Stocks 101

This will be veering away from my lesson plan but I believe that when an opportunity strikes, it has to be seized. Friends, the Philippine Stock Exchange Index or PSEi is one of the best performing indexes in the Asian region and it would be a letdown for me if I don’t let you in on this opportunity to earn a lot more than your usual deposits. But before anything else, let’s start with stocks. What are stocks anyway?

Company Ownership Types

If you listened in class, you would know that there are three basic types of company ownership: sole proprietorship, partnership, and a corporation. A sole proprietorship is owned by one person only, as the name implies; the taxes and other liabilities of the company are the proprietor’s liability as well. A partnership is owned by two or more partners, with liabilities equitably and personally shared by partners according to the interest stake. A corporation on the other hand is owned by five or more shareholders, it is by itself a legal entity or a separate person; incorporating (from the Latin incorporare, union into one body) is the act of forming a separate entity that has its own legal rights and obligations separate and distinct from its shareholders, i.e. the income tax of the corporation is separate from the income tax of each shareholder, the corporation may be sued and the shareholders will not have to answer for it, etc.

Stocks

As evidence of ownership, corporations issue stocks or shares. Holders of these shares or stocks are called, obviously, shareholders or stockholders. The stocks that people can invest in are stocks of public companies. In the Philippines there are thousands and thousands of privately-held companies, big and small, from the panaderia in your kanto to the big manufacturers in the eco-zones. However, there are only just more than 200 public companies listed on the stock exchange. Companies list in stock exchanges to have access to public equity financing, meaning, they sell their shares to the public in exchange for the investor’s money. The company uses this money to finance some of its operational or growth needs. The investors on the other hand, become owners and may earn from shares on the profit or dividends and has the right to vote on certain matters during general assemblies. For the company, this is an alternative to debt financing, borrowing money – taking in more debt – to finance your operations. For example, Cebu Air, Inc. a subsidiary of JG Summit Holdings (the holding company of the Gokongwei family), will list on the Philippine Stock Exchange and do an Initial Public Offering – the largest in the history of the PSE – to buy more aircraft.

Stock Exchange

There is only one stock exchange in the Philippines and that is the Philippine Stock Exchange. The PSE is an independent company licensed by the Securities and Exchange Commission to operate as an exchange. There is another exchange in the Philippines called PDEX or the Philippine Dealing and Exchange Corporation but this is a debt and foreign exchange, rather than a stock exchange. In some countries, there are
multiple exchanges like in Germany and India and different types of exchanges like commodities exchanges, where metals, oil and other products are exchanged. The concept of the stock market is actually very simple. The price of the shares are dictated by the buyer and sellers of the shares. Once a deal between a buyer and a seller closes, that price will appear on the ticker as the “Last” price. The price is ruled by the law of supply and demand, the greater the demand, the higher the price, the greater the supply, the lower the price. The supply and demand is affected mostly by public perception of the company’s business performance or by speculative plays by some investors. Investors tend to dump shares into the market when they hear bad news about the company’s financials, increasing the supply and driving prices down.

As an analogy, you can literally company the stock market to a public market. If you’re buying pork from the market, you usually have an idea of how much it costs and you have a budget allocated for it. The pork also has an idea how the pork costs and has a set selling price. The buyer is free to look for vendors selling pork at the price he thinks is fair and the vendor is also free to look for buyers who think that he is selling the pork at a fair price. Negative news such as foot-and-mouth disease or under-supply of meat will affect pork prices, driving their prices down. There really is truth in the popular jest that the stock market is “parang palengke lang” because both markets work on the same principle.

Stock Index

You see news agencies like the CNN and BBC and newspapers like the Inquirer publishing performances of indices such as Dow Jones, S&P 500 and PSEi. Indices are ways of measuring the performance of stocks in a given market. An index is a basket of stocks that is weighted depending of a certain criteria. The PSEi for example is composed of 30 stocks weighted according to their free-float adjusted market capitalization. It’s easier to understand in a real life analogy. The index is like your general weighted average in school. Subjects – like  stocks are weighted depended on the number of units they carry. A 5-unit class with a grade of 1 will have more impact on the average that a 2-unit class with a grade of 2, because of the weight of the units. Similarly, you will compare your performance in one class with the average to see where you’re doing good and where you need some improvement. For example, if you have a grade of 1 in Bio Lab and your average for the semester is 1.5, you’re doing better in Bio Lab than your overall average performance. Similarly, if your stock is up 10% and the index is up 5%, this means that your stock is over-performing the index (that’s a good thing) and that you’ve invested your money well. What’s more critical with the index is the % change that has happened from a reference date, usually from the time when you made an investment. The key is to make sure that your stocks are appreciating at par or faster than the index. At the moment there is a lot of opportunity for that kind of growth. We’ll discuss stock picking next.

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About Benedict Bernabe

Benedict Bernabe, 27. Benedict has a Master's degree in Development Studies from the University of Melbourne, Australia and a Bachelor of Arts degree in European Languages, cum laude, from the University of the Philippines Diliman. He has worked with the United Nations in the Philippines as the Community Facilitator of the Community of Practice on HIV&AIDS. He worked with Standard & Poor's Capital IQ, a financial information company, as researcher, translator and quality analyst in the investment research team. Prior to this, we worked at IBM Business Services. Benedict is a certified yoga teacher.

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