect its price per share to go up since it will have a significant impact in the decision of the investors.

 

What about the company going out of the list?

Likewise, the price per share would go down since some investors might lose their confidence on the company.

 

So Ayala Corporation is the biggest in the country?

No, not necessarily. The list, if not obvious, in just in alphabetical order.

 

And how many shares can I buy from one company?

There is a pre-defined number of shares you can buy for each company, depending on their current trading price per share. This is called a board lot. A board lot determines the exact number of shares required to either buy or sell. Meaning, you can buy at least 5 shares from Company A, whereas you need to buy at least 100 shares from Company B. You may use the table below to quickly understand. 

 

 

The size of the lot will depend on the price of the stock. Mathematically, the lot size will be the multiplier of the price. Thus, if a company's trading price is 30/share; its lot size will be 100, based on the table above, which will cost 3,000, since 30x100=3,000. The tick size simply tells you how the price changes from time to time.

Again, each company will have a different lot size since they are being bought and sold at different price per share.
  

I want to know everything first about a company that I want to buy, what should I do?

The price per share, board lot, price movement history for the last 30 days, the company's profile, board of directors and every basic detail you wish to know are all publicly available at the PSE website.

 

A page similar below will be loaded in the PSE website, pls. take time to study the image below. 

   

There you go! Now you'll learn so many things just by looking at the PSE Website, right? Let me further explain each of the parts I labeled. The Search box at the upper-right corner of the site is where you will type the symbol of the company you wish to view.

Now how would you know the Stock Symbol for each company? All listed companies and their corresponding stock symbol is readily available from the PSE Website. But remember our online brokers? They too have an updated list of all listed companies and their corresponding symbols.

It is important to note that a stock symbol does not always need to be a 3-letter acronym like JFC, MBT or BPI. It can sometimes be as long as SMPH or BLOOM. Once you know the stock symbol of the company you're interested at, you just type that in the search box and click the name that appears. It will then load the page particular for the company you chose.

First, you'll notice the Last Trade Price; this is the current price/share of the company you're looking at. You should be aware that this price changes every single minute depending on how many trades are happening as of the moment. You need to refresh this page every time you want to see the latest price/share since it does not refresh automatically. 

You can see the board lot or the lot size I was referring earlier in the Board Lot section in the right side of the page. From here, you can now compute for the estimate of how much will it cost you to buy shares for a company, that is, by multiplying the Last Trade Price to the number of Board Lot. The value you will get will not be the same in the actual cost of buying though, because there would be additional fees such as your broker's fee and tax (see Buy and Sell computation above).

 

The 52 week High (52WH) and 52 week Low (52WL) are important when you're deciding to buy. 52WH tells you the highest price/share ever reached by the company for the current year whereas the 52WL is, of course, the cheapest or lowest value of the price/share within the year. It would be a good practice NOT to buy stocks if the current price/share is near the 52WH so that you're more confident that there is much room to grow.

 

The Free Float Level or Public Float shows you how much (in percentage) of the company's market capitalization is available to the public. The Market Capitalization, displayed just below the Free Float Level, tells you how much capital the company currently has. Market capital can be computed by simply multiplying the Previous Close value and the Outstanding Shares value.

 

The Profile tab is where you'll see the basic details about the company - the type of business it is taking, affiliates (if any), brief history, past and present achievements, future undertakings and plans, company website, contact numbers, board of directors, President of the company and more. Be sure to take a look on this tab if you're entrusting your hard-earned money on a certain company.

 

The performance of the company for the last 30 days in the stock market is best reflected on its previous trades. So you might want to check out the Historical Data tab, where you can see the price/share for the last 30 days. Here, you will see the Highest and Lowest price/share for month, including the Highs and Lows for each trading day. 

In Corporate Disclosures tab, you can view and download (in PDF format) all the company news, clarifications and disclosures about the business such as dividend declaration, merging or acquisition news, additional listings, etc.

What's next?

Now that you have been guided to a brief walk through on the Stock Market, I hope that this writing tickled your curiosity at the very least.

 

If you want to start trading investing in the Stock Market, and have the money to do so, I encourage you to join us - wise people who make up less than 10% of the total Filipino population who invest in the market!

 

Just remember that it does not require too much reading for you to invest in the market. Once you understand the basics, start investing! After all, it's not how much you know, but how much you actually apply. What's the use of knowing the ABCs of the Stock Market when you don't invest? No, I'm not a geek nor a millionaire (at least not yet), and I only know the ABCs, not the entire A-Z of the Stock Market, but I was able to write this article -- because I invest myself. I apply whatever I've learned. I wish you do the same.

To invest or not to invest is now a decision that awaits your approval. And if your next question is “When is the best time to invest in the Stock Market?”, the answer is plain and simple: Now!

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