INTRO
Some people have been asking me lately to explain to them how the stock market works. So instead of trying to explain it over and over again to anyone who will ask me, I decided to write an explanation that is simple enough for everyone to understand. If you've listen to finance news or any stock market jargon being thrown around in the media, it will be as if they are using a foreign language that only a few initiated ones understand. My goal for this post is to avoid all that foreign words that most people don't understand and try to explain this topic in a very simple language. This post will discuss what is the stock market and how you can start investing in it.
SO WHAT ARE STOCKS?
Companies who need more capital to expand their business can get access to more money by selling their shares. It is called going public or being listed as a public company mainly because the public (you and me) can now invest in it. People can now buy shares or stocks of the company, owning a part of the business.
Example:
Let's say for example that San Miguel Corporation wants to expand their business or want to build a new factory but they don't have enough money for it. They have an option of either borrowing from banks (loans), issuing bonds or going public. Usually, banks cannot lend them money big enough for their expansion so going public is a much better choice. If they decide to go public, San Miguel will have the money to use for their new factory or business expansion from selling their shares. The public who bought those shares will own shares of the company and every single one of them will be called stockholders or shareholders of San Miguel Corporation (cool right?).
*take note: This is only a simplified explanation
STOCK EXCHANGE?
The Philippine Stock Exchange (PSE) is the only place where you can buy and sell shares of many different companies in the Philippines. If any company wants to go public or be listed, this is the only place to do it. To explain it simply, the Stock Exchange is like a big mall where companies come together and rent kiosks to sell their shares inside the mall. The Stock Exchange regulates all the buying and selling of shares.
BROKERS?
If the Stock Exchange is the mall, the brokers are our sales people. They are the only ones authorized to sell those shares.We cannot directly buy stocks from the Stock Exchange, we need these brokers to be able to buy. These brokers earn their living by getting commissions on every transaction.
Examples of Philippine brokers:
Philstocks
COL Financial
BPI Trade
BDO Nomura
To know more about different Philippine stock brokers just read this review.
SEE THE SIMPLE ILLUSTRATION I MADE BELOW ON HOW THE STOCK MARKET WORKS
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SO, WHAT'S NEXT?
The next step is to learn how to start investing in stocks. Starting is actually as simple as finding a legit broker and starting with a small capital; some brokers let you open an account for as low as P5000. Starting is actually the easiest part, all you need to do is apply for an account in your broker of choice and put funds in it. Just like that and your'e ready to start investing.
If it all sounds too easy, don't get too excited just yet because the actual trading and investing comes with a warning; there is risk of losing money. To earn money, you have to learn how to choose which company to buy. Not every company listed in the Stock Exchange is a good place to invest your money. Choose wisely. Choosing what stocks to buy is a topic itself that needs another long blog post. For now, just know that you can easily start investing in the stock market by simply opening an account in any of the brokers of the Philippine Stock Exchange.
By now, I hope you have at least some basic understanding of what is the stock market and how to start investing. I deliberately made my explanation here very simple for everyone to understand. If you want to understand and dig deeper, I suggest you do more research about it. There are so many free resources available online about the stock market.
I will constantly be adding content to this post to continue the topic, and hopefully help people get started right. Opening a brokerage account is just the beginning, the journey after that will be filled with challenges and lessons. But in the end, the long term benefits you'll get from investing will be all worth the effort.
Cheers and good luck.
Alex (October 25, 2017)
Want to know more? Continue reading: TWO WAYS TO EARN MONEY IN STOCKS
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