Your Journey to Financial Freedom Begins. Investment 101: Guide for Beginners

January 2, 2017
 |  330 Comments

INVESTMENT FOR BEGINNERS

Have you ever observed the number of 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 their wealth and how do they 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 are interested to know more about the secrets of the becoming wealthy, you have come to the right spot!  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 venture into the world of investing. As you read through, I hope you sense that I am writing here to you not as an expert but as 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 to learn?

Perhaps, you’ve been hearing a lot about the stock market now more than ever. Why should you be interested in stock investment? Simple. Think of it: if you are working hard to earn money, until when are you gonna do it?

HOW TO MAKE MONEY WORK FOR YOU 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 knew how to invest, someday we would not need to work anymore to earn a living. Our money would 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 money that you intend to use later on, like in buying 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. You need to set aside P60,000 to P120,000 as an emergency fund preferably saved in a bank from 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 expected income or required return.

In short, your intention in investing is to grow that money for long-term goals like major purchases, college education of kids, comfortable life after retirement, etc.

The rule of thumb is: Investment should come from your savings. Invest only what is extra. If you do not save, once a major financial problem breaks in, you will be forced to pull out your investment in no time.

PART 2. WHY INVEST?

1. TO BEAT INFLATION AND TAXES.

If you simply put your money in a bank, sad to say, you will 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 be able to beat inflation and taxes.

The illustration below shows that depositing P10,000 pesos in the bank would earn you little at an annual rate of 0.25%. However, the interest earned by your deposit will be taxed by 20%.  What is left from the 0.25% interest taxed by 20%? Well, that is 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. The actual proceed of P10,000 after one year will be P9,520 so instead of earning, you are practically losing money (P480 to be exact). You do not want your money losing its value, right? Investing will earn you more and beat inflation and taxes. The higher the rate of return on our investment, the faster we can build our wealth, and the more prosperous we can become.

2. TO MAKE MONEY WORK FOR YOU.

Let us accept the reality that even if we have reached the top of the corporate ladder and become the CEO of our company, our salary could never surpass the income of big companies like SM and Jollibee.  When you invest your money in those companies, you will get a fair share of their income, and of course, losses, too.  But with good strategies and sufficient knowledge, I am confident that anyone who invests in stocks can be wealthy.

Our early working years basically would show that “we” are the ones working hard to earn money, but time will come that retirement would be a must. When we lose the energy and stamina to continue working, will we still have sufficient funding? The good thing about investing long-term is that once we stop working, our investment will continue to earn interest and compound year after year. We will then be Living on Interest (LOI), and can rightfully claim that MONEY IS INDEED WORKING FOR US. Who would actually want to work for money for the rest of their life?

3. TO ACHIEVE YOUR FINANCIAL GOALS.

Imagine yourself after 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, which is equivalent to an interest income of P1 million a year, wouldn’t it be enough money to book a flight and enjoy a European cruise? Retirement is just one reason why you might want to invest.  Certainly, there are 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.

Did you know that when you invest money in stocks, you are also helping companies to achieve their financial objectives? The money you invest is used by companies for their expansion. When companies expand and grow, they can help provide more employment opportunities for people. More jobs and better income would mean economic upliftment and improvement of the standard of living. Congratulations! As an investor, you make a difference in the lives of many.

Why invest? There are various reasons and some of them are not primarily for profit but for status quo but for sentimental ones. Whatever the reason is, it is crucial that we first clearly identify our objectives before we splurge on 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, and provide proper 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 such variables as goals, age, income, risk appetite, etc.

1. 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 include having a good life after retirement, purchasing your dream house, sending your children to college, having a  capital for your business, settling down, setting up your charitable institution, traveling the world, what-have-you.

2. DETERMINE YOUR TIME FRAME.

It answers “when” you will be needing the money you invested. If you invest your money today, when do you plan to redeem it? If your goal is after 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 have a shorter time horizon compared to the 20-year-olds. The longer the time span, the better.

 

3. KNOW YOUR RISK TOLERANCE.

Can you afford to lose 10% of your investment? Can you still sleep peacefully at night knowing that your beloved stocks went down and lost 50% of its total value? Some people are just not comfortable even with minimal losses while others have higher risk tolerance. When I started investing, I was 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 an aggressive type of investor.

When friends or clients ask me how and where to invest, the first thing that I ask is their why and what: Why would you like to invest? What are your objectives? I also determine their time horizon depending on their 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 invest. First and foremost, like in any other businesses, capital is an important factor to consider whether starting-up or expanding. Corporations, particularly those which 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 funds: one is by borrowing money (debt financing), and the other one is by offering their shares of stocks to the public (equity financing). 

When a corporation determines that the second option is more favorable than borrowing, they will go public through what we call Initial Public Offer (IPO) if it is the first time that its shares of stocks are issued to the public. They then become officially listed in the Philippine Stock Exchange (PSE). Only companies that are listed in the PSE may offer their shares of stocks to the public. Companies like Jollibee, SM, PLDT, BDO, BPI, San Miguel Corporation are publicly-listed.  You can actually buy their shares of stocks and rightfully claim being a “Stockholder.” Meanwhile, 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, and economic, political, and environmental changes. The stock prices of Jollibee, Ayala Land, and BDO are considerably increasing over the years and this is because of the strong demand.  A lot of people are investing their money in these companies.  On the other hand, the stock prices of some corporations have been decreasing over the past years because of sellers redeeming their shares or weak demand. Therefore, we can derive that more buyers means higher prices; more sellers means lower prices.

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 evidences of ownership in a company. Owners of stocks are also known as stockholders or shareholders. As mentioned earlier, investors 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 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, 100% of it.  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 interest income. If you want a steady flow of income, a bond fund is good for you.

MUTUAL FUNDS. 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 P1,000.

PART 7: FUNDAMENTAL AND TECHNICAL ANALYSIS

“Ok, I understand now where my money is going.  I have also learned about owning shares of stocks of publicly-listed companies. Now, in what company should I invest? How do I choose good stocks and avoid buying bad ones?”

Studying the stock market – its pros and cons, risks and returns, and its strategies – is a tedious matter. Basically, there are two ways to analyze stocks: (1) through fundamental analysis, also known as company analysis, and (2) 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 rather than Technical Analysis 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, values, history, and other relevant data like financial statements. He believes that when the fundamentals are good, any downturn in stock prices would just be temporary. This is like saying that if you believe that Jollibee’s fundamentals are good, you need not worry when its stock price goes down knowing that its price volatility is just temporary, and the company in due time can recover.

Meanwhile, technical analysis, as I have mentioned, is monitoring price trends using charts and graphs. With the advent of technology, investing in the stock market can as easy as 1-2-3.  All you need to do is open an online account with a brokerage firm, choose your stocks, and then buy, or sell.  However, I don’t advise beginners to invest directly in stocks right away. Well, 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? People who claim to be experts are not right at all times.  No one can actually time the market or 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 are 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 an investment risk? It is a measure of the uncertainty surrounding the return of an investment 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 risker. 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, 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 by 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 economic growth, and when stock prices are declining, the market is said to be “Bearish.” 

PART 10: TRADING VERSUS INVESTING

You have to understand that 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 do not hold a stock too long since their intention is to actualize profit more frequently and in the soonest possible time.  Also, they are not very interested in owning the business, or in knowing the company behind the stock.  Since its time frame is shorter, with an instantaneous expectation, trading is said to be much riskier than investing.

Investing

is a buy-and-hold method with the proposition for long-term accumulation of wealth. Investors buy a company with the intention of holding 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 their stocks. In reality, investors who have stayed in the stock market long enough are 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 be in the form of either capital appreciation (capital gain), or dividends. 

Capital appreciation is the increase in stock prices. Say, you bought Jollibee shares at 200 pesos per share.  After a year, its price went up to 300 pesos.  The 100 pesos price difference multiplied by the number of shares bought is what we call “capital appreciation” or “capital gain.” 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. You have to have a strategy to become successful in investing. You may adopt some of these popular strategies:

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 time to grow.

Diversification.  It is a strategy of spreading your various assets into different classes or investment vehicles to minimize if not totally get rid of 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 zero loss, but it does help in minimizing losses and reducing the volatility of stock price movement.

How do you diversify? Experts say do not put all your money in equities in just one

sector. Try a mix of stocks, bonds, or money market securities, or even real estates. Invest only in company stocks that you can handle and monitor. Investing in 5-10 stocks in your portfolio is more manageable than investing in more than 20 which will be difficult to study and monitor.  Make sure you also have sufficient cash for emergency and liquidation 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 a long-term. You may keep on buying shares or putting 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 caused by 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 wonders.

Value Investing is all about choosing undervalued stocks.  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 will be corrected in due time.

Index Strategy.  Investing in an Index Fund enables an investor to track and buy shares in an index that have the same weights and portfolio of securities.

Invest in Mutual Funds.

For someone who has limited funds and insufficient knowledge of the stock market, or has no time to monitor stocks, one good strategy is to simply invest in mutual funds. A professional fund manager selects the right investments and allocates the funds for you. 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 investment.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 on how to pick stocks or to study how the stock market works, or if you do not have the time to monitor your stocks, investing in a mutual fund rather than investing directly in stocks can be a better option for you.

There are a lot of 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 have started investing at their 20’s can definitely outdo in terms of returns those who have started late. The saying, “Daig ng maagap ang masipag“ holds true in investing.

Invest early. Invest regularly. Retire early. Live to the fullest!

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 to Brokerage firms, Mutual Fund companies, and other financial institutions have enabled her to help people start their investing journey.

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 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. 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.

Would you like to learn more?
I agree to have my personal information transfered to MailChimp ( more information )
Hello!
Receive regular updates on investments, healthcare, and other finance matters. Don't worry, your contact number and email address will not be shared with anyone else.
Share:
 |  Tags: , , , , ,