How does the stock market work ?

Before you start investing in the stock market it is a good idea to ask
yourself, "How does the stock market work?" Companies go public by offering a
specific number of shares in their company to the public through the
stock exchange. Investors then can use the stock exchange to buy and sell
stocks of companies that they are interested in.

Stock prices are the price that a specific stock sells for. This price is
set by several market factors including the health of the economy, trading
trends, spending trends, and financial or technical reports put out by a
company or an independent third party.

Market capitalization is the value of the company or the stock that

is being offered. To calculate the market capitalization of a company, or stock,
simply use this formula: The number of outstanding shares X the price of
the stock = market capitalization of the company.

To buy a stock you will need to establish some kind of investment

account. In most cases you will open an investment account with a stock
broker that works at a local firm. After you have set up your account you will
need to fund it before you can make a purchase. Once your account is funded
you will be able to enter your order for a stock purchase. When you are ready to
sell your shares you will either tell your stock broker that you want to sell X
number of shares of Company A, or you will need to enter a sell order via your
online investment account.

How does the stock market work?

A. The stock market, also called the equity market, is a way for companies to
raise money from those with cash to invest. Investors make money
(hopefully) from buying shares in two ways - the income from dividends
that the company pays to shareholders and from the capital gain on
shares, realized when shares are sold at a higher price than that at which
they were bought.

Source:http://www.theanswerbank.co.uk/Article1426.html
 HOW TO INVEST IN THE PHILIPPINE STOCK MARKET
A Guide for Investors

1. What are stocks and equities?

A share of stock is evidence of a fractional ownership in a corporation. This

ownership is also referred to as having equity in a company, hence, stocks
are also called equities or equity securities.

2. What are stock certificates?

Ownership of a business is represented by stock certificates. The certificate

indicates the investor’s name, total number of shares purchased, the
certificate number, the par value and the name of the issuing corporation.

When shares are purchased, the stock certificates will be issued either in
street name or in the investor’s name. The difference is important to know
since without notice form the investors all stock certificates will be issued in
street name, i.e. in the name of the brokerage firm. In this way, the
brokerage firm – and NOT the investor – will be the holder of the stock
certificates.

3. What type of stocks can you buy or sell?

There are different types of stocks that you can buy or sell at the
Philippine Stock Exchange (PSE): common stock, preferred stock,
cumulative preferred stock and convertible preferred stock. The
difference depends on the right and privileges which you receive as a
stockholder.

Common stocks are usually purchased for participation in the profits

and control of ownership and the management of the company – they have
voting rights.

Preferred stocks .Its name is derived from the preference given to the
holders of this stock over holders of common stocks. Holders of the preferred
stocks are entitled to receive a fixed minimum amount of dividends
(expressed either in pesos or as percentage of the stock’s par value), to the
extent declared by the company’s Board and if there are sufficient retained
earnings, before any dividends are paid to the holders of common stocks.

Cumulative preferred stocks are special preferred stocks that

accumulate unpaid dividends for future payment. Cumulative preferred
stock has prior rights to dividends over common stock; therefore the omitted
cumulative preferred dividends must be paid before the common stock
 dividends can be paid. Convertible preferred stocks are preferred stocks
which are exchangeable into common stocks at the option of the holder
under specified terms and conditions.

4. Where can you buy or sell stocks?

The stock market is the place where shares of stock are traded while the
stock exchange is the organization that provides the facilities for the
buying and selling of securities. The trading floor is the place where
member-brokers trade daily. The Philippine Stock Exchange (PSE) is the
only operating stock exchange in the Philippines and has two trading floors
located at the PSE Centre in Pasig City and at the PSE Plaza in Makati City.

Trading at the two trading floors or PSE is electronically linked by a

computerized trading system, the MakTrade System, which uses the single-
order-book system where all the orders are posted and matched in one
computer. All trade orders entered by brokers in behalf of their clients are
matched with the best bid/best offer (BBO) regardless of which floor orders
originate.

5. Who can buy or sell stocks?

As the organization that facilitates stock trading, the PSE is not directly
involved in the buying and selling of securities. It is the Members (also
known as member-broker or member-firms) who can buy or sell stocks
for the investors since they are authorized and licensed by the
Securities and Exchange Commission (SEC) to transact business as a
broker and/or dealer or securities.

A stockbroker acts as an agent or middleman between the investor and

other buyers/sellers. As an intermediary, the stockbroker executes orders
for clients, purchasing or selling the stocks on the stock exchange. On the
other hand, a dealer acts as the principal rather than an agent – buying and
selling for his/her own account.

An individual or corporation is considered a PSE Member once they have

acquired a “membership seat” and have met all the set requirements for
membership. Each Member is entitled to one seat which can be bought from
an existing Member or from the Exchange.

6. How can you buy or sell stocks?

a) Choose a stockbroker. In choosing a broker, you must also see to it
that the broker (person or corporation) is a member of good standing at the
Philippine Stock Exchange. It is important that you trust your broker and
that you are satisfied – with the services it is giving you. Broker services
include market reports, advice regarding stock selection and timing of
purchases and sales, trade executions, on time delivery of important
documents – such as confirmation receipts – and other trading-related
activities that the client may require.
 b) Open a brokerage account..This account allows the client to perform
stock transactions (buy and sell shares) any time – similar to bank account
which enables you to deposit, transfer and withdraw money.

c) Place your order with your broker. After opening the account, a
trader will be assigned to the investor. A trader is a licensed salesman who
is authorized to buy and sell securities at the PSE. He/she will receive your
order, most likely by telephone (unless arrangements are made), and will
execute the order through the trading terminal connected to the main
system of the Exchange.

d) Settle your transaction. Buying and selling transactions are settled by

book-entry. This means the ownership of shares and cash is transferred
electronically to the brokerage account, without the stock certificates and
cash being handed over physically. The account is credited when buying
shares, and debited in the case of selling shares.

The paperless or scripless trading, now in place, has eliminated the physical
handover of stock certificates when buying or selling. The system replaced
the scrip-based system where stock certificates are handed over for transfer
for the next owner, which may take more then 3 to 4 weeks. Instead, stock
certificates are simply immobilized and kept in a safe place – the Philippine
Central Depository, Inc.

Currently the PSE settles trades on T+4, i.e., four (4) days after the
transaction date. Therefore, payments and/or securities must be delivered
to your broker on or before 1:00 p.m. of the fourth trading day following the
sale. Be sure to always verify the settlement deadline with your broker for
future developments.

7. What is the minimum amount you can invest in the stock market?

The minimum amount of money needed to invest in the stock market

depends on the minimum amount of shares to be traded .For each stock the
minimum amount of shares to be traded is fixed and depends on the price
range of the stock, as shown in the table below (otherwise known as the
Board Lot Table). To determine the minimum amount of shares, the investor
takes the market price of the wanted stock, looks for the price range in the
table below reads the minimum amount of shares in the same row.

Table 1
Board Lot Table
 Minimum Amount of

Price ranges Shares

0.001 to 0.0024 1,000,000

0.0026 to 0.005 1,000,000
0.0055 to 0.01 1,000,000
0.011 to 0.025 100,000
0.026 to 0.05 100,000
0.0525 to 0.10 100,000
0.105 to 0.25 10,000
0.26 to 0.50 10,000
0.51 to 1.00 10,000
1.02 to 2.50 1,000
2.55 to 5.00 1,000
5.10 to 10.00 1,000
10.25 to 25.00 100
25.50 to 50.00 100
50.50 to 100.00 100
101.00 to 250.00 10
252.50 to 500.00 10
505.00 and upward 10

For example, an investor wishes to buy a stock whose market price is

P100.00. This price is in the P50.50 to P100.00 price range; consequently,
the minimum number of shares to be bought at a regular transaction is 100
shares. In this case, the minimum amount of the investor needs is just
about P10, 000.00 (100 shares x P100.00 share price) exclusive of other
charges for buying stocks.

For shares in the lowest range (from P0.001 to P0.0024) a minimum of P1,
000,000 shares have be bought. If the share price is P0.001, the minimum
capital outlay is P1, 000.00 (P0.001 x 1,000,000 shares).

8. What charges will you incur in buying and selling stocks?

Brokerage commission. When you buy stock, the brokerage firm adds
the commission to the value of the shares bought. When you sell shares, the
commission is deducted from the proceeds that you receive. The maximum
fee is 1.5% of the gross value of the transaction (i.e., the number of shares
multiplies by the price) plus 10% value added tax (VAT). This means that
10% is added to the brokerage commission to be paid with a maximum of
1.65% (1.5% + 10%).
Transfer fee.A transfer fee of P100.00 plus 12% VAT is charged to the
buyer by the transfer agent for every security traded. The transfer agent
maintains the ledgers for each issuer the company showing the details about
each registered stockholder. It also has the responsibility to cancel the old
certificates and change the name when the shares have been sold.

Cancellation fee. Sales transaction and/or direct transfers are subject

to a cancellation fee of P20.00 per bearer certificate plus 12 VAT.

Philippine Central Depository (PCD) fees. For the book-entry-

settlement system, buying and selling transactions are subject to an ad
valorem rate of 0.00009174 (inclusive of VAT), without any maximum or
minimum amount, in lieu of transfer fee and cancellation fee. If the client
buys a PCD-eligible issue and still wants a stock certificate issued to his
name, he must pay the PCD ad valorem charge, a P25.00
upliftment/withdrawal fee per request and transfer fee. Also, if a client sells
a PCD-eligible issue and still has the stock certificate for delivery to the
broker, he is charged with the PCD ad valorem rate and a cancellation fee.

Documentary stamp tax. The documentary stamp tax is charged to the

buyer on every purchase transaction at the rate of P1.50 for every P200.00
par value of the stock being transferred or a fraction thereof.

Stock transaction tax.The stock transaction tax is charged to the seller for
every sale of stocks listed and traded on the Exchange at the rate or ½ of 1%
of the value of transaction, in lieu of the capital gains tax.

It should be noted that these tares are subject to changes. Please ask your
brokerage firm for the current tax rates and charges.

Illustration 1: Buying securities

If we assume that an investor buys 2,000 shares of stock at a market price

of P5.00 per share with a par value of P1.00, the computation for the total
cost of the transaction is as follows:

Investment cost (2,000 shares x P10, 000.00

P5.00)
Add:
Brokers' commission (10,000.00 x 1.5%) 150.00
10% VAT on brokers' commission 15.00
Transfer fee 100.00
10% VAT on transfer fee 10.00
PCD fee (10,000.00 x 0.92
0.00009174)
Documentary stamp tax
 [(2,000 shares x P1.00) x P1.50] 15.00
200
Total cost of the transaction P10, 290.92

This computation will be reflected on the Confirmation of Purchase which

contains the details of the buying transaction and which will be delivered by
the broker to his client.

Illustration 2: Selling securities

For an investor who sells 500 shares at a market price of P20,00 per share,
the computation is as follows:

P10,
Sale proceeds (500 shares x P20.00) 000.00
Less:
Brokers' commission (10,000.00 x 1.5%) 150.00
10% VAT on brokers' commission 15.00
Stock transaction tax (10,000.00 x 0.005) 50.00
Cancellation fee 20.00
10% VAT on the cancellation fee 2.00
PCD Fee (10,000.00 x
0.00009174) 0.92
Net amount to be received P9, 762.08

This computation will be reflected on the Confirmation of Sale which

contains the details of the selling transaction and which will be delivered by
the broker to his client.

9. How can you make money in the stock market?

Dividends are periodic payments made by the company to its shareholders

from its current and past profits. It is paid in either of two ways. The first
and most common method is cash; the second method is known as stock
dividend.

Cash dividend This income is computed by multiplying the number

of shares held by the cash dividend rate declared. For example, if a
company declares a P0.25 per share cash dividend to tits shareholders, a
stockholder with 10,000 shares of stock will receive a cash dividend
income of P2,500 (P0.25 x 10,000).

Stock dividend This dividend is given to shareholders in the form of

additional stocks, instead of cash. For example, a company with one
million outstanding shares declares a 25% stock dividend. A stockholder
who owns 10,000 shares will receive an additional 2,500 shares (355% of
10,000) for free as a stock dividend. This stockholder now owns 12,500
shares.
 Dividend payments are not automatic. All dividends must be declared by the
company’s Board of Directors, but it is the decision of the company whether
to declare dividends or not, the amount and when it will be paid. Usually,
the higher the company’s profit, the higher the dividends paid to the
stockholders. But if the Board decides not to declare a dividend, the
common stockholders receive nothing. Common stockholders cannot
demand dividend payments even if the company is profitable.

Capital gains This results form capital appreciation, or an increase in the

market value of the stock you own. For example, an investor buys 10,000
shares of stock at P2.00 per share. After several weeks, the market price of
the stock increases to P3.00. If the investor decides to sell all his shares, he
will be getting a total value of P30, 000 which represents a 50% capital gain
form his purchasing value of P20, 000. Thus, capital gains are profit made
due to an increase in the market price of a stock form the purchase price.

The combination of the dividend income and the capital appreciation made
constitutes the total return. The nominal rate of return is calculated by
assign up the cash dividend income and the capital gains (pr losses) and
dividing the sum by the purchase price.

For example, a company declares a cash dividend of P5.00 annually. In

the meantime, the stock price reaches P30.00 form a purchase price of P20.00
a year ago. An individual who owns shares of stocks of the company and sells
his 100 shares after receiving the cash dividend, has a total return of P1,500
(P5 x 100 +P10 x 100). The total rate of return would be 75% or P1,500 divided
by the purchase value of P2,000.

10. How do you collect information about stocks?

Stock market information.For price and other stock market information,

investors can rely on the following sources: stockbrokers, Philippine Stock
Exchange, media (newspapers, television and radio), and information service
companies (i.e., Bloomberg, Reuters, Technistock, etc.)

Daily quotation of stock prices can be obtained from your stockbroker.

Investors can call their broker any time to inquire about the status of the
stock market which includes stock process, closing and opening prices, bid
and asked prices, and traded volumes. Usually brokers can also provide you
with reports on the company and industry analyses which give you an in-
depth look into the performance of a particular corporation, industry or
sector that will lead to an advice to buy, hold or sell.
Stock price information can likewise be obtained from the Philippine Stock
Exchange. It also keeps a copy if all corporate statements that have to be
disclosed to the public and the PSE as part of its disclosure requirements.
Annual, semi-annual and quarterly reports have to be submitted to the PSE
on a regular basis by every listed company. These reports and other
financial statements are kept in the PSE library and are available to the
public.

In addition, the PSE Research and Public Information Department issues

statistical Weekly and Monthly reports and Fact Book in a regular basis.
These contain among others, trading statistics, the composite index and
sectoral indices, market capitalization of listed companies, volume and value
traded. These publications are available at the PSE Library. The Library is
open daily form 8:00 a.m. to 12:00 noon and from 1:00 p.m. to 5:00 p.m.,
except Saturdays, Sundays, and legal holidays. Also, these publications are
on sale at he Public Information and Assistance Center in Pasig City.

Most leading daily newspapers cover the stock market and publish the
previous days closing prices and traded volume.

For more in-depth news about the stock market, investors can turn to TV
programs which gives updates about the company, the various industries
and particular companies while stock price information is shown
simultaneously. “Stock market Live” on Channel 21 (Sky cable) covers the
stock market every morning during trading hours.

Those who have a computer can access the World Wide Web for the latest
stock market information. Numerous brokerage houses provide closing
prices as well as the composite index and the indices of the different sectors.
And give background information about the stock market along with the
market recommendations. You can visit the PSE at http://www.pse.org.ph.

Information about a listed company Apart from keeping track of the

stock prices and other indicators, the investor should likewise monitor
closely the companies he/she invested in. The financial performance,
dividend declarations, future outlook, the management of the company,
corporate developments, development plans – in short, anything that could
affect stock process – should be looked into. The following sources of
information can be consulted for company analysis:

Corporate annual reports.The annual reports of a corporation are

probably the best source for facts about a company. The most valuable
information contained in these reports are the financial statements, the
company overview, the achievements and developments, and future
prospects.

Prospectus. When a corporation wants to issue new shares to the

public, it must prepare a complete report about he company’s activities
and development plans, called a prospectus. Particularly, the prospectus
must mention how the raised funds will be used and attributed, This
 report is generally detailed and contains accurate information since it
has to be approved by the Securities and Exchange Commission before
the company is allowed to issue the shares.

A copy of the annual report and the prospectus can be obtained from the
issuing corporation or from the underwriter. Copies are also available at the
PSE Library or form your broker.

Another source of information are company reports prepared by brokers’

research staff. Full-service brokers regularly analyze listed companies and
consolidate their findings in a report which is usually available to their
clients.