INVESTMENT FOR BEGINNERS
Have you ever observed the number people shopping at SM, or eating at Jollibee, or paying MERALCO and PLDT bills? Did it occur to you how profitable these businesses are?
How did the rich like Henry Sy, John Gokongwei and Zobel De Ayala accumulate wealth and continue to amass a fortune?
Would you like to become a business partner of the rich and own shares of stocks of their companies?
If you answered “yes” to any of these questions, and if you are interested to know more about the secrets of the becoming wealthy, you’ve come to the right spot. Do you know that one of the secrets of the rich is that they know how to make money work for them by earning active income from their businesses, and passive income from their investments? They invest not only in real estates but in stocks as well.
Here, I have outlined the following topics that will help beginners to the world of investing. As you read through, I hope you’ll sense that I am writing here to you not as an expert but someone who wants to help you and be with you on your journey to FINANCIAL FREEDOM.
- PART 1. SAVING VERSUS INVESTING
- PART 2. WHY INVEST?
- PART 3. BASIC CONSIDERATIONS IN INVESTING
- PART 4. RAISING CAPITAL: DEBT VERSUS EQUITY
- PART 5. WHAT ARE STOCKS AND WHY DO THEY FLUCTUATE?
- PART 6. TYPES OF INVESTMENT
- PART 7. FUNDAMENTAL AND TECHNICAL ANALYSIS OF STOCK
- PART 8. UNDERSTANDING RISK AND RETURN
- PART 9. BEAR MARKET VERSUS BULL MARKET
- PART 10. TRADING VERSUS INVESTING
- PART 11. HOW TO EARN IN THE STOCK MARKET
- PART 12. INVESTMENT STRATEGIES
Are you ready learn now?
Perhaps, you’ve been hearing a lot about the stock market now than ever. Why should you be interested in stock investment? Simple. If you are working hard to earn money, until when do you think are you gonna work hard to earn money? HOW TO MAKE MONEY WORK HARD FOR YOU. This is what this article is all about. I believe that investing in stocks and mutual funds can be one of our vehicles in achieving financial freedom. If we only know how to invest, someday we don’t need to work anymore to earn a living. Our money will take care of us by then.
PART 1. SAVINGS VERSUS INVESTMENTS
To understand investment better, let us first differentiate it from savings. Basically, the difference is that when you SAVE, you are simply keeping aside money that you intend to use later on like when you plan to buy a brand new phone or a branded bag. When you save, your goals are basically short-term, and your purpose is simply to make it a liquidity buffer, particularly for your daily expenses and for emergencies like loss of job, illnesses, calamities, and repairs. Financial experts recommend that we save at least 3 to 6 months of our monthly income as an emergency fund. Say, you are earning a salary of P20,000 a month. That means you need to set aside P60,000 to P120,000 as an emergency fund preferably saved in a bank with which you can withdraw anytime.
Investment, on the other hand, is money (savings) placed in legal investment vehicles like mutual funds and stocks, with an expectation of income or required return. In short, when you invest, your intention is to grow that money for long-term goals like retirement or for major purchases, college education of kids, etc.
The rule of thumb is: Investment should come from your savings. Invest only what’s extra. If you don’t save, once a major financial problem breaks in, you’ll be forced to pull out your investment in no time.
PART 2. WHY INVEST?
- TO BEAT INFLATION AND TAXES. If you simply put your money in a bank, sad to say, you’ll never earn that much. In fact, you are losing the value of your money there year after year after year. Wonder why? Because your bank deposit earnings will not even be able to beat inflation and taxes. The illustration below shows that depositing P10,000 pesos in the bank would earn you an annual rate of .25%. However, the interest earned by your deposit will be taxed at 20%. What is the difference between .25% versus 20% tax? Well, that’s the cost of our financial ignorance.
As shown above, taxes and inflation will offset the amount you have earned from your deposits. Therefore, the purchasing value of your money diminishes over time. Suffice to say, instead of earning, the actual proceed of P10,000 after one year will be P9,660, or a loss of P340. You don’t want your money losing its value, right? We want to invest our money to earn more and to beat inflation and taxes. The faster and higher the rate of return on our investment, the faster we build our wealth and the more prosperous we become. So it is important that we make our money work for us. This boils down to another reason why we should invest:
2. MONEY WORKING FOR YOU. Let’s accept the reality that perhaps even if we have reached the top of the corporate ladder and become the CEO of our company, we’ll never get to beat the income that big companies like SM and Jollibee Corporation earn. When you invest your money in these companies, you get a fair share of their income, and of course, losses, too. But with good strategies and sufficient knowledge, I am confident that anyone can be wealthy in the stock market.
In financial planning, our early working years basically would show that “we” are the ones working hard to earn money, but until when? Time will come that retirement would no longer be an option, but a necessity. If we lose the energy and stamina to continue working, do we have sufficient funding for our retirement? The good thing about investing long-term is that once we stop working, our investment would continue to earn interest and compound year after year. We will then be Living on Interest (LOI), or we can rightfully claim that MONEY IS INDEED WORKING FOR US. Who would ever want to work for money for the rest of their life?
3. TO ACHIEVE YOUR FINANCIAL GOALS. Imagine yourself on your retirement. You are on a vacation enjoying life, traveling and doing the things that you love. Say, for instance, you were able to invest P10 million that is earning conservatively at 10% rate of return, or equivalent to an interest income of P1 million a year, probably enough money to book a flight and enjoy a European cruise? Retirement could be just one of the reasons why you want to invest. But certainly, you have other goals that you want to achieve like purchasing your dream house, putting up a business, settling down soon, sending your children to college, etc.
4. TO MAKE A DIFFERENCE. When you invest your money, your personal financial goals come first. You have dreams to fulfill for yourself and for your family. But did you know that when you invest money in stocks, you are also helping companies to achieve their financial objectives? The money you invest will then be used by companies to expand. When companies expand and grow, they contribute not only to the economy, but they also help provide more employment and job opportunities for our fellowmen. More jobs and better income would mean economic upliftment and improvement of the standard of living. Congratulations! As an investor, you are making a difference in the lives of many.
Why invest? There are various reasons and some of them have nothing to do financially. There are those who invest not primarily for profit but for status quo and sentimental reasons. Whatever it is, it is crucial that we identify first our objectives clearly before we splurge to actual investing.
PART 3: BASIC CONSIDERATIONS IN INVESTING
If we talk about factors to consider before investing, there are a lot. It is extremely important that we set up our emergency funds first, pay off debts, provide proper protection and safety nets before investing. Here, I have listed down the 3 most important factors to consider before investing. Please do not proceed to our next topic without reading and understanding this matter. Because there is no such thing as a standard-fits-all type of investment and no two people are exactly the same. The type of investment that fits you would depend on variables such as goals, age, income, risk appetite, etc.
- IDENTIFY YOUR OBJECTIVES/GOALS. You have learned “why” you should invest. Now, let’s determine your “what.” What is it that you really want? What are your financial goals? Examples of financial goals are for retirement, to purchase your dream house, for your children’s college tuition fee, as capital for your business, to settle down, to set up your charitable institution, to travel the world, what-have-you.
- DETERMINE YOUR TIME FRAME. It answers “when” will you be needing the money you invested. If you invest your money today, when do you plan to redeem it? If your goal is for your retirement then when are you retiring? Is it 10 years or 20 years from now? How soon or how long will you be needing the money? People over age 50 has a shorter time horizon compared to the 20-year olds. The longer the time span is the better.
- KNOW YOUR RISK TOLERANCE. Can you afford a 10% loss on your investment? Can you still sleep peacefully at night knowing that you beloved stocks went down and lose 50% of its total value? Some people are just not comfortable even with minimal losses. Others have higher risk tolerance. When I started investing, I am more of a conservative type of investor, but with continuous learning and experience, I can honestly say that I am now more of a risk-taker and aggressive type of investor.
When friends or clients ask me how and where to invest, the first thing that I ask is: why would you like to invest and what are your objectives? We also determine their time horizon, depending on the age, goals, income, and other factors. Learn other considerations in investing at 10 THINGS YOU SHOULD DO BEFORE YOU START INVESTING. There are also risk-profiling questionnaires that I ask them to answer. And most importantly, I advise them to attend seminars on basic money management and investment strategies. Invest in learning first. Never ever invest in something you know nothing or little about. After all, we are talking about hard-earned money here and no one is in a better position to protect your money than yourself. Financial Planners and educators like me are only here to guide and discuss the pros and cons of investing, but at the end of the day, the discretion of the client should ultimately prevail.
PART 4: RAISING CAPITAL: DEBT VS EQUITY
You might ask what the company does with the money you invested. First and foremost, like any businesses, capital is an important factor to consider whether starting-up or expanding. Corporations, particularly those who are expanding and growing will be needing money to finance their objectives, and there are two options available to them to be able to raise fund: one is by borrowing money, and the other one is by offering their shares of stocks to the public. When a corporation believes that the second option is much favorable than borrowing, they will go public through what we call, Initial Public Offer (IPO), this is the first time that its shares of stocks are being issued to the public and becomes officially listed in the Philippine Stock Exchange (PSE.) In short, only companies that are listed in the PSE may offer their shares of stocks. Companies like Jollibee, SM, PLDT, BDO, BPI, San Miguel Corporation are publicly listed. You can actually buy their shares of stocks and rightfully claim the title of a “Stockholder”. On the other hand, you cannot invest in McDonalds or Mercury Drug Store because they are still privately-owned.
PART 5: WHAT ARE STOCKS AND WHY DO PRICES OF STOCKS FLUCTUATE?
Now, we go to the core part of this article. Investing in stocks is a lot like buying a business. When you buy shares of stocks, you become a part-owner of the company and therefore entitled to its profits. When you buy shares of stocks of Jollibee, you become a part-owner of Jollibee, and that makes you one of its shareholders who is entitled to vote and receive dividends.
Why do the prices of stocks fluctuate? It is because of the law of supply and demand caused by numerous factors such as interest rate, economic, political and even environmental changes. The stock prices of Jollibee, Ayala Land, BDO are considerably increasing over the years and this is because of the strong demand. A lot of investors are investing their money in these companies. On the other hand, the stock price of some corporations has been decreasing over the last years because of sellers redeeming their shares. Therefore, we can derive that more buyers bring prices up; more sellers brings prices down.
PART 6: TYPES OF INVESTMENT
There are numerous investment securities in the market. Among the popular ones are stocks, bonds, mutual funds, money market instruments, and index funds. How would you know which type is appropriate for you?
STOCKS or EQUITY. These are evidence of ownership in a company. Owners of stocks are also known as stockholders or shareholders. As mentioned earlier, they provide capital for the firm, therefore they are considered part-owners of the company. Stocks are inherently risky because the price of stocks varies depending on the demand and supply. Stocks are generally volatile and fluctuate significantly. The risk of losing money in stocks is high, but it can also give investors significantly high returns.
How would you know if stock investing is the right vehicle for you? One way is to ask yourself if you can sleep at night with a 30 to 40% loss of investment, or worst, losing 100% of your investment. If you can take it, then you may throw in the towel. If not, you may seek other options like:
BONDS. A bond is a form of debt financing. Here, you are lending your money to the government or a corporation. In Personal Finance, a bond is simply a promissory note. Bonds have maturity dates, and bondholders are entitled to receive a fixed income. If you want a steady flow of income, a bond fund is good for you.
MUTUAL FUND. If you have no idea where to invest your money, whether in stocks or bonds, and you do not have the time to monitor them, you might want to try investing in Mutual Funds. Mutual Fund is pooling of money and investing the money in different companies, normally into more than 10 blue chip companies. An exceptional feature of a mutual fund is diversification which means that your money is invested in different asset classes. As the famous saying goes: “Do not put all your eggs in one basket” to lessen the risk of losing your money. Another advantage of mutual funds is that there is a Fund Manager who will do the hard work for you particularly in the selection and allocation of securities, and monitoring of stocks, local and global. Other advantages: mutual funds are non-taxable, highly liquid (redeemable anytime), and affordable. You can already start with an initial investment of P5,000.
PART 7: FUNDAMENTAL AND TECHNICAL ANALYSIS
“Ok, I understand now where my money is going. I’ve also learned about owning shares of stocks of publicly-companies. Now, in what company should I invest in? and how do I choose good stocks and avoid buying the bad ones?”
Studying the stock market, its pros and cons, risks and returns, and its strategies is a tedious matter. There are basically two ways to analyze stocks, one is through fundamental analysis, also known as company analysis. The other one is through technical analysis or analyzing stocks through price movement trends. Warren Buffet, one of America’s richest men and probably considered as the best stock investor of this lifetime, uses Company Analysis than Technical Charts in selecting his portfolio. It means that he studies and checks a company’s profile, its products, and services as well as its profitability. He digs into the company’s goals and values, and history, and other relevant data like financial statements. He believes that when the fundamentals are good, any downturns in stock prices would just be temporary. This is like saying that if you believed that Jollibee’s fundamentals are good, then you need not worry when its stock price goes down knowing that its price volatility is just temporary, and the company in due time will recover.
Now, technical analysis, as I’ve mentioned, is monitoring price trends using charts and graphs. With the advent of technology, investing in the stock market is as easy as 1-2-3. All you need to do is open an online account with a brokerage firm and choose your stocks and then buy, or sell. However, I don’t advise investing directly in stocks especially for beginners. You may do so but at your own risk. The risk is higher when you invest in something that you are not familiar with, right? A lot of people who claim to be experts are not right at all times. No one can actually time the market and guarantee its returns. It is okay to listen to the advice of experts but at the end of the day, it’s your discretion, it’s your call.
For beginners who have insufficient knowledge about stocks, who is more conservative and have no time to monitor stocks, a mutual fund investment is indeed more appropriate. Read more on Mutual Fund Investment at Build your Wealth. Invest in Mutual Funds.
PART 8: UNDERSTANDING RISK AND RETURN
Earlier I mentioned about risk. What is a risk? It is a measure of the uncertainty surrounding the return that an investment will earn or, more formally, the variability of returns associated with a given asset. In short, risk in investment means losing the value of your investment.
There is a general rule in investment: The higher the risk, the higher the return. The lower the risk the lower the return. In Risk Management, risk can be measured using statistical tools like Standard Deviation or Coefficient Variation. Investments whose returns are more uncertain are generally viewed as riskier. Stocks are generally riskier than mutual funds and bonds. If you are a conservative investor who wants a safer type of investment, you may invest in money market instruments like treasury bills, commercial papers or certificate of deposits, or government and corporate bonds.
PART 9: BULL MARKET VERSUS BEAR MARKET
A Bull Market is characterized by an upward market trend of stock price movement whereas a Bear Market is characterized by a downward movement of the prices of stocks. The Bull and Bear animals are used to describe the market as to how they attack their opponents. For one, bulls are the aggressive type. They are strong and they thrust their horns up into the air when faced with opponents. Whereas bears are slow and they normally swipe down their paws when attacking a rival. When the stock market is good, and the economy is strong, showing a trend of rising prices of stocks, the market is said to be “Bullish.” When there’s economic recession, slow growth of the economy and the prices of stocks are declining, the market is said to be “Bearish.”
PART 10: TRADING VERSUS INVESTING
Trading is not the same as investing. Trading is a more active practice of buying and selling stocks, which is done more frequently and with the goal of immediate redemption or generation of profit. Traders often use technical charts to analyze stocks and time the market.They adhere to buying low and selling high and they may not hold a stock very long since their intention is to actualize profit more frequently and the soonest possible time. They are also not very interested in owning the business or in knowing the company behind the stock. Since their goal is shorter and with an instantaneous expectation, trading is said to be much riskier than investing.
Investing is a buy and hold method with the proposition for the long-term accumulation of wealth. Investors buy a company with the intention of holding on to the stock for a long time. They use fundamental analysis to determine what stocks to choose. And so regardless of market price fluctuations, investors see changes as temporary. For as long as the fundamentals of a company are good, they will hold on to their stocks. In reality, investors who have stayed in the stock market for the long term have proven to be the most successful ones. Ergo, invest rather than trade.
PART 11: HOW TO EARN IN THE STOCK MARKET?
Earnings in the stock market could either be in the form of capital appreciation (capital gain), or through dividends. Capital appreciation is the increase in the prices of stocks. Say, you bought Jollibee shares at 200 pesos per share. After a year, its price went up to 300 pesos. The 100 pesos difference is what we call “capital appreciation” or “capital gain.” The increase in stock prices is brought about by the demand and supply, as I mentioned earlier. Dividends, on the other hand, have nothing to do with the demand and supply but are determined by the financial performance of the company. If the company earns and there are no future plans of expanding, it would declare and pay dividends to its shareholders.
PART 12: INVESTMENT STRATEGIES
Since individuals have different objectives, lifestyle, time plan, and risk tolerance, it is important to determine the strategies that would cater to each individual. Investors without strategies are like soldiers going to war without a tactical plan. With the right strategy, anyone can become successful in investing. Some of the popular strategies are:
Buy and Hold. This strategy means buying shares of stocks and keeping those stocks over the long run. They say that when investing your money, let it stay for a minimum of 5 years to give it an opportunity to grow.
Diversification. It is a strategy of spreading your various assets into different classes or investment vehicles to minimize, if not totally incur losses. According to the famous saying, “Don’t put all your eggs in one basket.” Otherwise, you are exposing your investments to greater risk. Diversification does not guarantee against loss, however. But it does help in minimizing losses of your investment and reduce the volatility of stock price movement. How do you diversify? Experts are saying not to put all your money in equities in just one sector. Try a mix of stocks, bonds or money market securities, or even real estate. Invest only in company stocks that you can handle and monitor. Some say that investing in 5-10 stocks in your portfolio is more acceptable than having more than 20 which will make it difficult for you to study and monitor. Make sure you also have sufficient cash for emergency and liquidity purposes.
Money Cost Averaging. It is a method of buying stocks regularly over a period of time regardless of market fluctuations. It has been a time-tested strategy of maximizing gain over long-term. You may keep on buying shares or put in amount periodically like P 1,000 every month until your target date or until you have reached your financial goals. Money cost averaging minimizes costs and reduces risk against market fluctuations thus maximizing your return in the long run. This strategy works best for people who do not have a huge amount of money but have the discipline to set aside money and invest regularly. Did you know that investing P1,000 every month at 12% rate of return compounded annually will give you P5.18 Million after 35 years? Money Cost Averaging works wonder.
Value Investing is choosing stocks that are undervalued. Warren Buffet’s strategy is to pick undervalued stocks or stocks whose intrinsic value is greater than their market value. For example, a stock that is being traded at P 100 but with a book value of P 120 appeals to value investors. Buffet believes that when stocks are fundamentally strong, any decrease in the market price of stocks will correct in due time.
Index Strategy. Investing in an Index Fund enables an investor to track and buy shares that have the same weights and portfolio of securities in an index.
Invest in Mutual Funds. For one who has limited funds, insufficient knowledge of the stock market, or has no time to monitor stocks, one good strategy is to simply invest in mutual funds. There is a professional fund manager who will select the right investments and allocate the fund. Fund managers are well versed in the intricacies of the world of investing. They have the time to monitor the portfolio and they are certainly experts in investing.They say that the success of any mutual fund depends greatly on the competencies of its fund manager. Again, if you are a beginner who has little knowledge how to pick stocks or to study how the stock market works, or if you don’t have the time to monitor your stocks, then investing in a mutual fund rather than investing directly in stocks can be a better option for you.
There are a lot other strategies that are available out there. But one thing is for sure, you can’t go wrong if you start investing early so you can take advantage of the compounded growth of your money over time. Those who started investing at their 20’s could outdo the return of those who started late. I will discuss the Law of Compounding Growth or the Rule of 72 in my next articles for you to better understand why those who started investment early in life have a greater edge in building wealth compared to those nearing their retirement. The saying, “Daig ng maagap ang masipag“ holds true in investing. Invest early. Retire early. Live freely.
Next: Investing in Mutual Funds
What have you learned in this article? Pls feel free to comment below. Thanks 🙂
About the Author
Divina Gracia M. Cabaddu, known to her students as “Ma’am Divine,” is a College Professor teaching Financial Management subjects such as Investment and Portfolio Management, Capital Market, Financial Analysis and Reporting, Strategic Financial Management, and Security Analysis. She started investing five years ago – both in direct stocks and mutual funds. As part of her advocacy, she is actively conducting financial literacy lectures to impart her knowledge on proper saving and investing. Her connections in Brokerage firms, Mutual Fund companies, and other financial institutions have enabled her to refer and help many people on how to invest and apply their learnings. Her mentors include Engr. Noel Arandilla, Registered Financial Planner (RFP) and founder of the Wealth Academy; Engr. Lyndon Malanog, financial coach of Bo Sanchez, Inc., and Mr. Rex Mendoza, former VP of Ayala Land, Inc. and the President of Rampver Financials, Inc. Ma’am Divine believes that anyone can be wealthy if they have the right mindset. She provides free consultation and seminars on Saturdays in her office in Makati. You may contact her at 0927.755.2285.
Disclaimer: The information on this site is provided primarily for discussion purposes only, and should not be misconstrued as an investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.