Stock investment 101: Long-term investments through stock market trading

First things first–Stock market investing is a long-term strategy tied to your long-term goals. It’s not for quick and easy wins or you risk losing to market volatility versus making gains against the general performance of the market. You also only want to invest money that you have no near to mid term need for. It’s for mature investors because judgement calls in the stock market.

Investing in the stock market isn’t for the faint of heart or those with a small appetite for risks. When stocks for an organization can fluctuate depending on the market and the public’s attitude towards it, it’s one of the most volatile investments to add to your portfolio.

But with high risks come high rewards. Stocks’ volatile nature allows investors to earn big when a business thrives. Unlike other investment instruments that are low-risk and low-reward that offer passive income, stocks that boom can provide large returns during their peak.

Interested in investing in the Philippine Stock Exchange? Here’s what you need to know about long-term stock investing before you do.

What are stocks and the stock market?

Companies in the Philippines can either be privately owned or publicly traded. As many business owners know, many businesses grow at annual rates that usually outpace the general trend of the economy. Publicly traded companies however, allow you to grow your investment either by buying the stocks low and selling it high, or just earning from dividends.

To illustrate this point, have a look at the charts below. One represents the economic performance of the country, and the other is the stock market performance over the same period of time:

Think of stocks as a share of the ownership in a company listed on the Philippine Stock Exchange (PSE). When you buy stocks, you become a shareholder or stockholder of the company. It’s good because you’re technically a part-owner of that company (though depending on the number of the stocks you buy, you may not be a large enough part-owner to make major decisions), so you’re entitled to a percentage of the company’s profits depending on how many stocks you bought.

Stocks can be bought in the Philippines through the PSE. You can opt to buy stocks directly as an investor. You can also opt to invest in instruments like UITFs that can invest in stocks using investors’ funds. For instance, the Metro Equity Fund invests in blue chip and fundamentally sound equities listed in the Philippine Stock Exchange (PSE).

Why invest in stocks?

Despite its volatile and uncertain nature, stocks are a popular investment asset because of the following features and practices:

• Buy low, sell high- The ideal stock investment involves buying stock when the price is low and then selling when the price is at its highest. This means playing the waiting game and trusting that the company you invest in reaches a price where you can profit greatly when you sell.

• Higher yields- Based on historical data, investing long term in stocks offers higher earnings that other low-risk low-reward investment tools.

• Dividends- Aside from the gains of watching their stocks grow, investors can also receive dividend incomes from some PSE listed companies. These companies would have to be profitable (there is no guarantee of dividends if the company is facing a loss) and investors can receive dividends up to four times a year, depending on their company’s policies.

• Part-owner perks- Being a stockholder gives you a right to vote for the company’s Board of Directors, though your voting power depends on how many stocks you’ve purchased.

• Anyone can invest- Gone are the days when stock investments were reserved for those with millions of pesos in disposable income. Today, any Filipino at least 18 years of age can invest for as low as P5,000. To make investing easier, safer, and more convenient, you can also invest using online trading platforms.

The benefits of long-term investments

The stock market is for those looking for long-term investment opportunities and don’t mind the waiting game. The longer you invest, the more opportunities you can profit. In this method, it’s best to diversify your portfolio and do your research on the companies that are likely to perform well after several years.

The longer you have stock, the bigger the potential to earn more dividends and the more likely you can watch your stock value grow. It’s not recommended that you put all your eggs in one basket and buy stocks in multiple industries.The volatility of the stock market means that part of your stock’s performance relies on the economic performance.

Cons of stock investment

• Volatile price- Stock investments’ volatile nature that is its strength can also be its weakness. You have little to no control over the prices of your stocks. One day you can see your stock double in price, but after a few days your stock may be 20 percent less than what you purchased it for.

• Non-economic factors-. While historical data attests to the economy’s stability, plenty of factors can also affect your stock’s value. For instance, it can be an emotional roller coaster for some due to how stock prices rise and fall per second. Many individuals tend to buy high due to greed and sell low due to fear.

• Major losses without diversification- Should you choose to put all your money in one company, you stand to gain a lot more when it peaks. But if that company fails, you could lose a significant portion of your money if it devalues. This is why it’s highly recommended you diversify your stock portfolio.

• No guarantee- Like all types of investments, profiting is not a hundred percent guaranteed. And given the market’s volatility, this makes it a much bigger risk compared to other types of investments.

• Time consuming- When you buy stocks on your own, you must do extensive research on each company to determine its profitability. This entails reading financial statements and annual reports as well as following the company's developments. You also have to constantly monitor the stock market itself. Professional competition such as traders and institutional investors have more time and knowledge to invest. They also have financial models, sophisticated trading tools, and computer systems at their disposal.

The stock market isn’t the investment choice for everyone. Those who aren’t comfortable with the high-risk high-reward that the stock market has should consider the other local options available that offer less risks but with a less (but more uniform) reward.

But for those who are risk takers, thoroughly research their options, and are willing to play the waiting game, many financial opportunities await when you enter into stock trading.