Stock Market for Beginners: What it is and How it works
One of the reasons why some people do not start a business is because it is a difficult process. There is a lot of work involved.
But what if you can be a business owner without actually doing all the work?
For many people, such a thing is a mere dream — but it is close to reality. This is what happens when you own “stocks” or invest in the “stock market”.
What is a Stock Market?
The stock market, as the name suggests, is a place or institution where people can trade (buy and sell) stocks, which are shares of a company.
A share is like a small piece of a large company. For example, if you have a stock or share of the telco giant PLDT, you own a small piece of the telecommunications company. The more shares you own, the larger a piece of the company you have.
When a person has a share in the stock market, he is now an “investor”.
How does the Stock Market work?
The stock market works when people buy and sell stocks of different companies. The price of each stock generally depends on a lot of complicated computations — but the main thing that affects them is the balance between the demand and supply.
Simply put, when many buyers want to buy a particular stock, the prices may go up. This usually happens when the company is performing very well.
Remember that you own a piece of this growing company, so your money will grow as well.
On the other hand, when the company performance goes down, people will stop wanting to buy it. Because of the decrease in demand, the price of the stocks may go down.
You can invest in the stock market wherever you are
Because of technology, the stock market is no longer just limited to a single place. People can join in the activities of the market wherever they are, thanks to computers and the Internet. This also allows people to buy and sell stocks easily and quickly.
However, there are some people who prefer to buy and sell stocks through stock brokers. These are people who help the stock market investors by doing their transactions for them.
An experienced stockbroker can also offer good advice on what the investor should do next. This advice is usually based on a lot of things. News and other public information about the company in question is a common source of stock advice.
More Information About Stocks
You might notice that we used the words “stocks” and “shares” interchangeably. They are also called by other names, such as “equity”.
A person who holds a stock is also called a “shareholder” of a company. He has a physical representation of the stock that he owns. This is the “stock certificate”.
Today, the individual owner no longer sees this piece of paper, because this is now held by the brokerage (the company where the stockbroker comes from).
This makes buying and selling stocks faster because you no longer have to manually get or receive the piece of paper.
Note that being a shareholder does not mean you have rights to the company itself. You cannot directly influence how the company is being run.
For the most part, each shareholder is given a vote in company elections equivalent to the number of stocks he owns. For example, there is an election for the new CEO. You vote for Candidate A, and you have 100 stocks of the company.
This means your vote will count for 100 votes for Candidate A. The more stocks you have, the more voting power you have. This is usually the farthest your influence in the company will go.
There are also different types of stocks:
Common Stock. As the name suggests, this is the common type of stock — most stocks in the market are of this type. In the long term, the common stock usually gives the investor higher returns than any other investment form.
Preferred Stock. With a preferred stock, the investor is usually given a fixed rate of returns for so long as he has the stock. This is in contrast with common stocks whose returns may rise or fall unexpectedly. When “liquidating” (think: encashing) the stocks, preferred stock owners are also paid before the common stock owners.
Aside from these two, companies that offer stocks also have the right to “customize” or change the types that they give out to the public. Sometimes a company may change the shareholders’ rights to vote, or they may want to make other arrangements. These different classes of stocks are usually designated by a letter of the alphabet (such as “StockX” or “StockY”).
Other Terms about the Stock Market
Here are also some of the basic terms you need to know to trade in stocks:
Stock Symbol. This is a set of letters that are assigned to a stock, for security and trading purposes. Some stocks have symbols that are three characters or less, while some have four. If there is a fifth letter at the end, that means it is not one of the common stocks we discussed. Another name for the stock symbol is the “ticker symbol”. For example, the ticker symbol for SM Investments Corporation is SM:PM, while SM Prime Holdings Inc. is SMPH:PM.
Market Price. In simple terms, the market price is the price at which the buyers and sellers of a stock agree. This is hence the ruling price for a stock. This is determined by a mathematical formula that focuses on the law of supply and demand. For example, you are going to buy the stock at Php50 each — this is the market price.
Bid Price. This is the maximum price that a buyer will be willing to pay for a stock.
Ask Price. This is the minimum price that a seller is willing to receive for a stock. When the bid and ask prices meet, a trade can be made.
Risks of the Stock Market
Many investors see the stock market as very “volatile” — meaning it can change drastically at any time. The stock market is also very easily influenced by different matters — economy, politics, international affairs, etc.
For example, Country A suddenly had a problem with Country B. Country B happens to be a source of raw materials for a product of a company in Country A. This problem in international relationships can cause a problem in the company, which can cause their stock price to decline.
Because of this, there are two key risks associated with the stock market.
First, returns are not always guaranteed — you may earn, but it is not assured.
Second, you may start losing money — the price of the stock when you buy it may be much higher than when it is sold, so you are losing money in the process.
There are, however, many ways to minimize these risks. It all boils down to a combination of experience and an awareness of the things happening in the stock market.
How do you earn from the stock market?
Earning from the stock market is fairly simple. There are two ways:
1. When the stock “appreciates” or increases in value.
For example, you bought a stock at Php 10. Over time, it grew to Php 20. Because the company is performing well, other people would want to buy the stocks as well. You can then sell your stocks to these people at a profit of Php 10 each.
2. When the company gives out “dividends” — a payout that is sometimes given to investors as their share in the company’s growth.
For example, you own 500 stocks in a growing company. Because of the successful performance of the company, its investors may be given a cash value proportional to the amount of shares they own. If the company decides to give Php 2 for every share, you will get a Php 1,000 dividend.
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