July 16, 2012
Stock market simplified
Dear Mrs. Colayco,
I really can't understand buying stocks and stock market in general.
Can you please explain what it is and how it works in layman's terms?
Mrs. Colayco replies:
The Stock Market or also called a Stock Exchange is a "market or an exchange" where goods are bought and sold. Another word used for "bought and sold" is "traded." There is no physical handling of the product. There are just many desks, chairs, computers, telephones and other electronic equipment for the "stockbrokers" who do the actual trading for their clients. There is a huge screen that shows everybody exactly what is going on in the trading. Serious traders may have a viewing area, usually like a balcony, to see what is going on and can easily contact their stockbrokers for their orders. Sometimes, a television station may air the actual trading live. Clients can call or email their stockbrokers for their orders.
The products bought and sold are the stocks or shares of companies. The owners or stockholders or shareholders in a company own shares or stocks of the company. Each share or stock is given a "par or nominal value" when the company is set up. The total shares or stock that the owners hold are dependent on the amount that each invested in the company.
Companies that want to make sure that their stocks or shares can be traded have to list their shares or stock, also called securities in the Stock Market. The Stock Market is one important way for companies to raise money for their expansion and operations. Each company wants its securities traded so that interested parties can buy the shares of the company. An increase in the price of the shares is usually an indication of the good value of the company and of generally good economic conditions. The more the trading of shares in the company, the faster owners can sell their shares to get back their investment when they need it. This makes the investment very interesting to investors who want liquidity (easy to sell) unlike other investments like real estate, for example, which is not easy to sell.
Anybody with money can trade in the Stock Market. Some issues you have to seriously consider are:
There are a minimum number of shares that can be traded for each company issue. The range could be 10, 100, 1000 and dependent on the value of each share. Depending on your available money, you might be able to focus only on one or a few companies.
You need to study and pay attention to the market continuously. The movement of prices of shares should be based on how the company is doing and economic conditions. However, those who take a lot of time to analyze the companies and the stock market information usually know developments earlier. By the time the public knows, the prices in the stock market may already consider the new information. In other words, if a friend "whispers" to you a "hot tip", it is probably too late.
It is very risky. The stock market prices can increase very quickly but it could dive down just as fast and definitely, there will be ups and downs. Thus, stock investments should be limited to the better companies that you can hold on to no matter how the market moves.
I believe that only those who are competent and have an investment appetite for risk should invest in stocks directly. Competency requires a lot of learning, both technical and experience. It requires that you study each company you invest in.
We, at Colayco Foundation, prefer to advise most Filipinos to invest in mutual funds. If your personal financial plan depending on your age and goals will allow you to invest in equities, then equity mutual funds are a good option. However, you should choose the better-managed funds. Your diversifying into fixed income and balanced funds is also a good strategy to spread your risks.
Managers of the better mutual funds and UITFs know how to ride with the ups and downs of the market. This is why you can stay invested in a mutual fund or UITF for at least three to five years by just buying shares on a regular basis, whether the market is up or down.
You need not really time your buying and selling like you would if you were buying directly into specific stocks.
You can check out www.pse.ph or better yet, join our seminars to help you. For more details, call (632) 637-3731 or 637-3741 or visit www.colaycofoundation.com.
If you wish to invest smaller amounts through our KsKCoop, check out www.kskcoop.com.
Mary Anne B. Colayco is a happy wife, fulfilled mother of three beautiful ladies, helpful mother-in-law of two handsome gentlemen, doting grandmother of two adorable girls and the diligent President of Colayco Foundation for Education (CFE). For over 40 years, Mabsi, short for MAB-C, was in executive-level finance-related positions, as well as general management positions in Ayala Corporation subsidiaries (then, Pure Foods and Globe Telecom among others) and also served as a Commissioner of the Energy Regulatory Commission.
She joins her husband, author-entrepreneur Francisco J. Colayco in their common advocacy of teaching financial literacy to income-earning Filipinos. Herword.com draws from Mabsis wealth of life experiences in giving advice on personal money management.
If you have any questions about personal finance, e-mail firstname.lastname@example.org.