4 Stock Perils And What You Can Do To Keep Yourself Safe

4 Stock Perils And What You Can Do To Keep Yourself Safe.  Stock investing is profitable - and risky.   What if my bank closes own, will I lose my UITF too? What about Mutual Funds? Can mutual fund companies go out of business? What happens then? Can my stock broker go out of business? What happens then? What if the company I invested in gets suspended or de-listed by PSE?   While investing in stocks is inherently risky, at least it isn't a total leap of faith. There is some measure of protection, we just need to be aware of them.
Stock investing is profitable - and risky. I've written before how you can reduce your investment risk.

But some risks are beyond your control. Fortunately, you aren't totally unprotected and don't have to just accept them.


What if my bank closes down, will I lose my UITF investment too?


Money you have in the bank is insured by PDIC, up to Php500,000. Anything more than that, you can lose.

However, UITFs are trust products and are separate from the bank's other assets (as per Bangko Sentral ng Pilipinas). That fortunately means that you can still withdraw your investment at it's current market value. So you're technically better off - "safer" than someone with a savings account.

But of course, you could suffer market losses because of this if the investment has not yet turned a profit and you're forced to sell. But that's still much better than actually losing your investment.


What about Mutual Funds? Can mutual fund companies go out of business? What happens then?


It's possible. Personally, it seems unlikely. However, the impact - like with UITFs - is relatively minor.

From FAMI's own site, you can just replace the fund manager.

The longer (and necessary) explanation: MFs are companies, but they simply manage assets. Each fund is technically a company itself, though managed by the MF.

That means that even if the fund manager performs so poorly that they can't get enough fees to pay their bills, the investment fund (i.e. your chosen equity or balanced fund) itself is still intact. Basically, it's business as usual after the fund manager is replaced.

It's technically possible that the fund itself will go bankrupt. But for that to happen, practically (if not literally) all of the companies in its portfolio has to go bankrupt first - quite suddenly and roughly at the same time. That's the only way even an incompetent fund manager would suffer such a total loss. That's also highly improbable.
 
You can find a more detailed explanation here.


Can my stock broker go out of business? What happens then?


This thought had actually not occurred to me until I read someone else ask the question. And apparently, it can happen every now and then.

The good news is that PSE will choose a different broker and transfer your holdings to that broker. Or you can go find your own broker and have PSE transfer it to your chosen one. There's practically no risk of losing your investment.

However, the cash you have deposited with the broker may be lost. In such cases you can get some relief from SIPF (Securities Investors Protection Fund, Inc.). It acts like PDIC does for banks, except it's meant for stock investors.

In case your broker commits fraud or goes bankrupt, the cash holdings with them will be replaced by SIPF - but only up to a certain amount. You can read about SIPF in PSE Academy.

Another option to avoid this or at least minimize the chance of this happening is to choose a well-established local broker with a lot of clients. Possibly a broker affiliated with one of the largest local banks. It's also best to minimize the cash you keep in your brokerage account.

You can find a good discussion of this topic in Pinoy Exchange forum.


What if the company I invested in gets suspended or de-listed by PSE?


This can happen if a company does not comply with PSE's rules and regulations. If this happens, the company can no longer be traded on the stock exchange. If it's "just" a suspension, there's still a chance they can again be traded relatively soon, after they've fixed whatever offense they've committed. If they get de-listed, then getting listed (and publicly traded) again is unlikely to happen in the near future.

For retail/small-time investors this is a very bad thing. Technically, after the suspension or de-listing, you are still a shareholder and part-owner. But since you own a relatively miniscule part of the company, there's almost no benefit in that.

You can hold your stock, if you're sure the company will do what it takes to get listed again. However if they don't, you'll have to find buyers of your share on your own - I'm not even sure how you'd go about doing that, let alone who would want to buy. The company also isn't obligated to buy out your shares.

But before this happens, your broker will inform you of any possible suspension or de-listing. From my experience, PSE goes a little further and provides info in the newspaper on potential suspensions.

In such cases a lot of people may be looking to sell, and only a few willing to buy. You obviously won't get a profit, but it would be prudent to sell anyway to avoid a potential total loss.

Note: Burn wrote  very comprehensive article on this topic. You can read up on it here.

While investing in stocks is inherently risky, at least it isn't a total leap of faith. There is some measure of protection, we just need to be aware of them.

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photo credit: Stock Screening via photopin (license)

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