What you need to know about the Philippine Stock Exchange
I have shared quite a lot about the stock market including the basics and some investment strategies but I thought you might also be interested in knowing more about the Philippine Stock Exchange and how companies or stocks become part of the PSE.
About the Philippine Stock Exchange
The PSE has been operating continuously since 1927, making it one of the oldest in Asia. The PSE has two “floors” where it trades. “Floor” is the term used to indicate the physical space where trading occurs. The first one is at the headquarters of the stock exchange, in Ayala Tower One, located in the Central Business District (CBD) of Makati. The second one is at the Philippine Stock Exchange Centre. This is a building in Ortigas, Pasig City. The PSE is being managed by a 15-man Board of Directors.
The Philippine Stock Exchange has an “index”. In stocks, considered as a bird’s eye view or overview of the market. It is usually measured by an average of selected stocks. While other countries have different indices such as the Dow Jones and the S&P 500, the Philippines has the Philippine Stock Exchange Index (PSEi).
This is also called the composite index. Our index is made up of 30 companies, selected from a set of qualifications. There are also six other indices, which are based on different business sectors: holding firms, financials, mining and oil, industrial, property, services.
The PSE opens its trading at 9:30 in the morning, from Monday to Friday. Before this, there is a “pre-opening” at 9 AM when the trading can already start. There is a recess from 12 noon to 1:30 in the afternoon. The market pre-closes at 3:15, and totally closes at 3:30 PM.
The PSE hit started a string of all-time high composite index scores during the beginning of 2013, when it rose to 6,847. This was after the Philippines has been upgraded to being an “investment grade” country by the Fitch Group, an international credit rating agency (those that measure the ability of a country to pay its debts).
This is an example of how the market responds greatly to news, especially those related to finance. In May of that year, the index rose to 7,403. However, it fell again to 5,889 due to news of America’s limitation of its monetary reserves. This is another demonstration of how great the stock market can move.
As of the time of this publishing, there are 313 companies listed in the Philippine Stock Exchange.
How are companies listed in the PSE?
To maintain integrity, the Philippine Stock Exchange has a set of strict rules that need to be followed for a company to be included in its listings. The criteria can be a bit confusing, but here are some of the general requirements.
1. The company applying for PSE listing should have a good financial standing in the year before the application.
2. It should also be already operating for three years before the application.
3. When required, the company should allow to be checked by an independent inspector. This inspector will be accredited by the Securities and Exchange Commission (SEC) and will ensure that the value of the company’s assets are correct.
4. The company should have an “investor relations program”. This ensures that any important news that will affect the company are effectively sent out to its investors (those people who will buy its stocks). The minimum investor relations program asked for by the PSE consists of the following:
- Basic company info, including board of directors, the organizational structure, and the management team.
- Latest news about the company, including any press-release.
- Financial reports. Aside from those sent once every three months, there should also be one sent once a year, which also usually covers the past two years.
- There should e a section that talks about the frequently asked questions of investors.
- Contact details. Many companies have a special hotline or contact details for its shareholders/investors. This allows the investors to contact them for assistance and other services.
- Stock details. Of course, companies should include details about the stocks.
When a company meets all of these, then their application for listing in the Philippine Stock Exchange will be granted. Then, the public will be sure that the company is a strong one — one that is not likely to cause investors to lose because of a defective system from the start.
There are also lots of other, more complicated requirements that tackle the company’s track record, capital, as well as the number of stock holders that it has. There are also things that a company is not allowed to do. All of these are listed in the PSE’s website.
The World of IPOs
In the stock market, IPOs are a special matter. “IPO” is short for “Initial Public Offering”. It is called “initial” because this is the first time that a stock will be sold by a specific company.
Before we can discuss the significance of the IPO, we first need to cover the two kinds of companies — private and public. A private company has few shareholder, and the owners of such a company would not have to tell anyone as much information about the company. While being private is commonly a characteristic of small and medium businesses, there are also large companies that are privately held.
A private company does not sell stocks to anyone else. While it is possible to approach the owners about buying a share to invest in the company, they may or may not sell you anything.
On the other hand, a public company is one that is already selling stocks to anyone who wishes to buy. A public company is also a part of the stock market. When investors talk about “doing an IPO”, this means the act of opening a company’s shares to the public.
Unlike private companies, public ones have lots more shareholders. They also have to follow strict rules. For investors, a public company is another opportunity to invest in something.
There are many positive sides to being a public company. Of course, when people buy your shares, it is possible to raise lots and lots of funds. Because companies are now following tighter rules, they can get better rates on their debts. There is also a better chance of two companies combining as one (called a “merger”) — instead of doing everything via cash, it is now possible to do deals by issuing stocks.
Should you invest in IPO stocks?
In the past, only those private companies with a considerable track record can do an IPO. It was not an easy task to get oneself listed in the stock market. In the Philippines, this is still the case most of the time.
However, the increasing influence of the Internet is quickly changing all this. Sometimes, a solid background is no longer needed in order for a company to go public. There are times when smaller businesses pass the criteria and use the stock market as an avenue to expand their operations.
For an investor, this could be a huge risk. On one hand, IPOs are usually priced low, thus they have higher chances of increasing its value over time. But again, this is not guaranteed as there are many factors that affect the movement of the stock price. There are investors who have gotten rich just by buying the IPO of a soon-to-be-big company. Imagine buying the stocks of Jollibee when it was first released — in a span of several years, it turned out to be a giant.
On the other hand, a company may just be trying to get an IPO out as an “exit strategy”. There are some companies in the stock market who never really planned on making a profit. When this happens, the shareholders will get no value from the stocks. As people buy their shares, the company will just keep the money without using it to expand their businesses. This can be used by dishonest businessmen to make themselves rich. Obviously, such companies will not remain in the stock market for long. Instead of being the beginning of new opportunities, the IPO then becomes the end.
Remember that in its simplest meaning, selling a stock is similar to selling any other product. If you can ask people to buy a stock, then you can use the money according to your will. This is dangerous for investors who want to see their money grow.
This is also why, when I first started investing in the stock market, I did not choose an IPO. I did not choose a giant, household name, either. They were companies with a considerable opportunity for growth, but they were not new to the stock market. Besides, the process of getting an IPO is not usually easy, and many times it takes a large bank account to buy one.
While the authorities at the Philippine Stock Exchange attempt to stop such bad events from happening, it is not a 100% assurance. In the end, it is still very important to do your own research. You should also check if you can take the financial risk of buying IPOs.
Read the Stock Market Series:
- Stock Market for Beginners: What it is and How it works
- How to Choose a Stock Market Broker in the Philippines
- How much should you invest in the Stock Market?
- Stock Market Strategies: How to Analyze and Value Stocks
- Stock Market Strategies: How to Maximize your Profits and Minimize your Losses
- 5 Possible Risks in Investing in the Stock Market
- What you need to know about the Philippine Stock Exchange