Money 101  >  Explainers

How the stock market works

POSTED ON October 07, 2019

The stock market is where people, companies, and institutions buy and sell stocks among themselves with the help of their stock brokers or stock brokerage firms.

In a physical market, buyers and sellers deal directly with each other, haggling and negotiating prices to make deals. In the stock market, however, brokers act as the go-betweens for buyers and sellers. Even presidents, owners, or CEOs of listed corporation can’t simply give out shares of stocks directly to employees, relatives, or friends. The transaction would have to go through a broker.

In the Philippines, there’s only one stock market: the Philippine Stock Exchange (PSE). There, Filipinos can choose from among 320++ publicly-listed corporations (as of Oct. 2019).

Investing in Stocks

Deposit instruments grow money by way of interest earnings. But because it only averages 0.25% per annum (before tax) it is not wise to keep all your money in savings accounts for an extended amount of time.

Bonds grow money through capital appreciation and coupon payments. Local bonds give average returns of between 3% to 8%, depending on the tenor.

Of course, when it comes to an investment instrument’s time horizon, the longer an investor lends his money, the higher the investment instrument should pay him back.

Now, what about stocks?

Because stocks represent ownership in a publicly-listed corporation, the investment does not just grow one way, especially if the investor was able to buy shares of a fundamentally-sound company.

Money grows in stocks by way of capital appreciation and by way of dividends.

Capital appreciation is when you buy something low, and eventually sell it at a higher price and make money.  (This is the general goal of investing — to make your money’s value be greater than its initial cost).

Dividends, on the other hand, is when the company gives you a share of its profits.

These two ways to earn make stock market investing attractive. The trick here is to be able to spot stocks with the potential to give you both capital appreciation and dividends.

The PSEi

From among the 320++ listed stocks, the PSE came up with a collection of the Philippines’ most stable, heavily-traded, profitable, consistent dividend-paying stocks. These are collectively referred to as the Philippine Stock Exchange Index (PSEi). They also go by the names ‘Index Stocks’ or ‘Blue Chip Stocks’.

The PSEi is a basket of 30 stocks, whose collective performance generally indicates the overall business, political, and economic atmosphere in the Philippines.

The stocks in the PSEi are reviewed, assessed and updated at least twice a year. This ‘rebalancing’ may include addition or deletion of stocks, or could just be a matter of increasing or decreasing weights in the basket. This depends on the historical performance and outlook of the companies, the industry they belong to, and the economy in general.

These Blue Chip Stocks generally have these things in common:

They are historically proven to weather economic downturns. Regardless of whether the economy is doing well or not, people still patronize the products and services of these stocks. These are companies that can also withstand ‘emotional downturns’ – that whether Filipinos are happy, or sad, their products and services are still on top of their list.

They have the lion’s share in their respective sectors. They could be one of the biggest, if not the biggest in their industries.

They have good brand recall/ demand. They may no longer have to hire celebrity endorsers to get market share; this is particularly true for those enjoying market monopoly – or those companies with little to no competition in their respective sectors.

Most importantly, they regularly pay dividends. These stocks are “Blue Chips” not because of popularity but because they are performing well, both as a company and in the stock market. It’s a virtuous cycle where consumers buy their products and services, and this helps to make the company profitable. Strong company performance makes their stocks attractive to investors, who buy shares. When more investors buy their shares, the price-per-share of the company increases. Investors then eventually get paid back either through capital appreciation or through dividends.

Investing in Stocks Online

People tend to think that — to start investing in stocks — you need a huge amount of money. The truth is, you could actually start investing by opening an online trading account with as little as Php 2,500.

There are 3 reasons why investing in stocks online is a good way to get started.

  1. Convenience. Investing online allows you to act as your own fund manager. This means you can put in orders or sell your stocks when you want. (Of course, this is subject to the stock market’s trading hours). Online trading platforms can also allow you to easily transfer money from your bank account to your trading account. So, you don’t need to physically withdraw your cash and deposit it before you can begin to trade.   
  2. Access to information. Online trading services usually provide you with research reports, stock picks, and forecasts that you can access as part of the service. These reports are also typically free. You can then use this information to act as your own fund manager.
  3. No transaction fees. Some online trading platforms also don’t charge you transaction fees since you’re doing the transactions on your own.

 

Andoy Beltran is a stock broker and entrepreneur. He heads Business Development and Market Education for First Metro Securities. Andoy is a self-professed "soldier of love," who believes that "Your money will not invest itself. Do it."