Stock market investing for beginners

(Can you handle the wild ride in equities? Photo from AFP)

Good investment advisors will never forget to tell you that potential gains in the stock market are interminably intertwined with potential losses. That is what TraderPinoy was saying in his comment here. Before considering the stock market, ask your delicate stomach if it can handle the wild ride so common in equities. You will notice this warning is NOT in fine print, so don’t allow your eyes to zoom out.

Take your time… there’s no hurry.

If it can stomach the risks, here’s an excerpt from an article from INQUIRER.net that seeks to help beginners get their feet wet in the market. You can read the entire article here.

Question: I have been working for the past five years and have been saving money in the bank. I now want to move some of my savings to other investments. They say investing in the stock market is good, and that this is a good time to buy. But I don’t know how this works. However, the thought of owning company stocks excites me. Please explain how the stock market works and how one should invest in it.—BernadetteAnswer: Many people find it exciting to invest in the stock market. Think about it — the concept of owning a portion of the fast-food outlet you go to, the airline you patronize, and the bank you have an account with and so forth makes you feel that you’re on the right track when it comes to finances. You “own” something big and that feels good.

And that’s exactly what owning shares of stock is — owning a portion of a company. You can be a stockholder by joining a corporation that’s being put up, in that case, you will also be an incorporator, or by buying shares of stock of existing corporations either privately, through a pooled fund, or via the stock market. A stockholder is also called a shareholder.

If you buy shares of stock yourself (via the stock market or by directly buying from other shareholders or by being one of the incorporators), you will be given a stock certificate saying how many shares of stock you hold in your name. Depending on the kind of stock you hold, you may be given voting rights whereby you may vote for the company officers during stockholders’ meetings, or preferred rights, where you will be given preference in decisions affecting stockholders’ holdings.

The nature of stocks
Because stocks are traded every day, their prices change a lot. The price of one share of stock at 9 a.m. when the trading day opens at the stock market may be different from its price at 12 noon. Think of the stock market as a bazaar where sellers offer goods at a certain price and buyers offer to buy them at a different price.

The stock market is very volatile. It reacts to market forces and to the political and economic climate. Thus when there is perceived political instability, the prices of stock more often than not goes down. This is because nervous stockholders dump or sell their stocks in the market so they can take their money somewhere they perceive to be safer.

In the same vein, when investors get wind of bad news about a certain corporation whose shares of stock are traded in the stock market, some of them may sell off their holdings driving the price of stock down.

On the other hand, when investors hear of something good happening in the economy or the government or in the company itself, they will buy more stocks, driving the price of stocks up. This is the law of demand and supply at work.

Since the stock prices fluctuate widely, stock market investing is recommended only for:
1. Brave hearts who are aggressive and won’t mind taking high risks for the chance to earn high returns
2. People who would like to invest in the long term, as doing so would let them ride out the market fluctuations and realize a gain in the long run

Getting into stock market investing
If you decide to invest in the stock market, there are two ways to do it:

1. Choose a licensed stockbroker. This broker will handle your “orders” and buy and sell stocks for you. You may also ask your broker for advice as brokerages employ stock market analysts who study the markets. You may choose to deal with a licensed broker who does the transactions by phone with you, or with an online broker you contact.
2. Join a mutual fund or unit investment trust fund (UITF) investing in stocks or equities. These pooled funds gather the small investments of several people then invest the money in a mix of stocks that fund managers think will do well.

Take note that investing in the stock market comes with additional fees: broker’s commission, fund fee, and documentary stamps tax.

As to how much money to put in, you may want to start with the minimum investment required first since you are still a beginning investor. Some mutual funds and UITFs accept investments for as low as P5,000 or P10,000. If you will directly invest with a broker, you may be able to put in an amount as low as P3,000 depending on the minimum board lot or the minimum number of stocks one can hold.

Although you may realize high gains by investing in a specific stock, your investment may be safer if you invest in a pooled fund. This is because your holdings will be diversified—the fund will invest in a number of stocks, not just that of one company. By doing so, investors may be better shielded from greater loss should one company stock go down; the other stocks may compensate with gains.

About IPOs
When companies want to offer their stocks in the stock market for the first time, they do an “initial public offering” (IPO). The public is given the chance to buy shares of stock at a predetermined price before the stocks are put on the stock market.

A lot of investors look out for IPOs expecting to make a quick profit. In the past, prices of IPOs go up on the day the stocks were listed in the stock market.

Read the business page to see what companies will be having IPOs soon.

Other tips
You may potentially gain a lot in the stock market, but you may also lose a lot. Go into it only after determining if you are comfortable with taking high risks in your investment.

Hold your investment in the long term to maximize the possibility of having gains. If you trade often to go after short-term gains, there’s a risk you may lose out on bigger gains offered later, such as when the company gives out high dividends or stock options, or its stock price rockets up. Returns from short-term gains should be enough to compensate for the higher fees associated with such trading.

Don’t put all your savings in stocks. Diversify and have a good mix of safe and risky investments to have an overall better yield.

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