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Who would you rather be?

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[continuation from Relaxed Stock Market Investing (part 1) ]

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#4. STRIVE TO BEAT INFLATION, NOT THE MARKET

Maybe it would be more appropriate to say it this way: “strive to beat inflation, or a long-term safe financial investment like a 10-year Government Bond, whichever is higher.

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Forget about earning +30% or more on your money in a year! Also, free your mind from the pressure of wanting to match (or even beat) what your friend earned or has been earning from his/her investment in the stock market.

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The idea of “saving” is all about setting aside something today for you to be able to buy things in the future.

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Inflation

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And since it is a known fact that prices do increase as time passes (which, by the way, is what inflation is all about), we have to couple the idea of “saving” with the idea of “investing“, which is:

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putting your savings to work so that, in the future, you can still fill your grocery basket with the same goods you are buying today even if their prices have already increased through the years!

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In summary, when we invest, our real goal is preserving the value of our money.

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Anything in excess is a bonus.

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Now, how much profit should we try to get from our stock market investments?

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Consider this:

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In the Philippines, for the last 10 years:

  • annual inflation has averaged between 5% to 6%
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  • while 10-year Government Bond can give you around 6.5%
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  • if you want to take it further, a 25-year Government Bond can give you 8.5%
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To determine what is a “just right” profit that we should strive to get from our stock market investment, we can think of it this way:
  • Average inflation is 5% to 6% — so our minimum requirement is 6%
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  • But a safe investment  (meaning, there is a remote chance that our investment will be gone or will significantly lose value) like the long-term Government Bond can give us 6.5% to 8.5% without doing anything (including not losing sleep when stock markets crumble and not digging into company reports, economic news, price charts) — it is just fair to raise our minimum requirement to at least 8.5%
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  • But we know that “putting our money in the future of an operating company” involves some degree of risk, it is just reasonable to ask something “extra” in return.
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    Since we become part owner of a company, if the company loses, we lose too; if the company wins, we win too.®
    Worse, the company is traded in a stock market, so its value is also under scrutiny by all other stock market investors.®
    With that, to justify our efforts to study the economy/markets/companies, and to compensate us for the risk we will be assuming when we invest in a stock, let us say we require an additional 5% profit?

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After that little exercise, we can now reach the conclusion that, for you to buy a stock, it should give you AT LEAST 13.5% (= 8.5% + 5%) for the period within which you have committed to invest in a stock.

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If you are more comfortable with a whole number, maybe you can set your minimum return (or profit) requirement at 15%.

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If you can get at least 15% net profit (after paying all taxes and other costs) from your stock market investments, then by all means you can say “it is worth it!”

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#5. BE PATIENT. PROFITS CAN WAIT.

When we said that we will only invest in a stock if it can give us at least 15% net profit, we should be clear about the period over which we expect to earn that profit.

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And, when we say “we want at least 15% net profit”, we mean Internal Rate of Return (IRR) of at least 15%.

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What?!?!!!!!

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Ok. For example, if we deposit Php100 today at 15% interest, we can withdraw Php115 after a year (Php100 x 1.15).

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If we deposit again that Php115  at 15% interest, after another year, we can withdraw Php132.25 (Php115 x 1.15).

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We can also say that, if we deposit Php100 today, and we can withdraw Php132.25 two (2) years from now, we can say that our Internal Rate of Return or IRR is 15%

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I think it is more commonly known as the Compounded Annual Growth Rate (CAGR).

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To get it a little closer to the stock market, if we can find a stock that is worth Php132.25 per share, to achieve our objective of earning at least 15% net profit, the following conditions should be met:

  • We can buy it today at no more than Php100 per share
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  • We have a reasonable basis that the stock price will reach at least Php132.25 within the next (at most) 2 years

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In our previous post [Relaxed Stock Market Investing (part 1)], we said that we should only buy undervalued stocks.

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Now, using the table below, we can decide the period over which we can wait to realize our expected net profit. Alternatively, we can see if our investment period is consistent with our return expectations.

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Net upside

Table 1. Basing the holding period on the net "mark-up" %

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So how do we use Table 1?

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Do you see the intersection of 15% net IRR and 5 years? It is 102%. It means, if you can find a stock that is worth Php100 per share but  current market price is only Php50 per share, you can buy it today, sit it out up to 5 years and still earn 15% net IRR. If it reaches Php100 per share earlier than 5 years, then it’s a bonus!

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Or, do you see the intersection of 15% net IRR and 2 years? It is 33%. It means, if you know a stock that is worth Php100 and the current market price is only Php75, and you think that it will take at most 2 years before other people realize that it is undervalued, buy it today, wait for its price to reach Php100 within (at most) 2 years , and get your at least 15% net profit.

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If you are more of a “discount-oriented” type of a person, you can use this table:

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net discount

Table 2. Basing the investment period on "net discount"

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Do you see the intersection of 15% Net IRR and 5 years? It is 51%. It means, if you can find a stock that is selling today for Php50 but it is worth Php100 (50% off!!), you can buy it today, ignore the twists and turns of the market price within that (at most) 5 years, wait for the stock price to reach the stock’s value (i.e. Php100 per share), and earn at least 15% net profit.

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Sounds familiar? It should. It is the same as looking for the intersection of 15% Net IRR and 5 years from Table 1, which is 102%. A 100% upside is equal to a 50% discount.

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In Summary, for a Relaxed Investing experience, one should:

  1. Invest in a company/business (not just the stock)®
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  2. Be clear with the reasons why he/she is investing in that company.
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  3. Buy ONLY undervalued stocks.
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  4. Stop trying to beat the market or to surpass a “record” by other institutions or other people, stop targeting over-optimistic profits, and instead set an acceptable and reasonable profit expectation.
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  5. Be patient.

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Happy investing!
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>> back to Investor Education – Home

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Who would you rather be?

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Who would you rather be?

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Just like in many things in life, we have a choice on whether we want to be:

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  • An investor who stares all day on his monitor, who is thrilled when stock prices go up, and devastated every time stock prices go down; or
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  • An investor who has a firm understanding of the big picture of stock market investing, who remains calm and relaxed amid wild swings in stock prices, and who makes decisions based solely on objective evaluation of the developments affecting the company’s business versus other alternative investment options. I call this person a relaxed investor.

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If you excitedly picked option #2, then CONGRATULATIONS! 🙂

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And the good news is, it is not really that difficult to be a relaxed investor. We just have to understand the things we’ll discuss here (and the next), and we’re good! 🙂

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#1 : IT IS NOT FOR EASY MONEY, IT IS INVESTING IN A BUSINESS

If your excitement in going into the stock market comes from the idea that it is where you can get easy money, then STOP. Save yourself. IT IS NOT what you think it is.

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After that, start telling yourself over and over — “I invest in stocks because I want to receive the benefit of being a part-owner of a great business. ”

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As a part-owner, you get the benefits either from the stock market or from the company itself. In some cases, you benefit from both!

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The market will reward you by buying your stocks at a higher price (only because you bought it at a bargain), and/or the company will give you your share in the profits in the form of dividends (either cash or additional stocks).

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#2 : KNOW WHY YOU BUY A STOCK

Before buying a stock, make sure to be clear of your intentions.

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Are you buying it because you are looking to sell it at a higher price?

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Or are you just after the cash dividends and that company is known for giving its stockholders regular cash dividends in the past (and is expected to be capable of continuing it in the future)?

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If you are just in it for the dividends, then most probably you should not be worrying about the ups and downs of stock prices.

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Companies paying regular dividends are usually mature companies: those that have already been in the business for quite a long time, have products/services that are very likely to be found in (almost) everybody’s “needs” list, and has enough accumulated cash profits, that’s why they can give out dividends.

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Also, stock price of dividend-paying companies usually don’t move that much during normal times. But if it does, say, plunge, and the dividend-paying capability of the company remains the same, then the wise thing to do is to buy more of that stock. Talk about blessing in disguise!

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Now, if you bought it because you are looking to sell it at a higher price, then you have to be convinced that you bought it at a price that is well below its true value. Otherwise, who would buy it from you, right?

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#3 : BUY A STOCK BECAUSE IT IS WORTH MORE THAN ITS CURRENT MARKET PRICE

….. and sell a stock because it is worth LESS than its current market price.

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(What follows is a long discussion, but I hope you can take some time reading it.)

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In stock market jargon, this is the same as “buy undervalued stocks” and “sell overvalued stocks”.

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What does it mean when we say “undervalued” stocks?

Undervalued Stock -- It is worth more than its Current Market Price

Undervalued Stock -- It is worth more than its Current Market Price

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Let me give you a simplified example.

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Suppose you have Php1 million and you  are looking for an investment that can give you at least 10% interest per year for the next 25 years, just in time for your retirement.

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Now, you know that you can invest in a Government Bond that pays 10% interest per year for the next 25 years.

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So, you are all set. You have the money, you have the investment, and that investment can satisfy your requirement of at least 10% interest per year.

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However, a friend of yours told you about another option —- investing in stocks.

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Let us say you gave it a thought. Suppose that you did the following for your research:

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  • You visited http://www.pse.com.ph and downloaded as many quarterly reports of a particular company (called 17-Qs) as you can from the website.
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    However, you were only able to download 17-Qs for 2 years (or 8 quarterly reports). You felt that it is not enough, you got in touch with the company through its investor relations office and asked for more reports. As a result, you were able to get 20 quarterly reports (or 5 years).
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  • Before going to the financial statements, you saw that the company has issued so far 1 million common shares, all outstanding
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  • Then, you went straight to the “Consolidated Statement of Cash Flows” and wrote down the “Net Cash Provided by Operating Activities“, which is sometimes called “Cash Flow from Operations”, or “Net Cash from Operations”, and you did it for each of the 20 quarterly reports you have.
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    As aptly described, the “Cash Flow from Operations” is the cash that the company has generated from the operation of its business/es during a given quarter.
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    Note that it is not the company’s profit.  It is CASH flow. A company can sell as many as it would want to, but they can do it for credit, and sometimes customers do not pay.
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    So, for investors, our focus is how much CASH is generated from the main business  operations.
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    After taking down all 20, you then add them all up, divide the sum by 20, and you got the Average Quarterly Cash Flow from Operations of =Php2.5 million.
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    To make it an Annual Data = Php2.5 million x 4quarters = Php10 million
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    Now, to make it Average Annual Net Cash Flows from Operations Per Share = Php10 million ÷ 1 million shares = Php10 / share
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    But, of course, the company needs to buy properties, equipment, tools, etc. to use in its business. Maybe it has to build a factory, or buy more trucks to improve its delivery.
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    Now, you thought it is logical for a company to just use 40% of the cash generated by its operations to buy tools, trucks, etc.
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    Therefore, our Net Free Cash Flow Per Share is = Php10 x 60% = Php6/share
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  •  Then, you visited http://www.treasury.gov.ph to get the interest rate that a 25-year Government Bond would give. But you already know this, right? It’s 10%(see above). ®
  • Lastly, you thought that it is a stable company. The company’s products and services are more of a necessity, some of them luxuries, but most of them necessities.
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    So, you thought, it is safe to assume that the company can grow its net free cash flow by at least around the historical average growth of the economy every year, which, with a little more research from http://www.census.gov.ph or http://www.nscb.gov.ph or http://www.bsp.gov.ph, you calculated at somewhere around 4.5%.

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You also checked out with your stock broker how much is the stock of that company selling today. Your broker said “It is trading at Php10 per share
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Then you ask —- Now what???
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You go to your MS Excel, type this in one of its many cells:
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=((10*(1-0.4))*1.025)/(0.15-0.025)
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After you hit “ENTER”, it will display “49.20“.
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Voila! You now have the VALUE of that stock! It means that stock is worth  Php49.20 per share!
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How much can you buy it today? Only Php10 per share!
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To appreciate what you just did, let us dissect the MS Excel formula you used in calculating the stock’s value:
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  • ((10*(1-0.4))*1.025)” is your Expected Net Free Cash Flow Per Share next year.
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    Why next year? Because as investors, we put in money today, because we expect something in the future.
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    Our Net Free Cash Flow Per Share today is (10 x 60%) Php6.
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    Now, remember the average economic growth you calculated? The 4.5%? You doubted it, and instead just used a more conservative growth rate of 2.5%.Next year, assuming it would grow by 2.5% , Expected Net Free Cash Flow Per share will be (Php6 x 1.025) Php6.15.
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  • (.15-.025)” the denominator, is what we call our “discount rate”.
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    We use discount rate to get the value today of anything the we expect in the future.
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    The discount rate you used is the difference between the interest in 25-year Government Bond and the growth rate.
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    Notice that, once again, we placed in our “safety nets”. Since this is a denominator, a larger value is more conservative.
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    First, we decreased the growth rate from 4.5% to just 2.5%. And now, we increased the interest rate from 10% to 15%.
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    These are our “just in case” factors — just in case the economy slows and just grow by 2.5% on average, and just in case cost of money (i.e. interest rates) increases in the future to average 15%.
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  • You can only use this formula if you have reasons to believe that, on average (STOP. This is important. Don’t forget — ON AVERAGE, so it can be higher or lower some times), the company can generate net cash flow from operations per share every year of Php10, spends only 40% of it to buy tools/equipments/trucks/build factories/etc., long-term Government Bond interest rate is 15%, and average growth rate of the economy is 2.5%, from next year to eternity.
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Putting it all together, we have:
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Undervalued Stock  - It is worth Php49.20, but you can have it at Php10

Undervalued Stock - It is worth Php49.20, but you can have it at Php10

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That, clearly, is one undervalued stock! It is worth Php49.20 per share, but it only sells for Php10! You may look at at it as:
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  • A -79.67% discount [ 1 – (10/49.20 ] ; or
  • A +392% potential profit [ (49.20/10) -1 ]
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….or applying what we know about stock trading cost (You may refer to “Watch out for stock trading costs“), then it is either:
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  • A -79.46% discount; or
  • A +387% potential profit

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You can either say “I bought it at less than half of its value!” or “I can more than triple my money from this stock!”

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But more importantly, you can say that you made the right decision that you bought the stock rather than investing in a 25-year Government Bond. Why?

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  • If you invested in the 25-year Government Bond, at the end of 25 years, you’ll get your Php1 million back plus Php2.5 million in interest (assuming you just left it to accumulate in a non-interest-earning savings account).  A total of Php3.5 million.
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  • If you invested in stocks, you bought at Php10 per share, and the stock price went to Php49.20 just as you calculated, you’ll have net of Php4,866,243.
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  • And, there is a very high probability that you don’t have to wait for 25 years before the stock price go to Php49.20 per share. But just in case it took you 25 years, at least you know that you are still Php1.3 million richer than if you invested in 25-year Government Bond.
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After buying, just leave it there, and wait.
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Should you be worried if, after a week, the stock price falls to, say, Php8 per share? Not at all!

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You know it is worth Php49.20 per share. What can a week’s worth of news/politics/rumors/etc. possibly do to affect that very conservative value of Php49.20 per share?

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The logical thing to do is, if you have money, buy more shares at Php8 per share. Why? Because the bargain just got crazier!

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If the stock finally reached Php49.20 per share and you are happy with the profits you have, sell all your shares, especially when all the assumptions you used are still the same.

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If all your assumptions are unchanged, and, after some time, the stock price reached Php55 per share, the stock is now overvalued. If you still have some shares, you should sell it. If you don’t have shares in that company, you should not buy it.

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Overvalued stock - Current Price is Php55, but it is only worth Php49.20

Overvalued stock - Current Price is Php55, but it is only worth Php49.20

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(click here for Part 2)

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>> back to Investor Education – Home

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In Part 1, we talked about the PSE and those people (and institutions) that we get to be with when we invest in the stock market (we called them the market “players”).

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In Part 2, I introduced you to the “T+3” rule, and we gained appreciation of its importance. Also, we had an illustration of how our total cost when we buy stocks is calculated, as well as how the net proceeds are arrived at when we sell stocks.

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In this last installment, we will get to know another feature of our stock market that holds much importance in our stock investing lives —- the Board Lot

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Of course, our introduction about the Philippine stock market will not end without a discussion of the “gauge” or “measuring stick” of how the Philippine stock market is doing —- the Philippine Stock Exchange Index or more popularly known as the PSEi.

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A tour of the Philippine Stock Market

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THE BOARD LOT TABLE

Who says you need a lot of money to invest in the stock market?

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From my previous post (Is investing in the stock market only for rich people?), we know that it takes less than a thousand Pesos to be a stockholder of Jollibee Foods Corporation (symbol: JFC). We need only Php882.72 to be a part-owner of Jollibee. [That is all the money you need when you buy JFC, based on its price of Php86 per share (as of 28 June 2011) and the minimum “lot” of 10 shares based on the board lot table.]

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BOARD LOT TABLE
(as of 28 June 2011)

Board Lot table

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The Board Lot Table tells us the minimum number of shares and by what multiple we can buy stocks from the stock market.

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For example, we decided that want to buy Megaworld (symbol: MEG) after seeing that they are doing a great job in developing township projects in high-value areas in the metropolis.

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The stock price of MEG as of 28 June 2011 is Php2.02 per share.

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Using the board lot table above, we can see that we can only buy MEG from the stock exchange if we are willing to buy at least 1,000 shares of MEG.

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Can we ask our broker to buy 1,500 shares of MEG? NO. Why? Because based on the board lot table, we can only buy MEG in multiples of 1,000 shares (i.e. 1,000   or   2,000   or   3,000   or   4,000…..)

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Actually, we can do that, we can buy only 500 shares of MEG, but it will now be called an “Odd Lot” transaction, and the execution of that order is NOT assured.

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Since we want to be able to buy when we want to buy, and we want to be able to sell when we want to sell, we should stick to buying or selling “in Board Lots

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WHAT IS THE PSEi?

PSEi stands for the Philippine Stock Exchange Index. Its old name is PHISIX, just in case it is more familiar.

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What companies belong to the PSEi?
(as of 28 June 2011)

PSEi constituents and weights

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In ordinary conversations and in reports we hear from financial media, the PSEi is the “price of the Philippine Stock Market”.

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Since it is a price, if the PSEi goes up, it is good. It can mean many things — good corporate earnings, favorable investor sentiment, high economic growth, good governance, and many others.

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Conversely, if the PSE is down, it is bad. It may be a result of a terrorist threat, an unfavorable earnings forecast, a failure to limit the budget shortfall, to name a few.

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Technically, however, it is only a representative of the whole stock market.

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Perhaps it will be more correct that when we say “the PSEi is up“, it means the prices of the 30 companies (see PSEi table above) increased, and vice versa.

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These 30 companies are “weighted based on market capitalization”. Roughly, however, it means their influence to the PSEi speaks of their relative importance to the whole stock market based on certain criteria.

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How does it work?

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For example, even if the stock price of PLDT (symbol: TEL) went up by merely +0.33% on 28 June 2011, it added +2.05 points to the PSEi (using a not so simple calculation).

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Compared it to the effect of, say, Metro Pacific Investments (symbol: MPI). It’s stock price went up by +1.69% on 28 June 2011, but it added only +1.64 points to the PSEi.

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How did that happen? TEL’s price went up by +0.33% and it added +2.05 point to PSE, while MPI’s price increased by +1.69% and it added just +1.64 points to PSEi?

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It is because TEL is 14.32% of the PSEi, while MPI is just 2.30% of PSEi. (please check the PSE table above)

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WHY IS PSEi IMPORTANT?

The importance of the PSEi lies on the idea that it is composed of quality companies from different industries.

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It was made that way so that it can be a “representative” of how investors view companies in the Philippines.

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Sometimes, companies in PSEi are called “blue chips“. It means they are relatively safe, they earn good profits, they are managed well, and some even give out cash dividends.

®PSEi as a benchmark for stock portfolios

That is why many investors use the performance of PSEi as a “benchmark” against which they compare how their portfolios are doing.

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To keep the purpose of having a PSEi valid, the PSE conducts regular review of the companies that are in PSEi. If based on a set of criteria, a company no longer deserves to be in PSEi, it is taken out from PSEi and replaced by other company/ies.

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Happy investing!

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>> back to Investor Education – Home

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In my previous post, I introduced you to our stock market, the Philippine Stock Exchange (PSE).

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We’ve learned that only through PSE can we buy or sell stocks of publicly-listed companies in the Philippines. We also had some discussions about its functions, particularly about the PSE having a power to create and enforce its own rules, a privilege it uses to ensure a “fair, efficient, transparent and orderly market for the buying and selling of securities“.

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PSE also endeavors to improve financial literacy through various investor education programs.

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Lastly, we talked about the “market players” which include the PSE (as the owner of the stock market), the publicly-listed companies, stock brokers and investors (like us).

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Now, let us talk about the “T+3 Rule” and how we calculate for the net cost when we buy stocks, as well as the net proceeds we get when we sell stocks.

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REMEMBER THE “T+3”

When trading stocks through the PSE, you would never miss to hear something called “T+3”. What is it? It means Transaction Date (the “T”) plus 3 days (the “+3”).

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BUYING STOCKS. Let us say, you call your broker today, June 27, and tell him that you want him to buy 1,000 shares of Ayala Land (symbol: ALI) at Php15.50 per share. Then, let us assume that someone who has 1,000 shares of ALI sold his ALI shares to you (in stock market investing language, we say that “the order has been matched“) at Php15.50 per share. Do you have to pay your broker today? NO.

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In buying transactions, your broker will require you to pay for your order (i.e. to buy 1,000 shares of ALI at Php15.50 per share) or settle the bill “T+3” or three days after transaction date.

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That means, if you were able to buy on June 27, you have to pay your broker on June 30 the total amount of Php15,545.73 (we’ll discuss how this total cost was computed later).

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SELLING STOCKS. Now, let us say after a week, or on July 4, you decided to sell your 1,000 shares of ALI after the stock’s price suddenly went up to Php17 per share. You gave your broker a call and ask him to do just that. After a minute or so, the broker told you “SOLD!” Do you receive the proceeds from the sale (which amounts to Php16,864.85, computation to be discussed later) on the same day? NO.

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The broker will give you the net proceeds of Php16,864.85 T+3,, or on July 07.

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NOTES FOR INVESTORS. Why is it important to remember the T+3 rule? For example, you currently have shares in Globe Telecoms (symbol: GLO). But you saw that the developments in PLDT (symbol: TEL) are doing great, so, you decided that you want to buy PLDT today. But you don’t have cash today, so you decided to sell Globe today thinking that you can use the money to buy PLDT shares today. Is this possible under the T+3 rule? NO.

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In the case of online brokers, however, since you were already required to deposit money with them when you set up your account, you can forget about the T+3 in buying transactions because the broker will immediately deduct the amount from your cash balance.

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Also, some (NOT ALL) online brokers allow you to do what you intend to do in the Globe-PLDT example, i.e. use the cash from selling Globe today to buy PLDT today. But do note that even those online brokers that allow you to do that would only let you withdraw the proceeds (i.e. in case you changed your mind and decided to just withdraw the proceeds instead of buying PLDT shares) three days after you sold your Globe shares (i.e. T+3 still applies).

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HOW MUCH DO I PAY WHEN I BUY STOCKS?

Luckily, I have already talked about this in one of my posts. Please check “Watch out for stock trading costs“.

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In gist, when we buy stocks, our brokers charge us a fee, the government collects some taxes, and the PSE ask us to pay something for the use of their trading facility. In buying transactions, we can calculate the amount we pay our broker using this shortcut:

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Below is a screenshot of an actual trading confirmation sent by an online broker for a BUYING transaction:

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Based on the screenshot, the Net Amount to be paid to the broker for buying 10,000 shares of Megaworld (symbol: MEG) at Php1.34 per share is Php13,439.53.

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Using our shortcut, we can easily calculate for that amount: 10,000 x Php1.34 x 1.00295 = Php13,439.53.

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HOW MUCH DO I RECEIVE WHEN I SELL STOCKS?

When we sell stocks, same charges apply, except for taxes which is bigger since we are charged “Sales Tax” when we sell. We can easily calculate for the net proceeds when we sell our stocks using the following:

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Below is a screenshot of an actual trading confirmation sent by an online broker for a SELLING transaction:

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Based on the screenshot, the Net Amount that we receive from the broker after selling 300 shares of International Container Terminal Services, Inc. (symbol: ICT) at Php32 per share is Php9,523.68.

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Using our shortcut, Net Proceeds = 300 x Php32 x 0.99205 = Php9,523.68.

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To be continued….. (about Board Lot Table and the PSE index)

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Happy investing!

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If the answer is YES, then let me first give you a guided tour of our very own stock market  — the Philippine Stock Exchange (PSE).

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A tour pf the Philippine Stock Market®

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In the Philippines, when we do our Christmas shopping, we usually go to Divisoria or Baclaran. Of course we have other choices —- we also have ShoeMart (SM) and Ayala Malls in the list, among many others.

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But when we want to buy (or sell) ownership shares (aka. stocks) of Philippine companies, we only go to our stock market.

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When we say “stock market” , what we really mean is the Philippine Stock Exchange (PSE).

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Philippine Stock Exchange (PSE)The PSE is a “private organization that provides and ensures a fair, efficient, transparent and orderly market for the buying and selling of securities” (source: PSE website)

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Note that the PSE is a private corporation. Its business is investing in and operating the facilities where we can buy and sell stocks. It is also listed in the stock exchange. So if you think that in the future more people will be engaged in stock market investing (which means it will collect more fees from those using its facilities), then buying the stock of PSE may be a good idea.

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Currently, PSE operates two (2) trading floors — one in Ortigas and one in Ayala, both in Metro Manila. Although they are geographically apart, the price of, say, Metrobank (symbol: MBT) stock in Ortigas is the same as its price in Ayala.

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PSE in Ortigas and in Ayala

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It maintains a website (www.pse.com.ph) which contains information on listed companies and valuable updates.

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FUNCTIONS OF PSE

In 1998, the Securities and Exchange Commission (SEC) gave PSE the status of a Self-Regulatory Organization (SRO). What does it mean?

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An SRO can make and implement its own rules and impose penalties on erring trading participants and listed companies (source: PSE).

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It means the PSE has the power to create its own rules and to enforce them for compliance of both the trading participants (aka. brokers) and listed companies to achieve its objective of providing and ensuring a “fair, efficient and orderly” stock market.

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The PSE also provides the investing public various ways to promote and enhance financial literacy through its investor education programs, either on its own or in partnership with various institutions.

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market education

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It also protects stock market investors when there seems to be unlawful or malicious attempt to defraud them.

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PSE promotes an environments of full disclosure. If there is something questionable about a listed company, the PSE requires that company to submit information ASAP. If it needs to, the PSE has the power to suspend the trading of that company’s stock to ensure that investors’ interest are protected pending clarification of concerns.

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WHO ARE THE MARKET PLAYERS?

Market Players®

Who are “in the market”?

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Market players include:

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  1. PSE, as the owner of the stock market
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  2. Listed / Publicly-Traded Companies, which number around 240+ as of this writing
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  3. Stock Brokers, also known as trading participants, who accept instructions from the investor (its client) whether to buy or sell a stock for their client’s account. As of this writing, there are about 190+ stock brokers.
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  4. Investors, including us. Investors are generally classified into two groups — institutional and individual (or retail) investors
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    • Institutional investors are entities like corporations, government, banks, insurance companies and mutual fund companies which invest big money in the stock market either for their own account or for the account of their clients
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    • Individual investors are people like you and me who invest money in the stock market
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WHAT ELSE DO I NEED TO KNOW ABOUT TRADING STOCKS THROUGH THE PSE?

In our next post, we will go through a more illustrated presentation of some things that we need to be on top of as stock market investors, which include the following:
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  • T+ 3 settlement, which means that when we buy a stock, we should only pay the broker three days after (the “+3”) the day we bought it (the “T” which means transaction date). When we sell a stock, the broker will give us the proceeds three days after the day we sold it
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  • Cost of buying and selling stocks, which includes not only the stock’s price, but also taxes, broker’s commission and PSE’s fee for the use of its trading facilities
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  • Board lot table, which sets the minimum number of shares (and by what multiple) that we should buy (or sell) based on the stock’s price
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  • PSEi or the stock market index, which serves both as an indicator of how our stock market is doing and as a benchmark which the performance of stock market investment portfolios are measured against.
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Happy investing!

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rich guy

Many Filipinos are still with the idea that investing in the stock market is reserved only for wealthy people. They think that investing in stocks is a rich man’s game.

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I would not be surprised if it is one of the top reasons why, based on the survey by the Philippine Stock Exchange (PSE), less than 1% of Filipinos invest in the local stock market.

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But some (if not most) “experts” would be quick to say that it is NOT.  A popular personality even boasted about his household helpers investing in the stock market.

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After all, do you know that you can ba a part-owner of Ayala Land, Inc. (symbol: ALI) for as low as Php1,543? Or, are you aware that it only takes Php864 to own part of Jollibee (symbol: JFC)? (click here to download the MS Excel file showing cost calculation)

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As you will learn after reading this post, while it is true that the odds of success are tilted in favor of those who have deeper pockets (who own companies, who have experts to give them advice, who have more money to throw in when times are tough, etc.), the “not-yet-rich” still can invest in the stock market and benefit from it.

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WHAT ARE MY OPTIONS?

There are two ways to invest in the stock market:

  1. Open a stock brokerage account and buy/sell stocks directly, or
  2. Invest in pooled funds such us UITFs (or Unit Investment Trust Funds)

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For Option #1, local stock brokerage companies usually ask for a minimum amount before they open your account. As of date, the more popular online stock broker requires at least Php25,000 before they allow you to open an account with them and use their system to buy/sell stocks.

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For Option #2, banks offer UITFs that invest primarily in the stock market for a minimum of Php10,000. However, due to the growing interest of would-be investors, and partly because of competition with other banks offering UITFs, the top universal bank (to date) in the Philippines has just recently announced that they accept investments in UITFs for as low as Php1,000.

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CAN I AFFORD IT?

Based on the facts presented so far, we know that we can invest and benefit from the gains in the stock market if we can set aside at least Php1,000.


Now, let us see if there is a good chance that most of us (again, the “not-yet-rich”) can afford to invest in the stock market.

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Consider a call center agent who, after working for a year, thought about investing in the stock market.

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Based on the Salary Report published by Jobstreet.com.ph, the average monthly salary of a call center agent with 1-4 years experience is Php15,000. With a little more calculation, net take home pay is roughly Php12,000 per month.

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Assume further that the call center agent:

  1. …keeps his food allowance at Php80 per day
  2. …takes two (2) jeepney rides going to work, and another two (2) jeepney rides going back home
  3. …pays a monthly rental of Php3,000
  4. …pays a monthly utilities bill (e.g. electricity, water) of Php700
  5. …takes daily vitamins which cost him Php5 per day
  6. …was able to read our post on “Things to consider before investing in the stock market” and decided to set aside Php1,000 a month to build up his emergency fund (placed in a time deposit account), and took out a life insurance policy with Php700 premium payable every month

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After some organizing, we arrived at this:

click on the image for a more detailed presentation of the calculations

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So, every month, the call center agent has Php3,346 at his disposal. He can use some to go out with friends once in a while, or give some to his parents, or buy new clothes, or spend on a date with someone special, or save some for future travel plans.

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But more importantly, he has enough “extra” to make setting aside at least Php1,000 per month for his long-term savings invested in a stock market UITF possible.

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POINTERS BEFORE YOU INVEST

We now know that it only takes as low as  Php1,000 to invest in the stock market and that most of us can afford to set aside at least that amount for our long-term financial objectives. The only thing left to do is to start investing!

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A little caution though. Before setting foot on stock market investing, be sure
that:

  1. You put first things first (please see “Things to consider before investing in the stock market“)
  2. You should know the reasons why you are investing (aka. financial objectives)
  3. You commit to exercise discipline and put in additional investments to your “stock market account” regularly (please see “Peso Cost Averaging is no magic, but it works!“)
  4. You resist the temptation of withdrawing your money from your “stock market account” since it is supposed to be for your long-term cash needs
  5. You adhere only to sound financial advice and swear not to listen to rumors about a “hot stock” that you should buy for quick profits

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Happy investing!

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>> back to Investor Education – Home

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A good number of people has asked me, “Where can I put my money now?”

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And then they go on talking about how much is that “money” that they plan to put into something. Some have Php10,000, others have Php50,000, still others have more.

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I am not sure whether it is the reason why they approached me in the first place, but most often, the first thing that comes to their mind when they think about where they can invest their cash is investing in the  stock market.

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And this is where the trouble begins.

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To put it simply, investing in the stock market is RISKY.

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Sometimes, especially when you invest directly in stocks and just pick the three or five most popular companies from the list, or buy whatever stock your “trader” friend told you, without any other reason, investing in the stock market becomes VERY RISKY.

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Stock prices go up and down. Sometimes up, up, up (and this is when it invites people to get in and invest), and then down, down, down (and this is the time when new investors sell their stocks and promise never to do it again).

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KNOW WHY YOU WANT TO INVEST

Know why you want to invest

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The answer to the “Where can I put my money now?” question really depends on the reason why you want to get your cash into action, i.e. why you want to invest.

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Of course, the simple reason is we want to earn. We want to grow our money. We want our Php1,000 not to stay Php1,000 any longer. We want more money than what we already have.

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But do we want more money to buy something today (next week, next month, or within the year)? Or do we want more money to afford something in the future (three, five, ten, twenty years from now)?

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Having a firm understanding of the specific reasons why you want to invest your cash today is essential in determining the kinds of investments you can allow yourself to get into.

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Are you saving for your child’s tuition fee for the next semester? Or are your cash supposed to be your/your family’s emergency fund? Then investing in the stock market is not for you.

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Do you want to save for retirement? Or do you have extra cash that you are willing to invest today and a commitment to put in additional investments every month for as long as you can? Then maybe investing in a stock market fund (a mutual fund or a UITF) can help you achieve your goals.

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PUT FIRST THINGS FIRST

Before committing your life-long savings, your first salary, or your hard-earned cash to risky investments like the stock market, consider the following:

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  1. Do I already have an emergency fund? An emergency fund is just a fancy term for the old-fashioned (but time-tested) “secret stash” the elders used to have. Although in our modern age, you don’t have to keep it  in the darkest part of your closet anymore.
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    It helps to have something you can dip into when the need arises. It gives us the peace of mind.
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    It does not have to be big, but it has to be there.
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    Some say you should keep a “secret stash” with cash equivalent to at least six months’ worth of your necessary expenses (e.g. food, rent, transport fare, medicine, among others). If you have a family, consider including as “necessary” the minimum installment tuition fee for your children, so as not to disrupt their way to a brighter future.
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    You may choose to set aside smaller than a six months’ worth. Let us say, keep enough just for two months. But you might have to work a little harder and make sure you don’t get unemployed (or your income stream does not flow) for more than two months.
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    But more importantly, never let your emergency fund get into risky investments like in the stock market. Keep it in a safe time deposit. Never mind  if it is earning almost nothing.
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  2. Do I have something to leave behind just in case “that thing” happens? “That thing” refers to unexpected (or unanticipated) death or becoming disable and unfit to work and earn a living.
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    Especially for those who already have a family or are planning to have one, the responsibility spans beyond providing for their needs while you are alive and working. It is also our responsibility to ensure that they can cope with the (costly) demands of life at least until they get to the stage where they can earn a living for themselves.
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    Consider getting an accident, disability, and/or life insurance. You may also include pre-need products such as an educational plan for your children. Don’t be afraid to talk to your insurance/pre-need agent.   Shop around, get to know their wide range of products and services, know how much premium (i.e. the amount you have to pay every month/quarter/semester/year) they charge, and decide what best fit your protection needs.
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    Consulting with agents is FREE. But they can be really persuasive and overly persistent with their offers. Make sure you know how to say NO when you have better alternatives.
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  3. Do I still owe somebody something? Before thinking about investing in financial instruments (e.g. time deposit, bonds, stocks), it helps if we free ourselves first of worries from having debt, especially those which bear huge interest rate and are very costly to maintain.
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    One example is credit card debt. If you use a credit card, make sure you pay the full amount of your credit card bill every month.  It doesn’t make sense to invest the cash you have now and not pay your credit card bill in full.
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    Credit cards charge around 2% to 3.5% PER MONTH for unpaid balances. If you don’t pay a Php100 this month, it will be (at least) Php102 next month. If you still don’t pay it next month, it will be Php104.04 the month after, and it will just multiply to huge sums before you know it. Accept it that you can never earn enough to pay for your mounting debt from a bond or a stock market investment.
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    (If you know that you cannot control the way you spend, do yourself a favor, do not use a credit card.)
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So, after you have set aside something for emergencies, after you budgeted some for your monthly insurance premium, and after you paid off your debts (especially those that have interest), you may now start to consider investing in bonds or in the stock market to achieve your other long-term financial objectives . Happy investing!

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