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Investing 101: What are stocks and stock exchanges?

Maybe you’ve heard about stock investments but don’t know how it works? Don’t worry, you are not alone.

I have been in that same situation. I guess it’s overwhelming because our schools do not teach about investing. 

I did a lot of research and reading to become confident to start investing. Now I am investing in stock market for over three years. I encourage you to do the same – invest in education first.

In this post, I will share in the most simple way, the basics of investing in stock market.

What are stocks and stock exchanges?

The stock exchange is nothing more than a giant global network and organized marketplace where every day huge sums of money are moved back and forth. It is where the trading happens.

However, it is not apples or goods that are being traded in this marketplace, but predominantly – stocks or shares. An example of an exchange is Philippine Stock Exchange (PSE).

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A stock or share, on the other hand, represents a piece of ownership in a particular company and a proportionate claim on a company’s assets and profits. It is just a piece of paper or certificate. But each share is worth a certain amount based on what the company is worth.

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Why are there shares in the first place?

Companies issue shares to investors in order to raise money or capital for their business operations or expansion.

Investors become partly owners of the companies in return for the money they provided and they expect financial gain.

It’s a win-win for both parties!

If the company is able to greatly increase its profits, the value of the company also increases and as a result, so will the value of its shares.

An example of a share is JFC (Jollibee Foods Corporation). We all know Jollibee, “Bida ang saya”, Filipino’s favorite fast food restaurant. Yes, you can be a part-owner of Jollibee by owning shares of JFC.

Of course, Jollibee has billions of shares in actual, but for the purpose of an example, let’s just suppose it has 100 shares. When you buy 1 share of JFC, then you have 1% share of JFC, you own 1% of JFC.

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And suppose you bought it 10 years ago when the value of JFC is Php 32, hence, your total investment is Php 32. If you hold your share and forget about your investment, 10 years later, the value of your JFC share is now Php 260.

If you will sell your share today, you would have Php 228 profit or 712.5% gain.

But what if you had bought 1,000 shares? That’s right, when you do the math, you would have earned Php 228,000 passive income from investment in JFC.

Take a look at the charts of JFC below showing how it grew from 30 to 200.

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What if you invested in another company, say a start-up company also listed in the stock exchange and then the company’s value goes down due to operational losses, various economic factors, etc? The value of the shares go down as well, so does your investment.

High Risk = High Return

You see, potential income is high but there is the risk of not choosing the right company to invest your money into and eventually losing your money.

Stocks are considered high risk investments. While stocks have historically performed well over the long term, there’s no guarantee you’ll make money on a stock at any given point in time.

There are almost 300 stocks currently listed in the PSE. Which ones do you choose to buy? You can do a number of things to assess a stock, but still, no one can predict exactly how a stock will perform in the future. You have to be comfortable with the risk that you might lose all of your money.

There is also a very big difference between investing and trading and that is the horizon. Investing is for long-term, trading is for short-term. The latter is way riskier and requires substantial cash.

It takes time to harvest great returns through investing, but it may be all worth it, if you make it work for you.

Now, if you’re just starting to build your investment portfolio, I advise that you study first and read about how to build your own stable financial plan. Or if you think you’re ready to own your first few stocks, learn how to open a COL account and start investing in stocks.

Good luck!

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