Stock Market Trading And Stock Market Investing

Photo by Catherine Karnow

In my previous post of the series, I mentioned about the two main types of stocks and how they trade.

Now I'll be talking about the two ways you can make money in the stock market, stock trading and stock investing.

Stock trading is buying stocks at a low price and selling them at a higher price. This is usually a short-term way of getting into the market as you're in and out in a matter of months, weeks, days or even hours. This is because stock prices are always volatile, constantly going up and down at a rapid rate. In order to make money through trading, you need to be able to predict (as accurately as possible) whether the price of the stock that you want to purchase will go up or down.

For example, BDO's current price is at P30 per stock and through analysis (more on this later) you predicted that it will rise to P60 in the next few days, so you bought 100 shares of BDO for P3000. And after 3 days BDO's stock price rose to P55, so you decided to sell 60 shares for P55, earning you P3300. So you got your investment back with a 10% increase and still have 40 shares left (There are certain requirements to the number of shares you can buy and sell depending on the price of the share. This can bee seen in a board lot in your brokerage account).

Stock investing on the other hand is buying shares and holding them for a long period of time (long-term). You basically buy stocks from blue chip companies that you believe will still be around in 10-20 years (in the Philippines, these companies are Ayala, BDO, PLDT, Metrobank, and so on). You don't have worry about the volatility of the market, you just keep on buying stocks of the blue chip companies. This is because, on the average, the stock market have grown in value for the last 20 years, regardless of the economic or financial crisis that the country is experiences.

For example, Ayala's stock prices is at P80 and through analysis you saw that the company is considered a blue chip company and will be around for the next 20 years. So you bought the stock at P80 and you keep on buying it monthly, regardless of the price fluctuation. Since the value of the market grows on the average, it is safe to assume that Ayala's value will also grow, so you're investment will then grow for as long as you're holding Ayala's stock.

So how do we know which stock to choose from and how can we know if the're prices are going up or down? Well there are two ways to do this, Fundamental Analysis and Technical Analysis.

Fundamental Analysis relies on a company's balance sheet to determine the value of the company (you don't need to study everything in the balance sheet, just the cashflow and past performances). This indications will determine whether a company's stock value is over priced or under priced. The company's management is also an indication of a company's value. Good management means the company is solid and will be able to perform well. While a company with bad management means the company won't last long and could very well be in trouble.

Basically you use Fundamental Analysis to know the real value of the companies that you want to invest in. The stock price of a doesn't necessarily tell you the real value of a company as prices are subject to a lot of factors, mainly of course the supply and demand of the market. So to know the real value of a company, you need to do a Fundamental Analysis. You use this to know which company you need to invest in (especially for the long-term).

Technical Analysis on the other hand relies on the  company's stock price performance. Technical analysts makes use of the charts found in brokerage and stock market websites. These charts represents the stock price performance of a company. Reviewing this charts can help determine whether prices will go up or down. There are patterns that can be used to determine the direction of the stock price using technical analysis. These patterns help determine whether the stock price is on its way up or down.

You use Technical Analysis to make a, close to accurate, prediction on whether prices of a stock will go up or down. You read charts to check for indicators and patterns and base your prediction there. The charts will show you historical trends and cycles of how a certain stock moves. Through this data, you'll be able to forecast the future movement of stock prices. You use this to know when to go in and out of the market.

So after learning the basics of stock investing and stock trading, what will be the best way to earn money in the stock market? All indications point towards stock investing as the safest, surest and easiest method of earning money in the stock market. The downside with stock investing is that you have to be in it for the long term. You have to be willing to keep on putting money in your investments and just let it grow for at least 10 years before you can see the fruits of your investments.

Stock trading on the other hand allows you to earn money outright. You buy a stock today at a low price and sell it a higher price in just an hour or so. The market is so volatile that you can easily make a lot (or lose a lot) of money within the allotted time to trade in the stock market. The downside is that it would require you to study and monitor the market almost entirely to make sure that you make money instead of losing it.

So if you don't feel like taking the time to learn and study how the market works, than its best for you to just invest for the long term. But if you like the excitement that monitoring the market daily brings, than stock trading is for you.

Whatever you choose though, make sure that you don't put your entire savings and funds into this. The worst thing you can do is use money that you have saved, for emergency, education, or other things to invest in the stock market and hope that it grows. Even if you are an expert or you're following an expert, its important that you use extra money for the stock market. You can never be sure on where the market will go, so you still have to protect yourself from unforeseen events.

Sources: Truly Rich Club, Investopedia

Good Debt And Bad Debt

Photo by Whisson

Do you know what debt is?

Debt is defined as a state of owning money. Meaning you are considered in debt if you owe any money to an entity.

So are you in debt right now? To whom? How deep in debt are you?

I used to think that being in debt is a bad thing, because to me it meant that I spent money that I don't have. I overindulged in my expenses and now my debt is an additional expense that I need to cover. My thinking that debt is bad also originated from stories that I heard when I was still young, about families being so in debt that they just spend most of what they earn paying it off. Worse they need to go further into debt just so they have enough money to cover their basic needs.

My notion of debt is not unusual as this is how most people see debt, as a means to purchase something that they can't afford with their current income. The stories that I heard were also common for most people. Some are even worse as their debts are so big that it have been passed on from one generation to the other.

However, as bad as debt may seem, it can actually be used for something good. According to Robert Kiyosaki, best selling author of Rich Dad Poor Dad, debt can be a great tool in building wealth if it is used correctly. He also called this good debt or debt that puts money in your pocket. If it is used wrongly though, it is a tool that can destroy your wealth or keep you in poverty. He calls this bad debt or debt that takes money out of your pocket.

An example of a good debt is debt you use to purchase a property and rent it out to someone. You take out a loan to buy the property, pay the down payment, then pay the rest of the loan in installments, let's say, 10 years. So every month for 10 years, you'll pay the bank a certain amount. For example P15,000 a month. So for it to be a good debt, you need to rent the property out for more than P15,000 a month. Let's say someone is willing to rent it for P18,000 a month. So P15,000 will pay for your loan and the remaining P3,000 will go to your pocket.

Monthly installments = P15,000

Monthly rent payment = P18,000

Profit = Monthly rent (P18,000) - Monthly installments (P15,000) = P3,000 (this will be the monthly income your property puts in your pocket).

An example of a bad debt is debt you use to purchase a personal car. So you take a loan to buy a car, pay the down payment, then pay the rest of the loan in installments, let's say for 5 years. So every month for 5 years, you'll pay the bank a certain amount. For example P15,000 a month. Since you'll be using the car for personal use, it won't be earning you any money, so the P15,000 to pay for it monthly will come out of your own pocket.

Monthly installments = P15,000

Monthly income = 0

Profit = Monthly income (0) - Monthly installments (P15,000) = - P15,000 (this will be the monthly expense your car takes out of your pocket).

These are just rough and basic example of good and bad debt. Bottom line though is that debt can be used to put money in your pocket (good debt) or take money out of your pocket (bad debt).

Debt is a powerful leverage that you can use to achieve financial freedom, you just have to learn to use it wisely.

Types Of Stocks and How They Trade

Photo by Lito C. Uyan

This is the second of a series of posts about the stock market. 

In my first post, I talked about the basic definition of the stock and how you can get in. Now I'll be talking about the two main kinds of stock and where you can trade them.

There are two main types of stock: the common stock and the preferred stock.

Common stocks are the stocks that most people are referring to when they talk about it. Majority of the stocks are issued in this form and it is the stock that you're buying in your online brokerage account. The features of this stock are what was discussed in the first series (see Basic Introduction To The Stock Market).

Preferred stocks are stocks that represent some degree of ownership in a company but doesn't have the same voting rights that the common stock have (varies depending on the company). The good thing about preferred stocks is that dividends are usually fixed and guaranteed forever (dividend in common stocks are never guaranteed). Preferred shareholders are also paid off before common shareholders in case of liquidation, when the company goes bankrupt (but they are still paid after debt holders). Preferred stocks can also be bought back by companies from shareholders at anytime for any reason (usually for a premium of course).

These two are the main form of stocks. Of course other companies have the option of customizing the different classes of stocks that they issue. This is done by companies who want to give voting power to certain group of people.

Now that you know the two main types of stocks, let's proceed to how do we trade them.

In my first post of the series, I mentioned that you can buy stocks through an online brokerage. Now these brokerage are just medium for you to buy and sell stocks. Stocks are bought and sold on exchanges. Exchanges are the market where buyers and sellers meet and decide on the price of the stock. It's like a market place where stock brokers gather to buy and sell stocks at an agreed upon price with other stock brokers. 

Before this is done physically, where stock brokers gather in the stock exchange and starts yelling and signaling each other buy or sell when they hear or see the preferred price of a stock that they want to buy or sell. But with the advancement in technology, this is now done online.

The purpose of the stock market is to facilitate the exchange of stocks between buyers and sellers, thus reducing the risk of investing. Now there are two market when it comes to stocks, the primary market and the secondary market.

The primary market is where stocks are created, by means of an Initial Public Offering (IPO). This is where companies first sell their stock to the public. The secondary market is where stocks that have been previously issued are traded without the involvement of the issuing company. This is the one that people refer to as the stock market.

The name of the exchange in the Philippines is the Philippine Stock Exchange (PSE). The PSE is the one who facilitates all of the stock trades done in the Philippines (it was formed in 1963 when the Makati Stock Exchange and the Manila Stock Exchange were combined).

Next I'll be discussing about the two ways people make money in the stock market.

Source: Investopedia, PSE

Tip In Managing Your Money

Photo by Judith Haeusler

I often hear people complaining that they're not making enough money, their salary is not enough to cover their expenses or how they wish they are making more money to solve their financial problems. Now this may be true to some extent, but more often than not, most financial problems are caused by people mismanaging their money.

Most people tend to spend more than what they're making, thus putting themselves in a financial hole that they struggle to get out of. Earning more won't solve their financial problems, because what usually happens is that people just spend more when they earn more.

One way to solve this problem is to live within (or even below) one's means. Meaning spend only the money that they earn on needs, and eliminate unnecessary spending.

But living within one's means (or even below it) is very hard to do. Considering the slew of advertisements and promotions that people are bombarded with on a daily basis, urging them to spend and spend and spend.

One Tip I can give that will help people in managing their money is to follow what we The Prosperity Formula.

This is what most people usually do when they receive their income:

INCOME - EXPENSES = SAVINGS

The problem here is that there's usually no money left to go into savings. Most people use up their income paying for the expenses that they end up not having any money left for savings (some even go overboard with their spending).

Now The Prosperity Formula goes like this:

INCOME - TITHE (optional) - SAVINGS = EXPENSES

How do you divide your income in this way? Here's a suggested way of dividing your income:

INCOME - TITHE(10%, this is optional) - SAVINGS(20%) = EXPENSES (70%) you budget your expenses on only 70% of your income.

Before you react violently, here are the reasons why its good to follow this formula:

10% to tithes is basically the money that we give back to God. It's our way of saying thanks for all the blessings that he has given us (tithes are optional though, we don't force people to give to God, its more meaningful if they do it on their own accord).

20% to savings is just saying that you should pay yourself first before you pay for your expenses. You've worked hard for your money, you've earned it, so its natural that you pay yourself first before paying McDonalds, Jollibee, Starbucks, your utility bills, and so on. No one will will do this for you, so its important that you take care of yourself first before you take care of everybody else.

Following this formula will help you monitor your expenses to live within the 70% that 0505you'll be allotting. It will also help you instantly make money, without needing to get a second job to earn extra cash.

It's going to be hard to follow at first, but with constant practice, you'd be able to do this without problems. And once you're able to do this, you'll see an increase on your savings and your wealth (you can check out my article on How To Budget Your Money for additional guide).

Basic Introduction To The Stock Market

Photo by Catherine Karnow

With the good economy that the Philippines is enjoying, I believe that it's important for Filipinos to learn how to ride and take advantage of the many investing opportunities available.

One of the most popular, and probably easiest investment to get into, is the stock market. Now I didn't say easy to understand, just easy to get into. But before I get deeper into that, here's a little basic information about the stock market.

A stock is basically a share in the ownership of a publicly listed company. It means you become become part owner of a company whose stocks you own. For example, you own a stock of Banco De Oro (BDO), then you are technically a part owner of that company and have a claim (a very small one) to the earnings of the company.

Owning a stock doesn't mean that you have a say in the day-to-day operations, or you can just walk in the company and make suggestions on how it should be run, or take any of the products for free. It just means that you have a share (depends on the number of stocks you own) in the company's earnings and a vote (one vote per share) in electing the board of director's during the annual stockholders meeting of the company (this doesn't usually hold any value, unless you own a big amount of shares in the company).

So what do you get then for owning stocks?

Well owning a stock in a company, entitles you to a share in the profits earned by the company. Profits are usually paid in the form of dividends (a small percentage of the company's earnings given to a class of shareholders, decided by the board of directors). You also get to grow your money as the company's value increases. For example you purchased the stock of BDO for P50. After a month, the mangement was able to increase the value of the company to P80. So your P50 then gets a P30 increase in value because of the increase in the company's value.

Of course you can also lose money in the stock market. If the management of BDO did a poor job and decreases the value of BDO instead to P30, then your P50 investment loses P20 in value. (There are a lot of underlying factors that determines how the price of a stock will move, company's earnings, market sentiment, and so on. That will be discussed in future posts).

So how do you get into the stock market?

Before, you purchase a stock through a stock broker. Then you get issued a stock certificate as a representation of the stock you own. But in today's computer age, you can now do things online. You just need to register an account with an online brokerage (I'm currently familiar with two, First Metro Securities [I use this] and COL Financial) and provide the necessary documents needed. Then you just need to deposit money (usually there's a minimum requirement for this, First Metro Securities requires P25,000 minimum deposit to those without Metrobank account). Once you have an account, you can now start buying stocks.

Now this is just a basic introduction to the stock market to give you an idea of what the stock market is and how you can get in. There's a lot more information and knowledge that you need to learn in order to understand how the stock market works and how you can benefit from it that I'll be sharing with you in a series of posts to follow.

P.S. Stock Brokerage companies also offer free seminars to help you understand more about the stock market. Just click the links above to learn more.

Source: Investopedia

How To Budget Your Money

Photo by Jamie Grill

Do you have problems in saving money? Always ending up spending more than what you can afford?

How about setting aside a portion of your money to save for emergencies or your retirement, are you having problems doing those as well?

Saving money is not that hard, you just need to have a system that you will follow to help you achieve the kind of savings that you want.

I'd like to share with a system that I learned from Bro. Bo Sanchez, author of My Maid Invest In The Stock Market. In his book, he taught his maids how a simple system to follow to properly save their money so that they'll have income to put in the stock market for their retirement.

His system for budgeting was to put their money in envelopes and to label the envelope to know what they are for. In his book he taught his maids to label five envelopes (you can use more, depending on your requirement).

The five envelopes are:

• Tithe Fund
• Expense Fund
• Support Fund
• Emergency Fund
• Retirement Fund

Tithe Fund is where you put the money that you give to God. Bro. Bo explained that it is important to also give to God's work. He said that we'll grow in abundance thinking if we give beyond our family needs.

Expense Fund is where you put money for your daily expenses, like clothes, food, house, entertainment, bills, etc. This is basically where you put the money you'll use for all of your personal expenses.

Support Fund is where you put money that you send to your family in the province (or for your family here). This is the money that you'll use to support the needs of your family. His maids send money regularly to their family in the province so this is where they put the money for it.

Emergency Fund is where you put money for other expenses that are not found in your budget. This is basically for added expenses. Bro. Bo's maids use this in case a relative calls them and asks for more money because of an emergency.

Retirement Fund is where you put money that you'll use for retirement. In the case of Bro. Bo's maids, the money they put here is used for investing in the stock market.

Bro. Bo's maids have a total of P7,000 in earnings every month and here's the breakdown of their budgeting:

• Tithe Fund:                 P700
• Expense Fund:            P1,000
• Support Fund:            P2,000
• Emergency Fund:        P1,000
• Retirement Fund:        P2,000
• Miscellaneous:            P300

The system that Bro. Bo taught is a good system to follow for monitoring and budgeting your expenses. If you follow his system, you'll be able to your money. You don't necessarily have to follow them, you can customize them that will fit your lifestyle.

I don't have a support fund, for that envelope I label it reward fund, where I put the money I used to buy stuff that I want but doesn't necessarily need  like gadgets, a new shoe, etc (This is usually the last envelope that I put money in and it usually contains the least amount). My expense, on the other hand, fund is divided into three parts, (bills, entertainment and personal expenses)

It's really up to you on how you will divide your money. But the point is to monitor and properly budget your money. This will greatly contribute in your road to great wealth because you can set priorities on how you use your money.

Take control of your financial future

How To Achieve Your Financial Goals

Photo by Dodie Legaspi

Last Friday July 4, 2014, I attended the Money Summit and Wealth Expo held at the SMX Convention Center. It provided a lot of learning and information about investing, saving, money management and personal finance through the exhibitors and the various financial topics discussed by different financial experts during the money summit.

One of the topic discussed, that I'd like to share, is about changing the way you think about money. Conducted by Christopher Casipit, Head of Business Development, Agency Sales Group at Philam Life.

The speakers discussed that a lot of Filipinos want to have a lot of money and become rich. But only a few are willing to grab the opportunities that appear in front of them.

Why is that? 

It's because most Filipinos are naturally shy. They say that they want to have a lot of money and become rich, but they don't back it with any sort of action. They just say it talk about it, hope for it, and dream about it. Your dream won't manifest itself, you need to take action. Do something to achieve your dreams.

Others, on the other hand, rely on the government or their family to take care of them when they retire and grow old. At first this will probably work, but when your children start to have a family of their own, problems will start to arise. Your children may have promised to care for you when you grow old, but understand that they will also have their own family to take care of.

You also can't expect the government to take care of you. It will be financially impossible to provide adequate pension to millions of retired people, even if graft and corruption is not a problem, Imagine just giving P10,000 a month to 10 million retired people, that's P100 billion a month. I don't think the SSS or GSIS have that kind of money to give to people (these are just rough estimates). Instead of relying on others, you take care of yourself

The speaker said that Personal Finance is 20% knowledge and 80% behavior. Which basically mean that people achieving your financial goals, should start with the proper mindset. Knowing what to do alone, won't be enough to make you rich, you need to have the proper behavior and mindset to do it.

The speaker provided several things you need to do to achieve your financial goals:

1. Stat with the objective - Set smart financial goals and develop a financial plan with your family (if you have one already). It's important that you include your family in doing this because the financial goals you set, will directly affect them as well. Besides getting rich is a team game and not a one-man show.
2. Effort and hard work is required - Getting rich is not a one time big event. It is a long process full of ups and downs. There is no shortcut to achieving, you need to work hard and work smart for it.
3. Don't just dream, take action - A lot of people dream of becoming rich, but only a few are willing to do the action necessary to achieve it. Don't be just sit around and dream of becoming rich, stand up and take action on your dreams. Educate yourself and your family, learn what you need to do. Look for mentors who can guide you. Just take the first step and do something.
4. Commit yourself to your plan - I'd like to add this to the list as I believe commitment will be the key to achieving your financial goals. It's not enough that you just make a plan and execute it, you also have to commit yourself to following through with your plan. You'll experience bumps along the way, and without commitment, you'll just give up at the first sign of trouble. So be committed.

Remember we are in charge of our own future and retirement. No one will do this for us, nor will our finances magically take care of themselves to provide us with enough for retirement.  So we must change our mindset and start to take charge of our own future.

The Start of My Financial Education

Photo by Larry Washburn

I wasn't always a big advocate of financial education (but I did learn about the art of saving and budgeting at an early age). I used to be like most people when it comes to finances, ignorant. That all changed though after reading a book.

My journey began on December 2011. I was just barely four months into my job yet I was already feeling restless. I started asking myself if this is really what I want? Is this the life that I see myself living? Is this what I was really looking for? I thought that, after getting a job in a good and stable company with good pay and good benefits, I already found my home. I though that I can see myself staying for at least 5 years, climbing the corporate ladder, starting a business on the side and just be happy and content with life. I was just 6 months removed from turning 25, but this was the age that I promised myself that I'd be more serious with life. I have already worked in three (five if you count my one month tenures) different companies since I graduated and have little savings to show for. So I thought that this job is the one I've been looking for, the one I see myself staying in for a long time or even retire with.

Then I started to question all of that. I started to doubt the path that I laid down for myself and began looking to see if there's another path that I can follow. During this time, I was actually trying to learn about making money on the internet, I've already heard of people succeeding in it so I wanted to get into the action as well. But I never really saw it as something that I can fully replace working in the corporate world, at least not yet. My quest for answers took me to the book store, particularly in the business and marketing section. I was already thinking of getting into business during my working years because I had this vague knowledge that having a business is the way to getting rich, so I wanted to start reading books about  business.

The first book that I actually picked up was Robert Kiyosaki's Cashflow Quadrant, I read the back cover to see what the book was about. I found it interesting but I wasn't sure yet if its the book that I need to read, so I put it down and checked out the other books. After about 20 minutes, I realized that none has caught my interest in the way that Cashflow Quadrant has so I bought the book and started reading it as soon as I got home. Cashflow Quadrant opened my eyes and my mind to the world of money and financial literacy and I got hooked ever since. I started buying more books about the subject and kept on expanding my knowledge.

Being financially educated provides you with the necessary knowledge and tools to properly manage your money, take care of your financial well-being and lets you see investment opportunities and earning possibilities. It will attract you to wealth.

I believe that having financial education is the key to achieving true wealth and abundance.