If putting all your money into bank accounts won’t provide you with investment success, where can you generate the returns you need? In the US, over the past thirty years, stocks and bonds generated double-digit returns (or nearly so). Consider the following, the average annual return from 1979-2008 in bonds – 9.4%; real estate – 10.3%; and stocks – 11.0%.
There are two basic ways to earn from an investment in stocks. One is to simply trade it – buy low, sell high – and the other is to earn periodic income from it. Basically, you can make money in the stock market by “buying low and selling high.” How is it done? Consider this, the price of Jollibee stock ranges from P47.50 to P94.45 from March 2010 to May 2011. If you buy at the lowest, P47.50, and sell it at P94.50, there is a return of 98%. Hence, if you invest P10,000 of Jollibee stocks or 210 stocks, and sell the 210 stocks at P94.45 or P19,834.50, there is a profit of P9,834.50. And if you have P100,000 invested in said Jollibee stocks, you will be earning P98,345.00.
What is a stock? Simply, stocks are ownership in a corporation. When you buy stock in a corporation, you become one of its owners. If the company does well, you may receive part of its profits as dividends and see the price of your stock increase. But if the company fares badly, the value of your investment can drop, sometimes substantially. Investors buy stock to make money (1) through dividend payments while they own the stock, and (2) by selling the stock for more than they paid.
A stock has no absolute value. At any given time, its value depends on whether the shareholders want to hold it or sell it, and on what other investors are willing to pay. If the stock is hot, and lots of people want shares, the value will go up. If a company is losing money or a particular industry is doing poorly, those stocks will probably drop in value. Some stocks are undervalued, which means they sell for less than analysts think they are worth, while others are overvalued.
Some people hesitate to invest in the stock market because they consider it too risky. Afraid of choosing the wrong stock or being battered in a crash, they prefer to stick with investments they consider safe. The problem with that approach, experts agree, is that by skipping stocks, investors are missing out on the most reliable source of long-terms gains. While you could lose money in a single year or on a single stock, investors who have held a portfolio of stocks through any 15-year period since 1926 in the US have always come out ahead.
When some investors choose a stock, they keep it through thick and thin, a strategy known as “buy and hold.” Other investors buy and sell frequently, which means they select stocks they think are going to increase rapidly in value. When the price goes up a certain percent – 15% to 20% - they sell and buy something else.
Understanding the wide variety of stocks you can purchase is one key to successful investing. Stocks with histories of paying consistent dividends are known as income stocks. Growth stocks are share in companies that reinvest much of their profits to expand and strengthen the business. Although they typically pay few if any dividends, investors buy these stocks because they expect the price to go up as the company grows. Stocks in the largest, long-established and consistently profitable companies, like PLDT, San Miguel, etc., are known as blue chips. They offer investors stable and predictable income and steady if slow growth in value.
My choice stocks are: SM Investment Corp., J.G. Summit, San Miguel Corp., Megaworld, Ayala Corp., SM Prime, Jollibee, Meralco, Ayala Land, Aboitiz Equity Ventures, Metro Pacific or Alliance Global.
One of the great advantages of owning stocks is that they are liquid. They can be sold at a moment’s notice and converted into cash. Contrast that with trying to sell your business or a real estate. When people ask, “How’s the market,” most want to know what the basis trend is. Most investors judge the “market” by what is happening to the Philippine Stock Exchange or in the US, the Dow Jones Industrial Average – an index of 30 stocks listed in the New York Stock Exchange (NYSE)
Many people have heard of the Philippine Stock Exchange (PSE). But what is this stock exchange? A stock market is about buyers and sellers. It’s about finding a place where most buyers and sellers are located. It’s about supply and demand. Basically, all the transactions in our life, from selling a used car to running a “sari-sari” store, contain elements of what happens in the stock exchange floor. But in the world of stock markets, this happens faster and on a much larger scale than at a “sari-sari” store.
In the United States, stocks trade in two main markets: the NYSE and the Nasdaq Stock Market. A number of other markets exist in different countries. A stock market goes through cycles, heading up for a time, and then correcting itself by reversing and heading down. A period of rising prices is known as a bull market – bulls being the market optimists who drive prices up. A bear market is a period when stock prices have dropped by 15% or more. Overall, the US market has tended to rise more than fall. Between 1960 and 1999, there were only six bear markets. The stock market does not go up due to greed, it goes up because of new products, new services, and new inventions.
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