Investing in stocks (equity) can be one of the most profitable investments any investor can make. However if we're not careful, we can also lose a lot of money instead of making any.
In this article, we'll cover basic steps in how to invest in the stock market.
But first what does it mean when we buy stocks?
When we buy stocks in a company, we become shareholders (part owners). We are entitled to vote in certain decisions and a share of the company's profits. But our ownership is relative to the number of stocks we own. So the more stocks we own of a particular company, the more our vote counts and larger our share of the profits are.
So how do we make money by buying stocks? There are two ways:
- The stock price appreciates in value (capital gains), which we can then sell.
- The company pays out dividends (either in stocks or cash)
How do we start investing in the stock market?
I suggest reading the Philippine Stock Exchange's official guide to investing in the stock market.
But the basic idea is that we open an account with a broker; then we can start trading. For a list of legitimate brokers, we can refer to PSE's list of trading partners.
Choosing a broker is an important decision. They provide the same basic services, and we can choose anyone we like. However there are some factors I recommend you consider:
- Research - Some brokers provide their clients with research to help in their investment, while some do not. It doesn't hurt to be informed, but you should decide how important this is to you.
- Online access - Some allow you to place orders online through their site. This can be convenient, but it's up to you if this is important.
- Track Record - It's best to check if they have a good track record. Check how long they've been existing or if they've run afoul of PSE's rules and regulations.
After choosing a broker and opening an account with them, we will be able to buy and sell stocks by placing the order with them.
But before we do any transactions, it would be a good idea to start with paper trading. It's basically a simulation using real market data, but without using our money.
It can be as simple as using our own spreadsheet, and pretending we bought particular stock(s) and then follow the market.
We can also take advantage of PSE's online stock trading game.
Before you buy stocks for real, it would be a good idea to learn how to do fundamental and technical analysis.
Lastly, there are various strategies or techniques when investing in the stock market. It is advisable that you read up on them as well.
We will not be able to detail them all here, but some of the basic ways are:
- Buy and Hold - buying a stock and holding it for a long time until it appreciates in value. However a lot of research goes into what stocks are undervalued or are likely to have a large increase in value to justify the investment.
- Active trading - basically, this is buying low and selling high. However there are several techniques under this as well.
- Cost Averaging - this is a great technique, and has been well discussed by Fitz Villafuerte in his site. I urge you to read about it there.
And with that, we should be all-set to start investing in the Philippine stock market. I myself have been investing for years now.
But I would like to caution everyone. When I started, I decided to "wing it" and went ahead investing without reading up on the strategies and techniques of investing in the stock market. Thankfully I did not suffer huge losses, but I also failed to make substantial gains. So please, read and soak up as much information as you can before starting. It really does pay off to be well informed.
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How To Invest In The Stock Market Series:
- How To Start Investing In The Philippine Stock Market
- How You Should Evaluate Your Stock Broker
- An Overview On Technical Analysis for The Stock Market
- Position Sizing - Or How Not To Lose Your Shirt In The Stock Market
- An Overview Of Fundamental Analysis For The Stock Market
- Elliot Wave - Investor Sentiment, Crowd Psychology, And The Stock Market
- 6 Stock Investing Strategies - Which One Fits You?
- Different Strategies For Bull Markets, Consolidation & Bear Markets
- When Should I Sell My Stock?
- Learnings from the Stock Market
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