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Stock Investment A Beginner’s Guide

Stock Investment A Beginner’s Guide

Last Updated on 4 months by DiaryNiGracia

 Stock-Investments-A-Beginners-Guide

What is the Stock Market?

When you purchase stock, also referred to as equity shares, you essentially become a shareholder in the business. Equity, sometimes known as equity interest, denotes ownership. The success or failure of the company, the kind of stock you own, the state of the stock market as a whole, and other factors all affect whether you make money or lose money on a stock.

Mins to Read: 13 minutes

The stock market is where brokers and investors can exchange equities for cash and vice versa. Anyone interested in purchasing shares is welcome to go there and buy everything the shareowner has to offer. Sellers anticipate no further stock declines, while buyers anticipate an increase in stock prices. And if the company does well, expect benefits from that success. That return will generally come in two possible ways:

 

Dividends – Dividends are paid out by corporations to their stockholders, which is a process by which the company’s profits are given to the investors. Either cash or stock could be used. You have the option of taking the dividends in cash or investing them to buy more stock in the company. To make up for the income they no longer derive from their employment, many retiree investors focus on businesses that generate reliable dividend income.

 

Capital gains – Stocks are continuously purchased and sold, changing prices. You can sell your shares at a profit when the price of a stock increases above the price you paid to purchase it. Capital gains are the name given to these profits. This is the buy low, sell high concept. In contrast, you’ve suffered a capital loss if you sell your shares for less than you purchased.

 

“The key to making money in stocks is not to get scared out of them,” a legendary investor Peter Lynch once said. When he took over the Fidelity Magellan Fund, he achieved a compounded annual return of 29.2% between 1977 and 1990. During that period, he turned it into the largest mutual fund in the world.

The stock market is a long-term endeavor. The best action is to maintain your investing position despite market ups and downs and diversify your portfolio.

Here are things you need to know about investing in stocks:

 

How to Start Investing in Stocks?

Choosing the appropriate chance to enter and invest in the stock market generally goes wrong. No one can be exactly sure when the optimal time to start is. And an investment is designed to be a long-term activity. There is no perfect time to start.

 

It takes action to start investing; it’s not simply about thinking. Start right now. Because compound interest can have an impact on investments made now and frequently over time. If you want to invest, getting started and allowing yourself to reach your goals over time is essential.

 

Who can open an account?

Any person or organization at least 18 years old may open an account, including individuals, couples, overseas Filipino workers, businesses, corporations, and foreign nationals. An in-trust-for (ITF) arrangement permits even children to open an account so long as a parent or legal guardian is present.

The process to start investing in stocks

The process of entering the stock market is straightforward.

 

1. Select a stockbroker or trading participant from the directory of stockbrokers.

Your decision on a stockbroker should be based on the kind of service you will need and who will best meet your needs. The many categories of stockbrokers include

  • Traditional – those who use a licensed salesperson to take orders over the phone or in writing.
  • Online – those whose primary method of communication with customers is the Internet

 

2. Create a brokerage account with your preferred stockbroker.

You need to open a brokerage account as the initial step. It is an investment platform used to buy, sell, and hold various financial products, including stocks, bonds, and mutual funds. To access stock market investments, you must have this account.

The following step is to transfer funds from your bank account to your brokerage account to finance trades for the equities you want to purchase. Your risk tolerance, goals, and the amount of money you’re willing to lose potentially will all influence how much money you decide to invest.

How can you set up an account?

You must complete the Customer Account Information Form (CAIF), similar to the procedure for opening a bank account and provide the supporting documentation, including

  • two (2) valid IDs
  • specimen signature card; and
  • proof of billing.

To start investing in stocks, your stockbroker could require you to provide essential paperwork and a down payment in cash

 

3. Place your purchase or sell order with your stockbroker over the phone or online.

Trade durations, fees, and price discrepancies varied between brokers and markets. Due to the high liquidity of stocks, transactions frequently take place swiftly. Your broker will either fill your order from their inventory or route it through a computer trading network once you place it. Your order is matched with a seller, and the exchange is then carried out.

Similar to how you buy stock, you can also sell shares. Place your order by calling your broker, then watch for your investing account to fill the order.

 

4. Keep an eye on and record your investments.

  • Track Your Investments Using Online Tracking Services: Robo Advisors and Brokerages.
  • Track Your Investments with Spreadsheets
  • Track Your Investments Using a Trading Journal.

Although the stock market’s value normally rises over time, keep in mind that there may be short market volatility that could put your money in danger.

The Costs to Invest in Stocks

There are various methods for determining shares/stock prices on a stock exchange. Offers and bids to buy or sell are typically made through an auction process in which both buyers and sellers can participate. A trade is created when the bid and ask match. A stock exchange offers a platform where connecting buyers and sellers of equities can conveniently carry out trading. A beginner would require a stockbroker to gain access to these exchanges.

 

Before engaging in active stock trading on the exchange, an investor must create an account with a broker and provide proper identification, much like a regular savings account. Get ready to make the required minimum investment to open your account. You can see online brokers and their reasonable investments of up to Php 10,000 in the table below.

 

The minimum amount of money needed to invest in the stock market depends on the minimum number of shares to be traded for the stock and the minimum amount required to open a trading account. The minimum number of shares that can be traded will be determined by the prevailing market price of a particular stock. The PSE has a Board Lot table which shows the minimum number of shares that can be bought or sold given a certain price range.

PSE minimum board lot

 

All brokers must, in some capacity, profit from their clients. Typically, your broker will charge a commission each time you trade equities, whether you purchase or sell stocks. If you decide to work with one of the top Philippine online stock brokers, the commission will be at least Php 20 or 0.25 percent of the trading transaction, whichever is higher. On the other hand, if you choose human broker assistance in trading, be prepared to pay more. This charge only applies to trading done online. But the cost can be higher if you seek advice from a registered broker.

 

To visualize the cost of buying a stock here is an example with BDO Securities:

Fees Buying a Stock with BDO Securities

Total Fee to buy PHP 10,000 of stock         PHP 29.00

Net investment after fee                              PHP 10,029.00

 

Fees Selling a Stock with BDO Securities

Minimum commission charge 2

Total Fee plus tax to buy PHP 10,000 of stock        PHP 89.00

Net proceeds                                                   PHP 9,911.00

 

What are the Ways to Invest in the Stock Market?

Through stock investing, gaining financial independence by utilizing the strength of expanding businesses is possible. Even while there may be long-term benefits, getting started in the stock market can be scary for many beginners.

The following are the ways to invest in the stock market:

 

Through Individual Stocks

Individual stocks are only a “do it yourself” option if you have the time and motivation to investigate and continuously assess stocks thoroughly. A brokerage account is required if you choose your stocks or funds. 

 

Advantages

No management fees: There are fewer fees when purchasing individual equities. The annual management fee charged by the fund firm for managing your assets is not required of you. Instead, a fee is charged both when you buy and sell the shares. There aren’t any additional fees for the remainder of the time.

 

High returns: Over the long run, stocks have historically provided one of the greatest returns across several asset classes. The best strategy is typically to invest in equities (stocks) if you want to see your portfolio expand.

 

High liquidity: Most equities traded on a significant exchange can easily be bought and traded. Due to this liquidity, investors have the freedom to quickly and unexpectedly change their stock holdings into cash.

 

Disadvantages

Inadequate Diversification: It is more difficult to achieve diversification with individual equities. You need to own somewhere between 20 and 100 companies, depending on the study you’re looking at, to obtain good diversity. This implies that investing in individual stocks will be riskier unless you hold many equities.

 

Not enough money to diversify: The less money you have, the more difficult it is to diversify. Due to the lack of diversity, you are especially exposing yourself to additional danger when you start investing.

 

Time-consuming: Keeping track of your portfolio takes more time when you own individual equities. Make sure the businesses you have invested in are not experiencing financial difficulties that could result in the loss of your wager. You should also keep an eye on the business and economic trends. Since you manage your portfolio, you should take the time to make sure you don’t have any negative positions.

 

Emotional Rollercoaster: You need to develop the ability to control your emotions when trading specific equities. Exaggerated responses to positive or negative news might lead stock prices to soar or fall abruptly. This may result in higher trading commissions and the locking-in of losses that would have been prevented by keeping an item for a little while longer.

Individual stocks

 

With the help of Human-Experts

To assist you in making investment decisions, you can work with a broker, an investment advisor, or a financial planner. These are the more established stockbrokers who will take the time to learn about your financial and personal life. This option is excellent for people who just have a few minutes per year to worry about investing. Additionally, it’s a wise decision for those with little experience in investing. 

 

They will consider variables like marital status, way of life, personality, risk tolerance, age (time horizon), income, assets, debts, and more. These brokers will learn as much about you as possible to assist you in creating a long-term financial plan. They are for investors who want everything in one package and can help you with your investment needs as well as estate planning, tax advice, retirement planning, budgeting, and any other type of financial advice.

 

Advantages

Offer direction and advice: You receive personal attention from your account representative. You get to know your account representative by name and disclose a lot of information about your finances and financial goals.

 

Access to research: Full-service brokers can grant you access to their investment research department, which can give you in-depth knowledge and analysis of a certain firm.

 

Help you achieve your investing goals: A good representative gets to know you and your investing goals before giving advice and responding to your inquiries about how particular assets and methods can assist you in achieving your wealth-building objectives.

 

Make investing decisions on your behalf: Making investment decisions is a hassle for many people. With your consent, full-service brokers can make choices for your account.

 

Disadvantages

You are their profit generator: Regardless of how nicely they treat you, they are still paid according to their capacity to generate profits for the brokerage firm. For the benefit of the business, they collect commissions and fees from you.

 

Decision-making power is in their hands: Giving your representative decision-making power could be detrimental because delegating your financial decisions to others is never a good idea, especially if they’ll be spending your money. You might not have any recourse if they choose bad investments that cost you money since you permitted them to act on your behalf.

 

Churning: Churning is an activity carried out by some brokers. Purchasing and selling stocks primarily to earn commissions is known as churning. Churning benefits brokers but hurts consumers. Ask for an explanation if there is a lot of activity on your account. Do not commit churning or other suspicious behavior because commissions from full-service brokers can significantly reduce your wealth.

Human Experts

 

With the help of Robo-Advisors

A brokerage known as a robo-advisor is a “do-it-for-me” option that essentially invests your money on your behalf in an index fund portfolio suitable for your age, risk tolerance, and investment objectives. You may set up an investing plan, and then, all you have to do is deposit money. Then, the robo-advisor will take care of the rest. A robo-advisor may choose your assets for you, and many of them will also optimize your tax efficiency and make adjustments automatically over time.

 

Advantages 

Costs are lower: A little portion of that, often between 0.25 and 0.5 percent of the value of your portfolio, is what robo-advisors charge. Additionally, robo-advisors often don’t charge commissions for rebalancing your portfolio or buying or selling assets within your account. Human advisors occasionally do.

 

Automated Rebalancing: Most robo-advisors maintain the appearance of their portfolio by following their objectives and goals on an ongoing basis. Consider, for illustration, the desired asset allocation of 90% equities and 10% bonds. If stocks have a horrible year, your portfolio will conclude the year with 85% stocks and 15% bonds. As a result, your robo-advisor adjusts your portfolio by selling some bonds and buying more equities.

 

Diversification: Robo-advisors don’t stake their entire business on a single company because diversification is one of their guiding principles. Instead, they lessen the risk by dispersing your investments over numerous markets, geographical areas, and asset classes.

 

Accessibility: Only clients with a higher net worth are accepted by human investment advisors. While some robo-advisors have a minimum investment requirement, many do not, making it possible for anybody with a few spare dollars to begin investing. It democratizes investing so everyone can do it without professional expertise or financial resources.

 

Disadvantages

Limited Personalization & Flexibility: Robo-advisors are made for the general public. They don’t base their choices on you but on investing profiles for people. Robo-advisors recommend a plan based on your profile, which you can accept or reject by choosing another. However, you frequently cannot alter the strategy.

 

It cannot Manage Your Emotions: Robo-advisors don’t have emotions, so there is no one to manage your emotions. You must occasionally learn to control your emotions since you are a human. Algorithms are quite competent at investing. But an algorithm can’t communicate with you in the emotional terms that you occasionally need to avoid making poor investment choices.

 

Limited Human Interaction: Some robo-advisors offer combined human and robo-advising services. The algorithm handles the heavy lifting until you need to speak with a human advisor or alter your investments.

Robo Advisor

 

What are the Risks/Factors?

If you want to invest risk-free, the stock market is not for you. Despite the risks inherent in the market, it is still an essential part of the best financial planning. It is enough to understand the most significant investment threats and be prepared to avoid them safely. These three risks aren’t the only ones you’ll encounter, but they are substantial risks to take note of.

Economic Risk/Factor

One of the most apparent risks in investing is that the economy could go down at any moment. For young investors, hiding and riding out these downturns is often the best strategy. If you believe in long-term capital market returns and have liquidity during a crisis, take advantage of temporary price declines to position yourself in solid companies that perform well over the long term. That means buying more stocks you like when the market is going down. Foreign stocks could be a bright spot thanks to globalization as the domestic market falls.

Inflationary Risk/Factor

Inflation is basically everyone’s tax, and if inflation is too high, it can destroy value and trigger a recession. Although inflation can be controlled by giving higher interest rates, it could end up being as bad as the problem. Inflation hits fixed-income investors hardest because it undermines the value of your stream of income.

Any of your assets or income streams denominated in money are potentially vulnerable to inflation risk because they fall in value in direct proportion to the decline in the purchasing power of money. Lending a certain amount to repay later is a classic example of an asset at risk of inflation.

Market Risk/Factor

Market risk is when the market opposes or ignores your investment. Sources of market risk are economic recessions, political instability, interest rate changes, natural disasters, and terrorist attacks. Market risks tend to affect the entire market at once.

Some investors see it as an opportunity to buy good stocks when the market isn’t pulling prices down. On the other hand, seeing investments stagnate month after month while other parts of the market are rising doesn’t get you anywhere. Do not get stuck with all your assets in one economic sector. By spreading your investments across multiple sectors, you increase your chances of participating in the growth of several stocks at once.

 

Tips in Stock Investment

Buy the right investment

Buying the right stock is easier said than done. While everyone can look at stocks that have performed well in the past, it is much more difficult to predict how stocks will perform. If you want to invest successfully in individual stocks, you must put a lot of effort into analyzing companies and managing your investments.

When analyzing a company, you should look at the company’s fundamentals, such as earnings per share (EPS) and price/earnings ratio (P/E). Analyze company management, assess competitive advantages, and examine financials, including balance sheets and income statements. 

Going out and buying stock in your favorite product or company is not the right way to invest. Also, do not rely on past performance, as it does not guarantee future performance. You have to research the company and predict what will happen next.

Cut losses early

When stocks start going downhill, take a cut loss; it might be time to take a hit and move on. Selling these stocks is a good idea because the longer you hold them, the more you lose, and the price may never go up. Do not be stubborn and wait to take unnecessary damage. Stocks often keep going down, so it is wiser to exit earlier than later. This also opens up the possibility of buybacks at significantly lower levels in the near future.

Create a diversified portfolio

Diversification is the practice of spreading your investments around. It is essential because it reduces the risk that stock in the portfolio will become a significant pull on overall performance. On the other hand, if you only buy one share, you’ll have all your eggs in one basket. Purchasing an ETF or mutual fund is the easiest way to build a broad portfolio. The product has built-in diversification capabilities, eliminating the need to analyze the companies included in the index fund. It is a great way to start.

When it comes to diversification, it doesn’t just mean many different stocks. It also means investing across various asset classes because stocks in similar sectors can move in similar directions for the same reasons.

Prepare for losses

The most challenging problem for most investors is losing money on their investments. Also, the stock market can fluctuate so you will experience losses from time to time. It would be best if you strengthened yourself to cope with these losses. Otherwise, you will tend to buy high and sell low in times of panic.

Individual stock holdings will not significantly impact returns as long as you diversify your portfolio. Even index funds fluctuate, so you can’t completely eliminate the risks, but try as much as you can.

In investing, you need to know that losing money is possible since stocks don’t have principal guarantees. It’s important to understand that the volatility you see on the upside will also be on the downside.

Commit to your long-term portfolio

Investing should be a long-term activity. One strategy for beginners is to set up a calendar and plan when to evaluate your portfolio. By following these guidelines, you can avoid selling out during periods of high volatility and underutilizing your well-performing investments. Be patient and focus on the primary performance of the company. Over time, the market will recognize and appropriately value companies’ cash flows.

 

Common Terminology

Ask – When a trader offers shares for sale at a specific price. If a trader holds shares and wants to sell them at a specific price, they place an order asking buyers to purchase them.

Bear Market – A market condition in which prices continually fall. Traders and investors are less willing to buy stocks, and many are looking to sell. This causes prices to fall.

Bid – When a trader in the market makes an offer to buy shares. Traders will bid for stock at a specific price.

Bull Market – A market condition where stock prices are continually rising. Bull markets are characterized by optimism and excitement from traders and investors.

Buy – To take a position by buying shares of a company. As a trader, you generally buy shares when you think a stock’s price will rise.

Day Trading – It is the practice of entering and exiting stock trades within a single day.

Dividend – This is when a company pays a portion of its earnings to its shareholders. Long-term investors and retirees generally focus on dividends.

Dividend Yield – This refers to the size of a company’s dividend compared with its stock price.

Limit Order – A type of stock market order that provides instruction to only execute at a specific price.

Liquidity – It is the measure of how easy it is to buy and sell a stock. If many buyers and sellers actively trade stock, you’ll generally find it easier to enter and exit a position. The stock is more liquid.

Market Capitalization – It is also called the market cap, which is the total value of all a company’s shares. 

Portfolio – A collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange-traded funds (ETFs).

Price Rally – A stock price rises at a noticeably quicker pace.

Price Quote – It is a stock’s price at a specific time. Traders often want up-to-date price quotes to analyze stocks better and find decent trading set-ups.

Sell – To sell the shares you currently own. Traders generally sell shares when they see an opportunity to take profits or think the stock’s rise is ending.

Stockbroker – An agent that allows traders to buy and sell stocks. Find out more about brokers here.

Stock Charts – A visual graph of a stock’s price over time. Traders use stock charts to help interpret a stock’s price action and pattern.

Stock Exchange – A stock exchange is an entity where stocks are bought and sold.

Trading Volume – The number of shares being traded at any time. More trading volume means more liquidity, and traders can more easily enter and exit positions.

Volatility – The statistical measure of how much a stock moves up or down. Stocks that move up and down wildly are known as volatile stocks. They can provide great profit opportunities but also come with greater risk.

 

's Guide Infographics

 

 

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Peace and love to you.


Gracia Amor
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