Being an Overseas Filipino worker, you might have asked yourself in what ways you can have an additional income without necessarily having to exert physical effort and allot an ample amount of your time. And rest assuredly, the best and the most convenient way is through the stock market. Why? You don’t have to exhaust yourself further just so you could add some more to the money you remit to your family back home. All you need is a basic knowledge of how stock market works.
Now if you are an OFW with less knowledge about how stock market works, but wants to invest in the Philippine stock market, here is a complete guide, as a beginner, of the essential things you need to know about how the stock market works.
How You Make Money through the Stock Market?
- Making money through stocks starts when you buy an ownership from a real operating business.
- When you buy a share of stock, you are also buying a piece of the company. Basically, what happens is, company owners approach an investment bank which would be responsible for issuing or selling stocks to the public in an Initial Public Offering (IPO). The owners, then, would price the stock so that future investors can earn a percentage of their investment plus whatever growth their stock generates. For you to have a better overview of how you make money through the Stock Market, here is a hypothetical scenario when investing in the Philippine stock market.
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Take for instance, Jollibee Foods Corporation (JFC), a fictional business who has sales of ₱10 million and a net income of ₱1 million. Now, what happens is that this corporation decides to sell their stocks for ₱100 per share since that seems affordable for interested buyers. Given that it’s ₱100 per share, then they are going to cut the company into 110,000 “pieces” or shares of stock (110,000 shares x ₱100 = 11,000,000). This also means that each “piece” or share of stock is entitled to ₱9.09 of the profit (₱1,000,000 profit ÷ 110,000 shares = ₱9.09).
This figure, ₱9.09, is what you call Basic EPS (Earnings Per Share.) In other words, when you purchase a share of Jollibee Foods Corporation, you are purchasing the right to your pro-rata profits.
Now, assuming that you decide to purchase 500 shares for ₱50,000.00, you would be purchasing ₱4,545 in annual profit plus whatever future growth (or losses) Jollibee has generated.
What You Need to Know as a Beginner in the Stock Market
1. How much can I earn from stocks?
How much you earn from stocks will gravely depend on how the board of directors and the management allocate your capital. Actually, what makes the situation indefinite is that you don’t see that ₱9.09 that belongs to you. Rather, the management have options available to them. And their decision is that which will determine the success of your holdings. These options are:
- The management sends you a cash dividend, either some portion or the entirety of your profit. This is one way for them to “return capital to shareholders.” You also have options on how you plan to use it. You can either use the money to purchase more shares or you spend it any way you wanted to.
- The management repurchases shares on the open market and then destroy them. Long term wise, this can make you a very, very rich in the long-run. Explaining this requires a lengthy discussion. If you want a thorough explanation, you can refer to some books such as “Stock Buy Backs: The Golden Egg of Shareholder Value.”
- For the future growth of the company, the management reinvests the funds by hiring more employees, building stores, increasing advertising, or any other capital expenditures that are presumed to increase profits.
- The management uses the money to build up liquid assets, or, if applicable, reduce debts, so as to strengthen the balance sheet.
As a shareholder or owner, the best option for you depends entirely on the rate of return the management can earn when they reinvest your money.
2. From what is my wealth primarily built from?
With regard to how much money you make, you should know that your wealth is built primarily from:
- An increase in share price. An increase in share price is the result of picking one, or a combination of two or more of the four available management options reiterated above. Over the long term, an increase in profit can be a result of share repurchases or business expansion, as these make each share represent greater ownership in the business.
- Dividends. Dividend is the sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves). This is what is being referred to earlier in the example mentioned previously. These dividends can be paid out to you in cash, in the form of additional shares reinvested on your behalf, or via a direct deposit into your brokerage account, checking account, or savings account.
3. What are the investment types I can choose from?
- Equity index funds or exchange-traded funds
These funds enable you to buy small pieces of many different stocks in a single transaction. These funds you can put together so as to form a diversified portfolio. By investing, you also get to own a small pieces of those companies.
- Individual stocks
This is applicable if you are after a certain company.
4. When can I get the money I earned from the Philippine stock market?
In instances, such as market bubbles, you can make a profit by selling your stocks to someone more than how much the company prices it. This is one way for you to earn in the short run. Now, in instances like this, you can get the money informally depending on your agreed date with the buyer. However, in the long run, as implicitly stated earlier, the investor’s returns are dependent on the increase in share price as well as the dividends that are generated by the operations of the businesses you invested in.
5. How much money do I need so that I can start investing?
Perhaps, even before, you are already interested to learn about the stock market. However, you are intimidated by it or are apprehensive about it due to the cost of investment. But no worries, you don’t need to have hundreds of thousands or millions of pesos just so you can start.
Actually, how much money you need depends on only two things:
- Company price per share
- Number of shares you are willing to buy
Just take another instance, Jollibee Foods Corporation, the actual, tangible one. As of July 28, 2017, the price per share is ₱220. If this is something you think you can afford, then go ahead and try to purchase. However, stock markets do not allow you to buy a single share, as every company sells their share at multiple called board lot. Often times, this means 100 shares. However, in the case of Jollibee, the minimum share you can buy is 10. Therefore, 220 x 10 = ₱2,200 is the minimum amount you need in order to start investing in Jollibee.
Now if you already have the money, the next thing that you need to do is to find yourself a stock broker, who is “a professional individual, usually associated with a brokerage firm or broker-dealer, who buys and sells stocks and other securities for both retail and institutional clients, through a stock exchange or over the counter, in return for a fee or commission” .
Fortunately, in this information age, you can transact on almost everything online. So, even if you are an OFW who is there abroad, you can transact with online brokers in the Philippine Stock Exchange who would allow you to open an account with them for as low as ₱5,000. Given this little amount of money, you can use this to start participating in the Philippine stock exchange. But if you have more budget, then you can add some more.
In general, investing in the stock market is not as intimidating as it seems. Just take note that you learn the basic knowledge you need, such as knowing the best stock option that would suit the kind of investor that you are. Are you a conservative or a risky investor? There are online tests that can help you determine these things.
Be that as it may, as a beginner in the Philippine Stock exchange who’s reading all these, I’m sure there are still some things that we might have not discussed or have discussed should have elaborated further. This is understandable as the basics of investing cannot be taught in less than 2,000 words. Now, if you want us to clarify anything or if you have any more questions, feel free to leave a message below.
6. Basic terminologies
- Board lot
- – standardized number of shares defined by a stock exchange as a trading unit
- – a regulated professional individual, usually associated with a brokerage firm or
broker-dealer, who buys and sells stocks and other securities for both retail and
institutional clients, through a stock exchange or over the counter, in return for a
fee or commission
- – a sum of money paid regularly (typically quarterly) by a company to its out of its profits (or reserves).
- – generated by assets held for longer than six months.
- – the term used to describe a proportionate allocation. It is a method of assigning an amount to a fraction according to its share of the whole.
- – generated by assets held for less than six months
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