Q: I have been keeping all my savings in my bank account and it is not earning so much. I learned that investing in stocks can give higher returns but I don’t know how to get started. Can you advise me? - A. Keith, by email
While it is true that investing in stocks can give you higher returns than fixed income offered by banks, you also assume higher risks of losing your savings if your investments fail to perform.
Taking more risks by investing in stocks does not mean you are going to earn higher returns. It simply means that you may potentially earn higher returns. Unlike fixed income, there is no assurance that you will not lose money from stocks.
So the moment you transfer your money from a savings account into stocks, you are on your own. Your decision to buy or sell a stock will be your own call and any losses that you will incur will be your own responsibility.
Making money in the stock market is more than buying and selling stocks for profit. It is about managing risks. Everyone has a different risk appetite. Some people are aggressive and some are conservative.
Whatever investment decision that you make, make sure that it is all aligned with your risk preference.
Here are the five steps everyone can follow to get started in investing in stock market:
1. Know the brokerage firm that you will transact with
Before you open an account, make sure that the brokerage firm that will facilitate the buying and selling of stock transactions on your behalf is an active member of the Philippine Stock Exchange.
There are currently 132 authorized brokerage firms that you can choose from. Some firms offer an online trading platform where you can directly execute your orders via the internet, while some offer only traditional brokerage services, where you need to call your agent and order your transaction.
If you are relatively new in the market, it is advisable that you get the traditional service where you can call and ask advice from your agent from time to time. At the same time, your agent will also give you updates when you need to buy or sell a particular stock at a good price.
Having an agent at your side can help you lessen your initial trading risks. Until you become comfortable trading by yourself, that is when you can decide to shift to online trading.
2. Know the level of services that you will receive
Not all brokerage firms are the same. Just like the banks, they all vary in terms of capital, size and level of service. There are brokerage firms that deal only with institutional investors like pension funds, banks and multinational investment funds. There are firms that cater to retail clients. Some are managed by owners themselves while some are run by professionals.
One of the services that you need from a brokerage firm is a regular research report that is prepared by their research team. The research report can focus on a particular stock or industry sector that can give you investment ideas you can act upon.
As a new investor in the stock market, part of your learning will be getting familiar with the different listed companies and one way to learn this is by reading research reports and understanding the investment opinions of different stock analysts.
3. Know the stockbroker that you will work with
The agent of the brokerage firm who will deal with your transaction orders and other matters affecting your investment account is called a stockbroker.
Make sure that you only deal with a stockbroker who is duly authorized to represent the brokerage firm. Also, the stockbroker must be a licensed Certified Securities Representative (CSR) by the Securities and Exchange Commission (SEC).
Stockbrokers in general are paid by commissions from monthly transactions of their clients. When you deal with stockbrokers, try not to allow your broker to do all the trading decisions for you. Whether you make money or not, your stockbroker will always earn commission from you.
Because the risk is your responsibility, you must make your own trading decision. You can do this by doing your own research. Your stockbroker can only guide and support you but the final decision should always be yours to make.
4. Know the transaction fees that you need to pay
There is a commission fee for every transaction you make whether you are buying or selling stock. Your brokerage firm can charge you as much as 1.5 percent plus VAT of 12 percent. Depending on the services that you avail and the amount of business that you transact with them, you can negotiate and bargain your commission rate to as low as 0.25 percent.
Aside from commission charges, there are also clearing fees of 0.01 percent and a PSE transaction fee of 0.005 percent that you need to pay. These fees are applicable to both buying and selling transactions.
For selling transactions only, there is also the 0.5 percent final tax that you need to pay on top of all the charges mentioned above. So for every round of transactions, that is buying and selling, your total charges can range from 1.03 percent if your commission is 0.25 percent to as much as 3.53 percent.
These charges shall serve as your breakeven rates when you decide to sell a stock.
5. Know the investment strategy that you want to execute
You need to understand how much risk you are willing to take when you invest in the stock market. In order to manage your risks properly, it will be helpful if you know your investment strategy.
If you like to invest in growth-oriented stocks that have the potential of capital appreciation in the future and you don’t mind that they pay little dividends, you should buy companies that are expanding aggressively and have high earnings growth.
If you like to invest in mature stocks that pays regular cash dividends and, at the same time, show promise of share price appreciation, you should look at blue chip stocks or preferred stocks.
If what you like is to speculate and trade in and out of the market for quick profits, you must monitor the market regularly and buy stocks that are likely to move fast. While this may offer lucrative opportunities given right timing, this may be too risky for someone who may be new to the market.
Henry Ong, RFP, is president of Business Sense Financial Advisors. Email Henry for business advice email@example.com or follow him on Twitter @henryong888