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062711 PHILSTOCKS 3.0 INFORMATION/EDUCATION INTRODUCTION TO STOCKS AND THE STOCK MARKET 1 [x] FIRST DRAFT [] REVISION#5 [ ] FINAL page 1

When a Filipino hears the word investment, what comes into his or her mind? For many Filipinos, investing hard-earned money meant either one of these things: 1. Save up a portion of the salary in the bank. Put a certain amount of money into a bank account or even a time deposit, and continue doing so until retirement arrives, or when the need arises. You can see how your savings will grow in your ATM or bank book bit by bit, although the interest is not really that high. 2. Invest in a small business. Maybe put in half of the familys life savings in a venture. A neighborhood sari-sari store, water refilling station, or even a small hardware shop or restaurant. If profitable, repeat and expand, and probably land enough profit to warrant the attention of bigger investors (like what happened to a certain chicken inasal restaurant). Then again, not all people are good with business, and not all businesses become success stories. 3. Go abroad and be an OFW, or even an immigrant. Invest in foreign embassies in the hopes of either bringing the family to a foreign country to live the first-world dream, or earn enough money to do # 2 above in the Philippines. Of course, the things mentioned above are all legitimate ways to invest time, money and a bit of patience. After all, it is everyones dream to have a warm and comfortable house (that you actually own) to go home to, with enough food to eat and enough to spend on the daily luxuries of Filipino life, and let all the children finish their schooling up until college, or even post graduate degrees. Of course, all of these can only be achievable with earned money to fund these things an average Filipino dreams for himself and his family. Saving up and earning more money is everybodys concern. In these hard times that Filipinos experience today, having no savings to stand on in the future spells doom for the unprepared. Then again, how can a single person make more money? Its not enough that a breadwinner works double shift humans also have limitations. Most Filipino families have two parents or even a first-born child work just to make ends meet, much less save up for the future. And even if it suffices, who wouldnt want a little extra for the good things in life? There are many options that are available to make your money work for you instead of you working for money. One of these options is investing in stocks and going into the stock market. What are stocks, anyway? Stocks are basically titles that give a certain person proof that he or she owns a certain company. Think of a mainstream corporation, lets say a mall. Having stocks mean that you own the company who operates the mall, or at least a portion of it. For example, you can own a part of SM Corporation by owning a portion of its

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stocks. It gives you the power and the bragging rights to say to your friends that you own part of SM Corporation. Of course, so that everyone else knows how much of a company is owned by someone, shares are delineated by the company, just so that everyone has an idea of how much of the company a certain person actually holds. Lets say that SM Corporation has a total of 1,000,000 shares, and these shares are divided to many people. So if you have in your name 10,000 shares with SM, you effectively own 1% of the company. It might seem small when you put it that way, but when you realize that, within those 1,000,000 shares, there are other owners numbering in the thousands owning different amounts of SM stock (with some as low as 10 shares of stock for the company, meaning they only own 0.001%). Suddenly your 10,000 shares seem so large. When a company decides to let people buy stocks, two things happen: The company is dividing the ownership pie between existing owners of the company. Using the previous example, lets say that before SM issues stocks, Henry Sy owned 100% of the company. When he announces an Initial Public Offering (where he sells to the public a measure of stocks), he is basically selling parts of his company to the public. In a way, the buyers of SMs stock have the same rights to ownership as Mr. Sy (We will discuss how stockholders meetings figure here in another post). The company, of course, earns money by selling the stock. Each stock is priced so that it reflects the price that will convince people to buy a portion of the company. The company also considers how much capital money is needed, compared to how much ownership the company is willing to sell. Of course, when someone buys from the Initial Public Offering, he or she buys a number of stocks valued at a certain price. This means that the company (not the owners) can use the money for useful purposes (e.g. buying more equipment) so that it could make more money out of what the company currently has. In the above example, SM needs P 100,000,000 to build a new mall. SM decides that a maximum of 1,000,000 shares can be released, because having more than a million owners might be too inconvenient for SM to handle. So, we can value each stock at around P 100.00 per stock. If you want to buy and own 1,000 stocks, you have to pay a total of P 100,000.

By owning a stock, you also own your own business, along with other people. So why own stocks instead of making your own business? Well, for one, most people arent really rich enough to build their own malls, their own petroleum refineries and their own car companies. Sometimes, people have only enough to create small businesses of their own. Of course, not all people are good with businesses, and some people might be good with businesses but dont have any money to build businesses. Putting it simply, corporations pool a lot of people into one venture so that the huge pool of money (in the millions, even billions of pesos) could be used more efficiently. In the case of SM, no single person

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could build their own mall, but if ten thousand people agree to contribute their money to build a huge mall in exchange for a portion of ownership (and profits) of the mall, then buildings like the Mall of Asia become more than a dream. Everyone benefits from the opening of a centralized mall, people get employed by the mall and earn salaries, and the ten thousand owners (or more) have a share of the profit (the dividends) and earn for their own as well. In the next post, I will be discussing stocks in more detail, why the stock market exists, and why stocks are sold by people in the stock market.