In this guide you will learn wealth building technique through stock market investment, how to pick good stocks (fundamental analysis) and methods of investing (Peso Cost Averaging and Technical Analysis).|Secure Your Future Needs
As a start-up investor, one of your financial goals, is to secure your future needs such as:
- dream house
If you're currently busy working in a company (employed) or a self-employed individual, you are in the status of working for money. If you want to secure your future needs, achieve financial freedom, and be rich, you need to change your status by making your money work for you and one way of making that happen is by knowing how to invest in the stock market.
What is Stock Market and what does it offer?
Stock market is a business game of the big bosses, the top business leaders and the rich people you've read in Forbes magazine. The stock market is the place where you can invest in other peoples' publicly-listed companies. In the stock market, a company sells shares of stock through an Initial Public Offering (IPO) to raise capital to grow their business. When you invest in stock market, you invest into a company to participate in its growth through: a.) price appreciation and b.) dividends.
- Capital appreciation - the ability for a stock's price to increase in value as driven by business prospects.
- Dividends - company returns wealth back to shareholders (distributes some profits either through cash or added shares)
- Cash Dividend - money given back to the investor as his share of distributed profits. Example: A cash dividend of 20 cents per share. If I had 1000 shares, I would get P200 as total cash dividend. Stock price will adjust by dividend value. This is taxed at 10%.
- Stock/Share Dividend - additional shares given to the shareholder. Example: Stock dividend of 20%. If I had 1000 shares, I would get a 200 additional shares. Share price will adjust down by: price/1.2 . Choice to cash in is yours.
- Dividend Dates:
- Ex-Date - the cut off point for dividend entitlement is a day before this date (you must be a shareholder as of the day previous to this date)
- Date Payable - the day when the dividend is given to shareholder (usually a month after the Ex-date).
Investing in Quality Stocks Provides Greater Returns than Other Investment Products
Investing in quality stocks performs better than other investment products offered in the market such as Treasury Bills and can beat over inflation.
How to Pick Good Stocks
Here are the techniques in choosing good stocks:
- Know Prices
- Know Some Fundamentals
- Do a Top Down Review
- Know a Company's Prospects
- Choose the Best Company
- Actual Value - the real value to which a stock can be said to be worth, it is commonly stated as Fair Value or Target Price. It can be studied through Fundamental Analysis
- Market Value - that value determined by market forces (demand and supply), and is also commonly known as the Market Price. It can be reviewed through Technical Analysis.
2. Know Some Fundamentals
- Fundamental Analysis - is a technique that attempts to determine a security's value by focusing on underlying factors that affect a company's actual business and its future prospects. (investopedia)
- We buy quality stocks today for what we believe it will be worth tomorrow!
- Remember: "What you don't know you don't touch"
3. Do a Top Down Review
- Is the economy growing? - a technique that attempts to determine a company's value by focusing on underlying factors that affect its business, earnings and prospects
- What industry seems attractive? - are there enough investments and potential moving in on these factos? Money must be moving in, no out...
- What are the best Stocks in that industry? - pick out the top performing stocks in terms of valuation, earnings growth, prospects and market participation
4. Know a Company's Prospects
Here's a performance trend of property and banks industry:
Look for companies that show:
- The Ability to Grow Earnings - look for strong or increasing profitability; watch earnings per share (EPS = income / number of shares)
- Good or cheap valuations - look for good stocks whose market value is notably lower or discounted to its actual (fair) value
- Good story - look for new buzz, solid products/services or catalysts for growth
Here are the popular techniques in investing in stocks:
|Positive impact to stock price:|
- Growth in Income/Value
- Prospective Story for business expansion
- Potential Buyout
- Worthy Dividends
|Negative impact to stock price:|
- Slowing growth or a loss
- No Story, no dividends, no nothing...
- Too much debt
- Inefficiency/poor relative performance
Techniques in Investing Stocks
- Peso Cost Averaging
- Market Timing
Let's go deeper with these two techniques:
Peso Cost Averaging
- a gradual buy and hold strategy
- make steady and fixed peso investments through time on good companies
- this is a personal wealth-building strategy that involves investing a fixed amount of money at regular intervals over a long period
- buying stocks over time reduces volatility risk in the market
- invest what you can at your own pace
How Peso Cost Averaging works?
When stock prices are higher, you should buy fewer shares. And when stock prices are lower, buy more shares.
In the long-run, these will be the tremendous positive results of Peso Cost Averaging. For example: if you invest monthly in BPI stocks worth P5,000 at a return rate of 16.92% annually, for 21 years, you will have over 10 million pesos future value of your stocks. That's 740% gain in your stock investment.
- you are utilizing technical analysis which is the study of market action (or market price) by reviewing price charts for the purpose of forecasting future price trends.
- you're aiming to watch and follow market direction
- the technique here is to buy stocks into up trends; sell into down trends thereby limiting risks.
How to Read Stock Market Graphs and Trends?
The three (3) trends are:
- Up Trends - characterized by higher lows and higher highs tracked by an up trendline
- Down Trends - lower highs and lower lows tracked by a down trendline
- Consolidations - sideways shifts
Market Swing in Cycles: BULL and BEAR