Guest Post: How you can start investing in the stock market

I don't always come up with posts that makes a lot of sense. Primarily because my intended audience is always just myself, hubby, and our children (when they are old enough to get embarrassed by my posts hee hee). I also would like for my son and daughter to have an idea what their mom 'sounded' like back in the day.

So, sometimes it amazes me why certain demographics (don't get me wrong they are still a very few) outside my family bothers to read my musings at all. Okay, so now to my point. You may not want to read this little blog BUT I urge you not to let this one pass.

My husband is my guest blogger. And he will talk about something that might change your outlook when it comes to your finances. No strings attached just pure unadulterated sharing for the sake of passing on something good. Read up. ;)

Note to hubby: I hope you can do more of this to add more sense in this blog. Haha. As always I am prouder of you than anyone else in this earth could ever be.

How you can start investing in the stock market

Introduction

I believe that the fear of the unknown is what prevents many Filipinos from investing in the stock market.  I think the two most common misconceptions about the stock market are: (1) too technical for ordinary people to understand and (2) too risky to put your money in.

It has become my personal advocacy to reach out to as many friends as I can and introduce them to stock market investing.  I started with it when I came across Bo Sanchez's book "My Maid Invests in the Stock Market... and Why You Should, Too!"  Catchy title right? 

But first let me just get these things out of the way: I'm doing this for free and I won't get an income out of this (well probably a little if you use the affiliate link I provided at the end).  I just want to make people aware of this option on how to grow money.  Also I'm subscribed to Bo Sanchez's teaching on stock market investing, so what I'm telling here is just my interpretation of that.  His teaching made a lot of sense to me, and my purpose is to just relay the message.

So how can you get started?  Read on.

What You Need to Get Started

First you need to understand and appreciate the following simple concept, discipline, and attitude in order to do stock market investing:

1. Compound interest
2. Consistent, regular setting aside of a portion of your income for stock market investing
3. Knowing the difference between stock market trading and stock market investing

I’ll discuss items 1 and 2 first, and then proceed with item 3.

Compound Interest and Consistent Saving

Albert Einstein once said, “Compound interest is the eighth wonder of the world.  He who understands it, earns it ... he who doesn't ... pays it.”


Did you know that that P50 can become P50 million and make you insanely wealthy because of compound interest?  Consider the following tables:



Above are different investment vehicles.  You need an investment vehicle to grow your money. 

Some people put their money in banks under a time deposit account, like in table (i).  As you can see, the initial P50 becomes P50 million because of compound interest, but it takes 469 years.  However, smarter people put their money in, e.g., government-issued bonds (table(ii)) or invest their money in the stock market (table(iii)).  They use a faster vehicle to grow their money.

The investors in the tables above ONLY made a one-time investment of P50 and let compound interest do its work.  But are you only capable of such a similar move? 

I’m sure you can do better than putting in a P50-savings once in your lifetime right?  You can instead put in P50 every year, yes?

But you can do better than P50!  Why not put in P100?  Why not put in P1,000?  Why not P2,000?

And of course you can do better than a once-a-year saving!  Why not instead of putting in P2,000 every year, you do it every quarter?  Or why not do it every month?

Let’s say you decided to put in P2,000 every month which makes P24,000 per year.  Using the rate in table (iii), see computation below how that very doable effort can bring you faster to a wealthy status:

Which is what drives the next point after compound interest – consistent and regular setting aside of a portion of your income.  It doesn’t matter how much you can set aside (but if you can set aside more, you can reach your wealthy status faster).  What matters is that you do it regularly.  If your age now is 40 it’s possible you still have another 42 years ahead of you, and if you start investing now, you will be P56 million richer by 82!

Knowing the difference: Stock Market Trading vs. Stock Market Investing

To earn from the stock market, as you may have heard, you need to buy low and sell high.  Both stock market trading and stock market investing essentially subscribe to this principle, but they differ in the time period wherein this principle is being applied. 

Stock Trading or Active Trading

In stock market trading, the buying and selling activities happen in a span of a month, weeks, days, or even hours.  Trading within these short time spans often necessitates a lot (really a lot!) of effort and makes use of very complex statistical analysis and forecasting tools.



Figure 1: Stock Market Trading

Figure 1 is as sample stock price movement.  The green bars mean that the stock price is in an upward movement, while the red bars mean that it is in a downward movement.  So to be able to use the “buy low, sell high” principle, stock market traders try to place a stock purchase at each of the bottom-most portion of the red bars, hold a bit, and then sell at each of the top-most portion of the green bars.  

   

In media portrayals, those involved in stock market trading enjoy very high returns or suffer very big losses.  To beat the market, they pour over a lot of data analysis on the fluctuations in stock prices.  They are celebratory when they beat the market or suicidal when the market beats them. 

I think this kind of media portrayal is what scares most people from being involved in the stock market. 

Stock Market Investing or Passive Investing

In stock market investing, the buying and selling happen in a span of several months, a year, or several years.  Short-term fluctuations do not matter and so one does not need to put in a lot of effort in predicting when to purchase or sell a stock.  

Figure 2: Stock Market Investing

Using the illustration above let’s assume that you don’t have time in closely monitoring the stock prices and decided to just passively purchase shares at regular intervals.  Let’s also assume a very unlikely worst case scenario wherein you placed all of your purchases at each of the bottom-most portion of the red bars.

If you average out all of these stock purchases in a span of several months or years, you still earn if you decide to sell in the end.  This is called “cost-averaging.”  The important thing here is there should be consistent stock purchases at regular intervals. 

As you can see, you don’t have to predict when the stock prices will fall at its lowest or rise at its highest (that is a very complex science).  You just have to pick big, well-managed companies that are very likely to maintain its profitability (can you imagine Ayala, SM, or PLDT not being profitable?).  Then you just do a piggy-back ride on their profits by buying stocks from them.

Parting words

Before you get to pick the right companies where you can buy your shares from, you should have a broker that will serve you with your stock market investing needs.  I use the online stock broker COL Financial wherein I have an account.  For details, visit this link: https://www.colfinancial.com/ape/Final2/home/open_an_account.asp

Understanding and appreciating the three items I have described above is I think already 90% of the strategy that you need to apply in stock market investing.  My goal in this write-up is to convince you that you can do stock market investing.  I hope I was able to do that.  This is the basic level – knowing that you can do it.

On a side note, I have and still am subscribed to Bo Sanchez’s Truly Rich Club which is where I get directions on how I can maximize further my stock investment earnings.  In this on-line community, members regularly receive stock updates that include which good companies to buy, when to buy, until when to hold, and when to sell.   This is the remaining 10% of my strategy.  You can visit http://bosanchezmembers.com/amember/go.php?r=19813&i=b0 for details.