Monday, January 28, 2013

Learn The Jargons Of Stock Investing

Investing on stocks can be fun but I advise you to learn the basics of stock investing first before you even consider this particular venture. For this post, I will try to explain the jargons  of stock investing as simply as I can so that other people will also be encouraged to invest in it. Apparently, I was discouraged before to join stock investing because I found it has a lot brain-melting technical jargons that I cannot easily relate to.

What is a stock?

Also called equities or shares, a stock is just a fancy word to describe a share in the ownership of a particular company. It is represented by a  piece of paper called stock certificate  that indicates a claim on a particular company’s assets thus when you buy more stocks in a particular company, your claim to the company’s assets also becomes bigger.

If you possess ownership to several stocks of a company, you are  called a shareholder and you are entitled to get a part of the earnings of the company. I have invested in five companies under different industries and I can proudly say that I am a part-owner of these companies even if I only have 100 shares for now. Hahaha!

What are the different types of stocks?

There are two types of stocks which are the common shares and preferred shares. Preferred stocks allow stockholders to have greater claim on the earnings and assets of a particular company compared with common shares. This means, that the earnings are given to stock holders with preferred shares first and the remaining will be equally distributed to those who have common shares. Those who bought preferred shares have more advantage over those who only have common shares but even if this is the case, stockholders can still earn over time.

How does one earn from the stock market?

There are two ways of earning from the stock market and these are capital appreciation and dividends. Let us say you bought 100 shares of Company A at 15PhP and after 5 years, the value of the shares is now at 30PhP. This means that your capital or the amount of money that you have invested has appreciated in value by as much as 50% so the value of your 100 shares is now 3,000PhP which means it has doubled after 5 years. On the other  hand, companies give out their excess earnings to their stock holders as dividends. Dividends may be given on a regular intervals or not depending on the decision of the Board of Directors of of a  particular company. The value of the dividends depend on the surplus earnings of the company thus the more earnings a particular company has, the more dividends are shared to the shareholders.

What is cost averaging?

While some people invest their lump sum money to the stock market, other people do cost averaging. Cost averaging is the subscription of shares at regular intervals regardless of the price of the share. It is important to take note that shareholders who invest in the stock market are prone to regular market crashes and this method of buying stocks allows investors to average the cost of each share over time.  For small and new investors, doing cost averaging is the best thing to do because they don’t have to time the market to buy their shares. I do cost averaging and, for me, it does not matter if I only invest 1K or 2K every month as long as I do it regularly. I believe that doing it steadily but surely will pay off through time.

What does bullish and bear economies mean?

When I first started investing in the stock market, I often hear the terms bull and bear. No, there are no animals in the stock market but these terms pertain to the status of the economy.  A good economy is described to be bullish and a bad economy is described to be bearish. A bullish economy means that the market is aggressive and doing well while a bearish economy resembles a bear on a long hibernation. The market crash in 2008 is described to be the worst bear economy after the Great Depression in 1920’s. However, that was the happiest time for stock investors. Why? Because the prices of shares are so down that it was the best time for investors to shop for as many shares as they want.  Two years after the market crash, the world market was able to get back on its feet albeit slowly and the price of shares have also increased.  Thus a person who has invested in the stock market in 2008 can now enjoy capital gains by as much as 32% to 80% depending on the performance of his portfolio in the current year. It is a shame that I did not invest in the stock market five years ago. Although this may be the case, I am still happy that the economy in the Philippines is stronger now and is predicted to get even stronger for the next decade.

Investing in the stock market will definitely give you a headache (and possibly a nosebleed too) if you do not practice due diligence. Try to learn the basics and the jargons first before you get your hands on it. It can definitely help you make your money work for you but if you do not do research first, you can also loose your entire investment in one market correction so good luck.

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