Stock Market Basics



First of all, I'd like to start by saying what most people say about the stock market like its dangerous, unpredictable, hard to understand, and not a good investment instrument are ALL not true. As a beginner, clear your mind from all of these misconceptions and start with a clean slate.


What is a stock market?
A stock market is a place where people trade stocks of companies listed in an exchange like the Philippine Stock Exchange. Prices are determined from bidding and asking prices; the last matched price equates to the current market price. Once you own a stock of a company, you are considered a co-owner of that company. Cool isn't it?


How to trade in the market?
You just need to open an account with a broker or simply open an account with any online trading facility like Philstocks.ph or CitisecOnline. Once you have an online account, you can now make your very first trade. If you want to trade virtually (recommeded for beginners) you may use Citisec's Virtual Tycoon. To keep it simple, trading is like purchasing an item in Ebay; you get to decide what price you want to pay for each stock.


Is there a minimum purchase amount of shares/stocks?
Yes. This is called Board Lot. Consider this as the multiples of shares you can buy. For example, a board lot of 1k would need you to purchase shares in multiples of 1k like 3k, 10k, 7k but not 1.5k, 12.8k, and 9.4k. Board lots vary depending on the price. The higher the price, the lesser the board lot.



How can I profit from the stock market?
Investors can profit in the stock market thru any or a combination of the following:

Capital Gains  -   These are profits made due to an increase in the market price of a stock from the buying price.
Cash Dividend  -   A dividend given to shareholders in the form of cash. It is computed by multiplying the number of shares held by the cash dividend rate declared.
Stock Dividend  -   A dividend given to shareholders in the form of additional stocks. It is computed by multiplying the number of shares held by the percentage of the stock dividend declared. 
Stock Rights  -   Stock rights offering is the option given to the present shareholders to buy additional shares of stock at a price lower than its market price.

Fundamental Analysis

If there's one thing that you would want to back up your portfolio regardless if you are in a bear market or not, it is good fundamental data. In my point of view, good fundamental data can't never be backed down. One way or another, good fundamental data will still hold its ground and will reflect in the company's stock price.

Fundamental data is derived from using fundamental analysis. Fundamental analysis is the study of the company's financial facts and its total business as a whole. To be more specific, it includes analyzing the company's annual reports, management, products/services, competitive advantage, and etc.. Basically, studying the company on how it makes money and its potential to grow in the future.

The result of fundamental analysis is basically, you would know if the company is worth buying or not. To start basic fundamental analysis, you can start by reading an annual report of one company listed in the Philippine Stock Exchange. The balance sheet, income statement, cashflow statement are the three most important things that you can analyze in an annual report. From here, you should be able to check and see how a company is really doing and how will it most likely perform in the near future.

There are lots of reference materials available out there. If you'll notice, I really didn't go into the specifics of fundamental analysis. I believe formulating your own investment philosophy is crucial in your investing career. I suggest, do your own research and try to understand every concept you encounter by heart.

Technical Analysis

By definition, technical analysis is a way of forecasting price movements through trend analysis of price movements. Generally, there are a lot of technical indicators that are being used by technicians to determine a stocks's next move.

Technical analysis, by theory, doesn't care completely about what company it is or even its earnings reports. The stock market is driven by belief and expectations of investors. So basically, price charts reflect or show the investors sentiment on a certain stock. Through charting, you will be able to determine when and how you'd get in and out of a stock base from the trends that charts show.

One of the basic essential concepts of technical analysis are the support and resistance concept. Support means that based from the chart, stock prices does not go below this level. Meaning to say, there are less likely chances that a stock price would go below this level. But when it does, this is called a break below and this suggests that prices would continue to go lower until the next support.

On the other hand, the term resistance is the opposite of the support. Resistance resembles a ceiling of a certain stock's price. Just like the support, if it breaks out its resistance line, this now suggests prices would now go up from that level; the resistance line now becomes the support.

Personally, the indicators that I use are very basic like MACD, Stochastic Oscillator, RSI, and Volume. This should be enough to get you started to know when to get in and get out of a stock.