Historical data as shown that investing in stocks over the long-term provides superior returns. Stocks offer potentially higher yields compared with fixed income instruments such as time deposits, government securities and bonds. Moreover, here are the rationales behind stock investing:
a. Participation in the ownership of a company – An individual who invests in the stock market automatically becomes a stockholder of a particular listed company regardless of how many shares of stocks he/she holds. As a stockholder, an investor is entitled to the following benefits: 1) voting rights; 2) dividends to be declared by the company; and 3) share of the remaining assets of the company if it is to be liquidated.
b. Liquidity of Funds – A stock market investor has an easier access to funds given that he/she can always cash in or out his funds anytime, during trading hours, through his/her stockbroker. Compared to banks which require high minimum conditions or collaterals for deposits and credit, an individual can start an investment for as low as P5,000. Note, however, that the minimum amount of investment varies depending on the stockbroker chosen and the stocks to be purchased.
c. Make money – The stock market is a good venue for an investor to grow his/her money provided that he/she understands the basics of stock investing. An investor can generate more money either through the cash dividends declared by the listed company or through the price appreciation of his/her shares over time – that is – assuming he/she bought the shares at a low market price then selling it at a higher price. An investor can also benefit from a listed company’s stock dividend declaration as the shares of stocks add up to their holdings at no purchasing cost and can later be sold anytime he/she wishes.
a. Common Stocks – These are usually purchased for participation in the profits and control of ownership and management of the company. Holders of common stocks have voting rights, and they are entitled to an equal pro rata division of profits through dividends without preference or advantage over another stockholder. However, they have the last claim on dividends and are the last to collect in case of corporate liquidation.
b. Preferred Stocks – As the name implies, preferred stocks carry benefits that are above what is enjoyed by holders of common stocks. Holders of preferred stocks, for one, receive dividends, to the extent agreed upon, before any dividends are paid to the common stockholders. Preferred stocks however, usually have a specified limited rate of return or dividend and a specified limited redemption and liquidation price.
c. Warrants – A company can also raise additional capital by issuing warrants. A warrant, normally issued on a detachable basis, allows its holders the right, but not the obligation, to subscribe to new shares at a set price during a specified period of time. It is usually provided free of charge and traded separately in the stock market.
d. Philippine Deposit Receipts (PDRs) – A PDR is a security which grants the holder the right to the delivery or sale of the underlying share and to certain other rights including additional PDRs or adjustments to the terms or upon the occurrence of certain events in respect of rights issues, capital organizations, offers and analogous events or the distribution of cash in the event of a cash dividend on the shares. PDRs are not evidences or statements nor certificates of ownership of a foreign/foreign-based company. For as long as the PDRs are not exercised, the shares underlying the PDRs are and will continue to be registered in the name of and owned by, and all rights pertaining to the shares shall be exercised by the issuer.
In the Philippines, the only operating stock exchange is The Philippine Stock Exchange, Inc. (PSE). Its main function is to facilitate the buying and selling of stocks and other securities through its accredited stockbrokers or trading participants.
The PSE has two trading floors, namely – the PSE Centre in Ortigas Center, Pasig City, and the PSE Plaza in Ayala Avenue, Makati City – where trading participants execute transactions daily from 9:30 AM to 12:00 NN and 1:30 PM to 3:30 PM, except Saturdays, Sundays, legal holidays and days when the Bangko Sentral ng Pilipinas Clearing Office is closed.
The PSE uses the PSEtrade XTS trading engine which runs on the X-stream Trading technology of Nasdaq. PSEtrade XTS allows for multi-asset class trading, expanded trading capacity, and enhanced risk management and business continuity processes.
The PSE through the Philippine Central Depository (PCD) uses the computerized book-entry system to transfer ownership of securities from one account to another, thus eliminating the need for physical exchange of scrip between the buyer and seller. Scripless trading describes the system where settlement is carried out via book-entries, rather than by the movement of physical certificates. However, you may still request for an upliftment of your shareholdings to get a physical certificate.
Market performance is typically measured by three indicators, namely, market capitalization; value turnover; and index levels.
a. Market Capitalization – Market capitalization is the total market value of all of a company’s outstanding shares. It is calculated by multiplying the company’s shares outstanding by the current market price of the company’s share per piece. Market capitalization is an indicator used by the investment community when determining a company’s size. For example, if a company has 35 million shares outstanding and each is worth P100, then the company’s market capitalization amounts to P3.50 billion.
b. Value Turnover – Value turnover is the amount of transactions in monetary terms traded on a particular period. It tells how much money is turned over from the trading of stocks. Value turnover is calculated by adding up all the transaction value of all shares traded in a specified day, month, quarter or even a year.
c. Index Level – The index level is a barometer by which the upward or downward trend of a group of stocks is established. In the case of the PSE, there are separate index levels for each of the six sector indices, all-shares index and PSE index (PSEi). The index levels vary due to the listed companies included per index and the different base years used when each index was created.
The primary purpose for the public listing of a company is to raise capital in a cost-effective way. It provides the company another venue to tap additional funds other than the traditional lenders like banks and other financing institutions. In this way, the company can expand its business without increasing debt or draining its cash reserves. Listing in the stock exchange can also catapult the company and its products to public awareness and interest, whether locally or abroad, and consequently increase its customer base or attract new institutional investors for the company.
The PSE incorporated the Capital Markets Integrity Corporation (CMIC), a spinoff of the Market Regulation Division, to monitor and penalize trading participants that violate the Securities Regulation Code and its implementing rules and regulations; the Anti-Money Laundering Law and its implementing rules and regulations; the Code of Conduct and Professional Ethics for Traders and Salesmen; CMIC Rules; and other relevant laws and regulations. The CMIC shall also have the jurisdiction to investigate and resolve trading-related irregularities and unusual trading activities involving issuers based on complaints received, findings and reports. The CMIC became operational in March 2012.
CMIC, with the approval of the PSE President, shall have the power to restrict, halt or suspend the trading of a listed security of an issuer or the trading by a trading participant of a particular listed security in cases of unusual trading activities or possible trading-related irregularities.
Through price fluctuation measures – The PSE enforces static and dynamic thresholds to safeguard against unusual fluctuations in share prices.
The Static Threshold enforces a 50% trading band within which the price of a stock is allowed to move. When the stock price jumps 50% (price ceiling) or falls 50% (floor price) on a particular day, to be reckoned from the last closing price or the last adjusted closing price, the trading of the stock shall be automatically frozen by the PSE upon reaching said limit, unless there is an official announcement from the listed company or the proper government agency which would justify such price fluctuations.
The Dynamic Threshold is the maximum allowable price difference between an update in the Last Traded Price (LTP) of a given stock or group of stocks and its preceding LTP that is equal to a percentage set by the PSE, subject to the classification of a stock or a group of stocks based on its trade frequency. The Dynamic Threshold of a listed stock may vary from 10% , 15% and 20% depending on its trade frequency.
• Through disclosures – Since timely and reliable company disclosures are essential components of a fair and efficient market, the PSE also sees to it that listed companies promptly disclose only factual and truthful information. The PSE requires that material information, which may affect a listed company’s stock price positively or negatively, are disclosed within 10 minutes after its occurrence. Disclosures must also be done first to the PSE so that it will cascade information to every investor and general public through its communication channels and not to a selected group of individuals only. Non-compliance with or violations of the PSE Disclosure Rules are heavily penalized with fines, trading suspension, or even delisting from the PSE.
• Through the SIPF – Another tool created for the protection of investors is the Securities Investors Protection Fund, Inc. or SIPF. The SIPF, which is comparable to the Philippine Deposit Insurance Corporation providing insurance for bank deposits, seeks to build and enhance investors’ confidence in the market and is envisioned to protect the investing public from extraordinary losses, other than the ordinary market fluctuations, arising as a result of fraud, failure of business, or judicial insolvency of PSE-accredited stockbrokers. Protection to investors is automatic upon the opening of an account with a PSE-accredited stockbroker and given by way of compensation for trade-related obligations of stockbrokers to its customers.
Stock market investing does not guarantee returns every time, so investors are best served to familiarize themselves with the risks involved. These risks may come from company and economic developments here or abroad. Robust economic growth, low inflation rates as well as stable interest rates and foreign exchange rates are good news for the stock market. They usually have a positive impact on market performance as these indicate a sound macroeconomic environment. An opposite scenario in any of these economic indicators could negatively affect the stock market.
Given the inevitable nature of risks in stock market investing, an investor should then be able to limit and manage his/her risk expectations. An investor can cope with this by setting the maximum level of gain or loss, and calculated decisions should be made when this level is reached.
While an investment has been entrusted to a stockbroker, it is also the investor’s responsibility to spend time and effort in studying his/her investments. An investor should keep track of the stock price and follow closely the developments of the company through disclosures posted on the PSE website as well as news from major newspapers, television, radio and the Internet. The PSE Ayala office also maintains a Library which is open from 9:00 AM to 4:00 PM, Mondays to Fridays, should an investor want to do research on his/her investments. Being informed helps an investor foresee possible gains and losses and thus make sound and wiser investment decisions.