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What are Stocks?

A stock is a share of ownership in a company.

When you invest in a stock you become part-owner of that company. Owning a portion of a company means you are entitled to a small portion of the assets and earnings of that company. The Philippine Stock Exchange lists the companies we can own in the Philippine stock market.

 

Why Invest in Stocks?

Each person has a set of financial goals - to make a business, save for tuition of children, retirement, etc. With their goals in mind, people look for the best financial plan to achieve their needs. Historically, stocks have the biggest potential returns in the long run compared to other investments plans.

Stocks can also protect you from inflation, the factor that raises the price of goods and services, in effect, reduces the purchasing power each unit of currency can buy.
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How to Make Money in Stocks?

There are two ways to make money in stocks: capital appreciation and dividends.

As mentioned, buying a stock is buying a piece of a company. Over time, the value of that ownership will rise and fall according to the success of the business. The better the business does, the more your ownership will be worth. The difference of your initial stock’s value to the current stock value is capital appreciation.

A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors to give to the shareholders. It can be in the form of cash payments or shares. Once you’ve received your cash dividend you may choose to withdraw it or buy more stocks.

When is the best time to enter the Stock Market?

There are two views on when to enter the stock market. The first view says that the best time to get in the market is when the economy is growing and companies are profiting.  This is what people call “timing” the market. But not everyone can sit, watch and wait for the right time to enter the market. That’s why the second view says anytime is the good time to enter the stock market since it provides better returns of investment in the long run. If you start early and invest regularly your capital should weather out the ups and downs of the market.

Two Important Techniques

Here are two techniques you might want to take note of as you begin to learn investing in stocks.

Regularly Invest

Investing is not a one-time deal. It is a regular and continuous process where you add value to your investments. Invest in stocks regularly such as yearly or even monthly.

Let’s say you want to invest P10,000 and add another P10,000 every succeeding year with an annual growth of 10%. Depending on how early you begin, you can invest as much as P5Million.
Invest P10,000 at the age of 20 30 40 50
Invest in how many years 40 30 20 10
Total investment by 60 5M 2M 640K 185K
No. of years investing P2,000/month 1 2 3 4
Total Savings 24K 48K 72K 96K
Total investment 27K 56K 87K 121K
You can even place aside a portion of your salary every month in your account where it can both work as a savings and investment. Let us say you want to save P2,000 per month and invest it on stocks. In 4 years with diligent saving, you can invest as much as P121,000.

Diversification

To diversify means to spread your investments and not to place everything in one stock. As they say, “do not put everything in one basket.” Choose stocks in different industries or sectors to spread the risk of your finances.

 

Now that you have an idea of what stocks are, gain more knowledge and experience.