How to Invest in Stocks

How to Invest in the Stock Market: A step-by-step guide on how to start investing and trading in the Philippine stock market.

“When the typical use of the Price-Earnings Ratio (PER) sometimes becomes confusing, look at it as the payout or payback period for the investment. Hence a PER of 5 means it will take 5 years for an investment to be fully recovered.”

Best2Invest.Net

So you have put aside some extra money and have considered putting some of it in the stock market. The problem is: you don’t know what to do.

Fret no more as the following step-by-step guide would help you actualize your plan of investing in the stock market. Before we move on, however, let me challenge you first on that “extra money” that you have.

Is your extra money really extra? Which means you won’t need it in the next few months or couple of years to spend on or buy something?

Is this fund on top of your rainy-day savings? Is this money not borrowed from someone or loaned from a bank?

If the answer is NO to any of these questions, you might as well reconsider getting into the stock market.

The stock market is a risky investment option and when you decide to get into it, you should be willing to lose ALL or a portion of your investment or capital – just like when you put up your own business.

Buying a stock is buying a portion of a real company, and companies may either flop or succeed in their ventures.

Once you are already sure about that extra money you’re willing to lose, we could move on to the nitty-gritty of stock investing, that is, in the Philippines and through the Philippine Stock Exchange.

“Risk comes from not knowing what you’re doing.”

Warren Buffett

How to Invest in the Stock Market

Table of Contents

3. Select Your Broker and Apply for an Online Account

4. Select Stocks

5. Place Your Order

6. Monitor Your Portfolio


1. Familiarize yourself With Investment Concepts and Terms

Securities, Equities, Stocks, and Bonds

Securities are financial instruments that are negotiable and freely interchangeable with another asset class like cash.

They are broadly categorized into two types: equity  (“puhunan”) and debt (“utang”).

Equity securities, more popularly known as “stocks”, are shares of ownership issued by publicly-listed companies like Meralco and PLDT.

The owner of a stock (called stockholder or shareholder) is entitled to the company’s assets and profits, proportionate to the shares one holds. Corporations issue or sell stocks to investors to raise fund to operate or expand their business.

Debt securities, on the other hand, represent borrowed money that must be repaid, with terms specifying the amount of the loan, the interest rate, and the expiration and renewal date.

Debt securities include government and corporate bonds and certificates of deposits. Examples of government bonds are treasury bills (T-bills), treasury notes, and treasury bonds.

Like stocks, bonds are also issued by publicly-listed companies. Both the government and private corporations issue or sell bonds to investors to raise fund for their operations.

Common Stock and Preferred Stock

Stock is the capital raised by a business or corporation by issuing shares.

Shares of stock represents ownership and a way of subdividing ownership. A share thus represents a percentage ownership of a company.

If a stock is listed in a stock exchange, it is called a publicly listed stock.

Common stock is the basic stock of a corporation. It is the default kind of stock when a corporation is created.

It provides holders of such stock rights to vote on matters of corporate policy such as the composition of the board of directors, corporate actions like mergers and acquisitions, and the payment of dividends.

Stocks are broadly classified into two types: common stock and preferred stock.

Common stockholders are entitled to vote at the annual shareholders’ meeting whereas preferred stockholders are not.

The latter, however, has priority over the company’s assets and earnings.

Thus preferred stockholders are paid dividends before the common stockholders are given whatever amount of dividends have been left after. In case of bankruptcy, preferred stockholders have priority over liquidated (sold) assets.

Examples of common stocks are: PLDT, Inc. (ticker symbol: TEL) and Double Dragon Properties Corporation (ticker symbol: DD).

A preferred stock, just like a common stock, is a share of ownership of a corporation.

Unlike a common stock, however, preferred stock is paid dividend at regular intervals. Holders of preferred stocks do not have voting rights though.

Examples of preferred stocks are: Double Dragon Properties Corporation Preferred Stock (ticker symbol: DDPR) and San Miguel Corporation Series 2 Preferred Shares Sub-series 2-A (ticker symbol: SMC2A).

There are other stock-related products that are offered by stockbrokers. These include Exchange-traded funds and Real Estate Investment Trust.

Earnings Per Share (EPS) and Price-Earnings Ratio (PER)

Earnings Per Share or EPS is simply the profit of the company divided by the number of common shares held by stockholders.

It is an indication of profitability – the higher, the better. For example, an EPS of 5 means P5.00 is earned by the company per share of common stock.

Price-Earnings Ratio or PER is the current share price of a stock divided by the EPS; thus: PER = Price/EPS. It links the company’s share price to its profitability.

Simply put, a PER of 5 means for every P5.00 invested (the cost of the share), P1.00 is earned. It is essentially the “price of profitability”, so to speak.

In general, the lower the current PER of a certain stock compared to its historical PER, the cheaper the stock is. It is an indication that the stock is undervalued or the company has recently been doing well.

You could view the PER of stocks through the PSE website.

Type in the ticker symbol of the stock in the search box on the top right of the screen, MPI (Metro Pacific Investments Corporation) for example.

If you don’t know the symbol, you could type the name or portion of the company’s name in the box and you will be given a list of stocks containing that word or phrase.

The Company Information screen gives you a lot of information about the stock you are interested in. Among these is the PER or P/E Ratio. In our particular example, the PER of MPI above is 5.69.

Remember that PER is price-dependent and changes value as the price changes.

Usage

A high PER indicates that investors have high expectations of the company’s earnings growth in the future. Inversely, a low PER could mean investors have downcast expectations of the company’s future performance.

When the typical use of the PER sometimes becomes confusing, look at it as the payout or payback period for the investment. Hence a PER of 5 means it will take 5 years for an investment to be fully recovered.

It is also sometimes appropriate to consider the inverse of the PER, i.e. one divided by the EPR (1/EPR). This is the earnings yield, which gives you some sort of a Return on Investment (ROI) metric.

2. Know Yourself

Identify your investment objective.

Do you want to simply preserve your funds, or you want to have a steady stream of income? Do you want your funds to grow?

Establish your investment horizon.

Do you see yourself needing your funds anytime, within one year, within three years, within five years, or beyond five years? Are you investing for your child’s college education or are you saving up for your retirement?

Assess your risk appetite.

Are you more comfortable with investments that provide safety of funds? Will you opt for high-risk investment that offers higher returns? Or will you go in between?

Assess your risk tolerance.

If the value of your portfolio goes down by 20%, how will you react?

Will you immediately transform your investment into cash? Will you find safer investment alternatives?

Or you won’t be concerned at all with the short-term fluctuations in your portfolio?

Identify your role.

Will you be an investor or a trader? Do you have time to monitor your portfolio on a daily basis? Do you have the skills and resources to be a trader?

These are just some of the questions you have to ask yourself. The answers will provide a clue as to your suitability to invest in stocks.

These will also give you an indication as to what stocks will you be carrying in your portfolio during how-long a period of time you want.

For instance, if you have deemed yourself fit for stock investing,  are aiming for capital growth and can tolerate higher risks and volatility, your portfolio could carry non-index stocks.

Otherwise, you will be better off focusing on blue chips. 

Your personal circumstances are unique to you. You and only you could decide which investments are good for you, or what kinds of stocks are suitable for you. Disclaimer: Please read the website’s Caveat.

3. Select Your Broker and Apply for a Trading Account

There are currently 126 brokers accredited by the Philippine Stock Exchange. Thirty-three of these are online brokers. (Source: Philippine Stock Exchange).

You could apply for a trading account with any of these brokers. I suggest that you pick one that offers an online trading platform.

  1. A & A Securities, Inc.
  2. AAA Southeast Equities, Inc.
  3. AB Capital Securities, Inc.
  4. Abacus Securities Corp.
  5. Alpha Securities Corp.
  6. AP Securities, Inc.
  7. BA Securities, Inc.
  8. BDO Securities Corp.
  9. BPI Securities Corp. (BPI Trade)
  10. Coherco Securities, Inc.
  11. COL Financial Group, Inc.
  12. DA Market Securities, Inc. (iTrade)
  13. Eastern Securities Development Corp.
  14. F. Yap Securities, Inc. (2TradeAsia)
  15. First Metro Securities Brokerage Corp.
  16. Globalinks Securities & Stocks, Inc.
  17. HDI Securities, Inc.
  18. Investors Securities, Inc.
  19. JAKA Securities Corp.
  20. Lucky Securities, Inc.
  21. Maybank ATR Kim Eng Securities, Inc
  22. Meridian Securities, Inc.
  23. Optimum Securities Corp.
  24. Papa Securities Corp. (P2P Trade)
  25. Philstocks Financial, Inc.
  26. RCBC Securities, Inc.
  27. Regina Capital Development Corp.
  28. Timson Securities, Inc.
  29. Triton Securities Corp.
  30. UCPB Securities, Inc.
  31. Unicapital Securities, Inc. (uTrade)
  32. VC Securities Corp.
  33. Wealth Securities Inc.

Recommended Online Stock Brokers

For recommended stockbrokers, please go to Best Stock Brokers. Best2Invest’s recommendations are based on own experience and feedback from various users.

To apply for an online account with Best Stock Brokers, click on How to Open a Trading Account under the Stock Market sub-menu on the top navigation menu or click here.

4. Select Stocks

As a newbie investor, it is suggested that you initially limit your stock selection to Blue Chips, i.e. those that are included in the PSE index.

These are stocks owned by big, stable companies that are generally more resilient in weathering economic downturns and whose stock prices are relatively less volatile.

You could venture out of the index stocks as you gain more knowledge, skills, and confidence in stock investing.

Determine the purpose of your portfolio. Do you want to buy undervalued stocks or you prefer accumulating dividend-yielding stocks? Again, the answer to this lies from the self-assessment you made in Section 2 – Know Yourself.

Assess the economic trends and outlook in the next 6 to 12 months, and if available, even further out to cover longer-term investment horizon.

You may check the strategy report written by your broker or read from business news reports. Be critical though and take commentaries and recommendations with a grain of salt.

Finally, select sectors favored by the outlook and then pick stocks within these favorable sectors.

As you perform the above, you will have to obtain information about your stock. As a starter pack, download the PSE Daily Quotations Report.

This will give you, among others, a list of Companies, their symbols, and closing prices. The companies are sorted alphabetically per sector (e.g. Financial) and sub-sector (e.g. Banks).

5. Place Your Order

Different online brokers have varying order-taking interface. Be sure to familiarize yourself with your broker’s trading platform. Aside from the log-in password, some brokers require the user to enter the password before each order is submitted for posting.

Order Types

Different brokers also offer varying order types. Most common of these though are the Day Order and Good Till Cancelled (GTC).

The default order type is the Day Order. When you don’t indicate the order type when you place your Buy Order (or Sell Order), the order will be set as Day Order.

That means the order will expire at the close of the day’s trading. If the order is unfulfilled, you will have to re-enter your order the following trading day.

When you want your unfulfilled order to remain active for many days, use the Good Till Cancelled Order.

A GTC order will remain active either until it is fulfilled, it expires, or you cancel it. Check with your broker the duration of GTC orders.

Board Lot

Trading on the Philippine Stock Exchange is done by board lot system, which determines the minimum number of shares one can purchase or sell at a specific price range. It is also called round lot system.

The minimum number of shares you can buy or sell will depend on the market price of the stock at the time you place your order.

Price fluctuations or so-called “ticks” are also not uniform and vary depending on the price range where the stock is trading.

The board lot table below can be found at your broker’s website and trading platform as well as at the PSE website.

Board Lot Table (Source: Philippine Stock Exchange)

Trading Fees and Taxes

The following are the various fees and taxes charged to you every time your order is fulfilled.

Buy Order
Broker’s Commission(Maximum of 1.5% but) usually 0.25% on the gross value or a minimum commission of Php20.00
Value-added Tax12% of the broker’s commission
PSE FeePhp0.00005 for every Php1.00 gross value traded
SCCP FeePhp0.00010 for every Php1.00 gross value traded
Trading Fees and Taxes for Buy Orders
Sell Order
Broker’s Commission(Maximum of 1.5% but) usually 0.25% on the gross value or a minimum commission of Php20.00
Value-added Tax12% of the broker’s commission
PSE FeePhp0.00005 for every Php1.00 gross value traded
SCCP FeePhp0.00010 for every Php1.00 gross value traded
Sales Tax0.60% on the gross value
Trading Fees and Taxes for SELL Orders

6. Monitor Your Portfolio

The stocks that you buy are kept digitally by your stockbroker.

If you wish, you may convert them into stock certificates (physical piece of paper that represents a shareholder’s ownership in a company) through a process called upliftment.  

Brokers charge upliftment fees though of a few hundred pesos for each stock certificate that you request.

Whether your stocks are with you or kept with your broker, you have to spend time and effort in tracking your investments.

Monitor stock prices and follow closely the developments of the companies through disclosures posted on the PSE Edge website as well as from news reports.

Maintain a record, preferably a simple spreadsheet, to monitor the stocks that you have with your broker.

Like the cash you have in a bank, you will have to check your stock and cash balances in your trading account.


For more information, please watch the Stock Market 101 video, courtesy of the Philippine Stock Exchange.

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