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Tuesday, June 7, 2011

What is stocks?

What is stocks?

Stocks are shares of ownership in a corporation. When you become a stockholder or shareholder of a company, you become part-owner of that company.

Securities, are proof of one’s ownership or indebtedness in a company. Examples of securities are treasury bills and commercial papers, which are considered as short-term and are traded in the money market; and stocks and bonds, which are long-term and traded in the capital market. Securities are easily bought and sold in the stock market.

Stock market is the place for the companies and corporations offer their shares of stock in the public in order to raise capital that can be use for their future growth. Once a company or corporations listed their shares of stock in the market, the public can now free to buy and sell those shares of stock.

What types of securities can I buy in the stock market?
Most of  listed company in the Philippine Stock Exchange (PSE) issues are common stocks. Other types of securities such as preferred stocks, warrants, PDRs and bonds are also traded.
  • Common Stocks – These are usually purchased for participation in the profits and control of ownership and management of the company. Holders of common stocks have voting rights. They are also entitled to an equal pro rata division of profits without preference or advantage over another stockholder. However, they have the last claim on dividends and are the last to collect in case of corporate liquidation.
  • Preferred Stocks- Its name is derived from preference given to the holders of these stocks over holders of common stocks. Holders of preferred stocks are entitled to receive dividends, to the extent agreed upon, before any dividends are paid to the holders of common stocks. However, preferred stocks usually have a specified limited rate of return or dividend and a specified limited redemption and liquidation price.
  • Warrants – A corporation can also raise additional capital by issuing warrants. A warrant, normally issued on a detachable basis, allows its holders the right, but not the obligation, to subscribe to new shares at a set price during a specified period of time. It is usually provided free of charge and traded separately in the securities market.
  • Philippine Deposit Receipts (PDRs) - A PDR is a security which grants the holder the right to the delivery or sale of the underlying share, and to certain other rights including additional PDR or adjustments to the terms or upon the occurrence of certain events in respect of rights issues, capital reorganizations, offers and analogous events or the distribution of cash in the event of a cash dividend on the shares. PDRs are evidences or statements nor certificates of ownership of a foreign/foreign-based corporation. For as long as the PDRs arenot exercised, the shares underlying the PDRs are and will continue to be registered in the name of and owned by and all rights pertaining to the shares shall be exercised by the issuer.
  • Small-Demominated Treasury Bonds (SDT-Bonds) – The SDT Bonds are long-term and relatively risk-free debt securities issued by the Bureau of Treasury (BTr) of the Republic of the Philippines. The bond is a certificate of indebtedness of the Republic of the Philippines to the owner of the SDT-Bonds.
How to trade in the market?

You just need to open an account with a broker. Once you have an online account, you can now make your very first trade. To keep it simple, trading is like purchasing an item in Ebay; you get to decide what price you want to pay for each stock.

Is there a minimum purchase amount of shares/stocks?

Yes. This is called Board Lot. Consider this as the multiples of shares you can buy. For example, a board lot of 1k would need you to purchase shares in multiples of 1k like 3k, 10k, 7k but not 1.5k, 12.8k, and 9.4k. Board lots vary depending on the price. The higher the price, the lesser the board lot.

Where can I buy shares of Stocks and/or Bonds?

In the Philippines, the only operating stock exchange is the Phil Stock Exchange (PSE). Its main function is to facilitate the buying and selling of stocks and other securities through its accredited trading participants.

The PSE has two trading floors – Phil Stock Exchange Centre in Ortigas, Pasig City and Phil Stock Exchange Plaza in Ayala, Makati City – where trading participants trade daily – from 9:30 a.m. to 12:10 p.m. except Saturdays, Sundays, legal holidays and days when the Central Bank Clearing Office is closed. Visit New PSE Trading Hours here.

Below a video showing stock market works. Although the video is in cartoon animation but it gives a lot of help to easily understand, how the stock market works? See the video.

Stocks have been known as a good investment instrument. Better than most investments instrument. It has lots of historical data proving that it is very profitable (once you get the hang of it). Buy at a low price and sell at a high price is the common strategy of traders.

Let’s compare it to the usual investments Filipinos make and their interest rate:
  • Savings Account – about 1% per annum
  • Time Deposit – about 3% per annum
  • Stock Trading – can be 3% on a day, 10% on a week, or even 100% in a year (it varies)

Isn’t that great! However before you celebrate, keep in mind that higher gains always mean higher risk. The difference between Savings Accounts / Time Deposits and Stock Trading is that the latter can lose your money. That is why you have to calculate your risk, and diversify your investments. Stock trading can be fun at the same time profitable (if you just keep on reading).

I hope you have learn interesting idea in stock market. Happy earnings!!

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