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Monday, November 20, 2006

Investing in the Stock Market

Having had a short stint as a financial analyst for a stock broker, some people still seek my advice about investment options, free of charge. It’s amazing how Filipinos know so little about the equities market. I get the same queries each time so here are some basic tips I believe would be helpful for any greenhorn stock market investor:

DO’s

1. Visit the Philippine Stock Exchange website (www.pse.org.ph). Read the primer and the rules about investing. Better yet, register and choose the stocks you initially want to keep track of. Eventually, you’ll be checking this site from time to time to update yourself of your stocks’ performance.

2. Choose a broker. No, I can’t choose for you. The website contains a list of accredited brokers and their contact information. Don’t ask me to invest for you, hello, I’m not a broker. Give them a call, or better yet, acquaint yourself with your broker’s requirements by visiting their website, before opening an account with them. They usually require a minimum amount to be invested. This is similar to opening a savings account in any bank.

3. Be sure to check that your broker has a competent research staff. Research Analysts (I used to be one) get paid by tracking down information and analyzing these for you to make sound investment decisions. Ask for research materials, always. Take advantage of this service.

4. Start reading economic and business news items. These factors determine the direction and movement of stock prices. I know, I know. How can inflation and the country’s Gross National Product (GNP) be possibly more interesting than Pinoy Dream Academy, you ask? It isn’t. But will you earn any money from parking your ass in front of the TV set watching Rosita strut her stuff nation-wide?

DON’T’s

1. Do not expect to get rich in a week. People, this is not a casino. There is an ocean of difference between investing and speculating. An investor puts his money wisely in stocks with values that are expected to rise over time. A speculator gambles his money on stocks which has little or no value, very much like a spin-a-win.

2. Do not be greedy. If your stock starts to climb, at some point it will have to go down. This is because investors always cash in, or take profits on the gains made by the share price movement. Thus if share prices rose 10%, 15% or even 25%, that’s a good time to take profits and treat yourself to some Burger Machine.

So you ask, so what’s the whole idea behind investing in the stock market?

Source of Funding

You see, companies get their funds from two sources: equity (meaning owners’ money) and debt. Large companies, in particular, which have ambitious expansion plans, cannot finance their expansion projects without funding, yes? So if internally generated funds are not enough to finance the project, companies resort to fund-raising activities.

Debt and Equity

So they borrow money from banks or issue notes/ bonds to big-time creditors. But another popular option is for companies (only those listed in the stock exchange, however) to expand their equity base by allowing the public to invest into their company. Essentially, when you put your money in some company’s stock, you become a part-owner, and you become entitled to dividends, or share of the profits.

Trading Game

This is where the stock market plays an integral part: you buy into the company (i.e. acquire shares) via the trading system enforced at the stock market. The good thing is, you do not have to get stuck should you feel that at some point, you want to take out your investment somewhere. In the stock market, you can easily sell it to someone else, especially if you can sell it higher than the price you bought it. It’s what we call “capital gains” and is the main driving force why stock markets exist at all.

So which stocks should we be interested?

Invest on Value

Remember, VALUE is everything. Look, just like any commodity, say a piece of furniture, a stock has its value. The piece of chair can be valued highly, i.e. expensive, because of the quality of the wood, its workmanship and finish. Same is true for stocks. High-quality stocks are those with strong potential for earnings to rise. Thus, these are valued highly, more actively traded and the potential for capital gains is assured.

In other words, earnings/income/profits are always the basis for valuing the stock.

Putting My Foot Where My Mouth Is

Enough with the lecture, here’s an example. I bought SM Investments about a year ago (hi Che!) because of the solid portfolio, which included heavy weights like San Miguel, Banco de Oro, SM Malls, among others which were all expanding aggressively. In other words, the potential for earnings to rise over time was clear as day, and the IPO price still left room for an upside.

I bought it at an IPO (initial public offering) price of PhP250/share. Sold it at PhP312.50 for a 25% gain. It took me quite some time to recover it because of the uneasy political situation driving away investors in the market, but 25% is still better than had I parked my money in say, a savings account at any bank that pays you a really unbelievable usurious rate of 1% (not including taxes!) per year! You see, with inflation hovering between 4-6% per year, your money actually lost 3-5% in real terms, while saving it in the bank.

C’mmon now, people. If you’re tired of stalking and begging prospective clients for “networking” or multi-level marketing schemes that dazzle and excite you with promises of instant riches, the stock market is a good alternative.

Good Time to Invest

With a value turnover of about PhP2bn-PhP3bn daily, foreigners are definitely back (they’re the ones that move the market), a sure sign that the market is filled with investors, rather than unscrupulous local punters and speculators. This is mainly due to improving economic fundamentals: strong foreign exchange thanks to hefty remittance inflows from OFWs eases pressure on interest rates, driving costs of borrowing down and providing boost to business. And with political tensions simmering down, for the moment, everybody can concentrate on making some money.

And should the index hit the 3,000 mark, I think we will be back in the booming days of the mid-90’s, at the height of the stock market. In other words, you won’t have to wait that long for you to recover and make some gains on your investment.

Happy Investing!

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