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How Stock Market Works
Posted On Sunday, 21 Dec 2008 By Tyrone Solee. Under Investments Tags: invest, money, stocks
In my effort to further educate newbies in the field of stock market, I initiated this
article for stock market beginners. You may call it Stocks 101 or Stocks for Dummies.
First and foremost, what is the stock market? A stock market is an avenue for
companies and corporations to offer their shares in the public. Once a company
listed their shares in the stock market, then the public is free to buy and sell those
stocks. It works in a similar way to how you might sell and buy gold. So whats the pros
and cons of a company in listing their stocks publicly?
Pros:
1. To raise capital. Companies hire an advisor called underwriter to formulate the
Initial Public Offering (IPO) price of the companys stock depending on several
factors. Then executives of these companies will conduct a roadshow usually out of
the country to entice foreign investors to buy these shares. The IPO price is the
starting price of the companys stock in the stock market when it first traded publicly.
An oversold stock mean that it did well in its initial public offering. It means that a lot
of investors bought the stock. It can be twice or thrice oversold depending on the
turn out of the IPO.
2. To know the market value of a company. One way to easily know the market
value of the company is by knowing the price of its stock. This in turn will be multiplied
by the total outstanding shares that the company holds. Here in the Philippines, the
largest company in terms of market value is PLDT.
Cons:
Since the companys stock is now open for public, it can be subject to several
external factors. Investors can now play its stocks. It can now be a subject for scrutiny
by investors and analysts. Also, it can be a subject for manipulation. A company that
did well, meaning, it beats analysts estimates on its earnings and profits will probably
go higher as investors buy these shares. In contrast, those that did not meet or has
some problems in liquidity, credit, labor, compliance, etc. will be dumped by the
investors that will lead to the so-called equity dry up. This led to the recent
bankruptcy of Lehman Brothers.
So much for the pros and cons, we will now get into the basics of the stock market.
Once a company listed its shares in the stock market, this will be represented by a
so-called Ticker Symbol. A ticker symbol is a short-cut name of the company. You
wont see the long name Philippine Long Distance and Telephone Company in the
stock market. It may be hard to memorize and to recall. Instead, it is represented by
the ticker symbol TEL.
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1 of 11 5/15/2014 11:44 AM
An index tracks the movement of the stock market. The ups and downs of an index
depends on the movement of the price of the stocks. You usually hear the index
went up or down by so and so points. Different countries have different names for
their indices for easy identification. In US, there are three indices. These are called a.)
Dow Jones Industrial Average or DOW or DJIA. b.) NASDAQ and c.) S&P 500. In
Japan, they called their index Nikkei. In Hong Kong, they call it Hangseng. In UK,
they call it FTSE 100. In Germany, they call it DAX 30. Here in the Philippines, they
call it Phisix.
Someone asks, is there a minimum amount to buy stocks? The answer is yes! Here in
the Philippines, it usually takes a capital of Php 25,000 to open an account but some
online trading platforms require just Php 5,000. All stocks have a minimum number of
shares that each investor needs to comply. This is called Board Lot. The purpose of this
is to avoid odd lots and to facilitate easier trading. This depends on the price of a
stock.
The movement of stock prices is also subjected to fluctuations. This is also
dependent on the price of a stock. Here in the Philippines, a stock with a price of 101
and up per share is subject to a fluctuation of 0.10. It means that it can move to a
multiple of 0.10, lower or higher.
The table below tells the board lots and fluctuations of stocks here in the Philippines
which are both dependent on its price:
When you buy or sell stocks, you placed a so-called Order. A buy order mean that
you requested to buy a stock at a specified price. A sell order mean that you
requested to sell the stocks that you currently holds. Every order is represented by a
price and volume. By volume, it refers to the number of stocks that you want to buy
or sell. By price, it refers to the buy or sell price that you want. All these orders will be
requested thru a stock broker. A stock broker will receive all these requests and will
post it in the stock exchange. Once an order materialized, it is called matched
order. Meaning, if you posted a buy order of 100 shares of TEL stocks at the price of
2,000, then another person posted a sell order of 100 shares of TEL at the same price
of 2,000. And so your order has been matched! If you posted beyond the trading
hours, then its called off-hour order and your order will be exercised the next
trading day. If you dont have sufficient funds to buy a stock, then it will be a
declined order.
Stock market is like any normal store. It has operating hours called trading time or
trading hours. Depending on the country, the stock market normally operates from
9:30AM to 12:30 Noon. Some countries like Japan operates from 9AM to 3PM.
Youve been hearing a lot about bear and bull markets. What do these terms mean?
A bear market is a stock market where there are a lot of sellers than buyers. By law of
supply and demand, since there are a lot of supply, in this case sellers of stocks, then
the stock price will be bound to go down. Why is it called a bear market? Just look
how bear attacks. It fights by using its claws in the downward position. In contrast, a
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stock market called a bull market is characterized by a lot of buyers than sellers. This
is again by using the law of supply and demand. Why is it called a bull market? Just
look at how bulls attack. They have this set of thorns in the upward direction when
they fight with an enemy. When there is a bull market, stock rally.
A blue chip stock is a stock of a well-established company having stable earnings.
The term blue chip came from casinos where blue chips represent counters with the
highest value. During trading, a stock can be called most active, top gainers or
top losers. A stock belonging to the most active list is a stock with a lot of buyers and
sellers. These set of stocks are also called movers. Top gainers list are stocks with the
highest gain in a single trading day while top losers are stocks with the highest loss in
a single trading day.
A stock that belongs to the list of most active, top gainers and top losers is usually
determined by its market volume and market value. A market volume refers as to
how many shares were traded in a particular trading day. A market value, on the
other hand, refers to the monetary value of all those traded stocks. You usually hear
reports of, for example, 3 Billion shares with a value of 1.5 Billion shook hands.
You usually notice a color associated with a stock during the trading. This indicates
the movement of a stock. A color red means that the stock is going down. A color
green means that the stock is going up. And a so-called unch, meaning a stock that
did not went up or down, is represented usually by a black or white.
Now why do investors buy stocks? Well aside from the buy low and sell high strategy
called capital gains of making nice income from it, a stock gives dividends. These
are profit shares given by the company for investors who bought their stocks. All
companies listed in stock exchange disclosed their dividend pay-out. This declaration
commonly involves two dates: The Ex-Date and Payment Date. The Ex-date is the
date on which you should have acquired the said stock. The Payment date is the
date at which the dividend will be paid. Dividends may come in two forms: Stock
dividend and Cash Dividend.In order to illustrate more of this, lets view the example
below:
- Ayala Corp. (AC) declared to give 20% stock dividend declaration ex-date June 1;
payment date July 31. Cash dividend of Php 5.75 per share ex date September 1,
payment date October 30.
- As an investor, if you want to take advantage, acquire as much stock as you can
before the ex-date. If the investor bought 100 shares of AC before September 1, the
he/she will have 120 shares by June 1. Aside from this, if he/she retained the said
stocks then he/she could have probably earned an additional Php 690 come
October 30.
One last way of earning from stocks is the so-called stock rights. It is the the option
given to the present shareholders to buy additional shares of stock at a price lower
than its market price. This is an additional opportunity for those who hold stocks of a
company and one way to raise additional capital for the company.
Historical values of a stock also play an important role in assessing whether the value
of a stock is cheap or expensive. A 52-week high means that it is the highest price of
the stock achieved in a span of 1 year. Consequently, a 52-week low means that it is
the lowest price of the stock achieved in a span of 1 year. A Year-To-Date (YTD) Yield
represent just how much the stock moved up or down starting from the start of the
year which is January 1. These two are both dependent on the present date and the
closing price of the stock (the price of the stock when the stock market closed). To
illustrate more of this, lets view the example below. Consider the following prices as
the closing price:
- SM Investments had a 52-week high of 400 and 52-week low of 185. If for example
the date today is November 10, 2008, then the stock of SM achieved its highest price
of 400 and lowest price of 185 from November 10, 2007 to November 10, 2008, a span
of 1 year. In the case of YTD Yield, lets say today the company has lost 35% of its
value. This just means the stock has fallen 38% of its value since January 1, 2008.
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Aside from the gauge of historical values of stocks, one way of assessing if a stock is
cheap or expensive is thru its Price-Earning Ratio or so called P/E Ratio. This is the
ratio of the stock price to the companys earnings. The higher the P/E Ratio, the
higher the profitability of the company. BUT do not solely rely on this ratio. It may
indicate that a high P/E ratio means that the stock is overpriced.
You also hear the term Technical Analysis. This refers to the technique used by
brokers and analysts to predict the future direction of a stock. They use charts and
graphs and is usually based on the historical value of the stock. In using this, they can
somehow know when a stock is cheap or not. However, this is not 100% accurate as
no one can really predict the movement of the stock market.
Ok, we will now go to some terms that are used by analysts in stock trading:
Cost averaging This means adding or buying more shares at a cheaper price and
disposing it at a modest price so that the cost will eventually average out with the
profit leaving a break even or a little income. This was a strategy to lessen losses. To
illustrate it, lets see the example. I bought 200 shares of AC at 250 per share. The
stock went down to 150 per share. To take advantage of it, I will buy additional 200
shares. And so when the stock moved to at least a price of 200 per share, then I am
break even. If I had not done it, then I will incur a loss when I sell it at 200 per share.
Window Dressing It is another strategy used by fund managers towards the end of
the year or fourth quarter. They buy stocks with attractive values and sell those ones
with beaten prices so that their portfolio will look good to their clients. To illustrate this,
a mutual fund company buys a stock whose trend is up and sell some of its shares in
another stock whose trend is down, even at a loss.
Short Sell This means that you sell stocks that you dont have at the time of the sell. It
is done with the intent of later buying the share at a lower price for a profit. Traders
usually do this when there is an expected decline of a stock. When the stock price
really went down, then the trader is well off. In contrast, when that expectation did
not materialize, then the trader loses money. Recently, this practice was banned by
Securities and Exchange Commission for manipulating the stock market.
Volatility The volatility of the stock refers to its price movement. The larger the
movement of the stock, the more volatile it is. This means that a stock which moved
from 150 t0 350 then back to 250 per share in a span of 3 days is more volatile than a
stock which moved from 150 to 200 to 175.
Here is a short video from Youtube on How Stock Market Works:
To learn on what stocks to pick, you may view my article on what stocks to buy and if
you want to know some stock trading strategies, you can refer to my article on stock
trading tips.
To get articles, you can subscribe using your favorite RSS feed reader or have them
delivered directly to your email address.
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43 Responses To How Stock Market Works
Allen Taylor Says:
December 21, 2008 at 8:30 pm
Nice writing. You are on my RSS reader now so I can read more from you down the
road.
Allen Taylor
Reply
Admin Says:
December 21, 2008 at 8:35 pm
Thanks Allen Taylor.
Reply
Dinah Says:
March 6, 2009 at 3:30 am
exactly what i need! thanks for a very well written post!
Reply
Jehzeel Laurente Says:
March 12, 2009 at 6:05 pm
now i have an idea. Mukhang marami pa dapat akong matutunan bago pumasok
dito sa stock trading raket, wah!
Reply
How Stock Market Works | Millionaire Acts http://www.millionaireacts.com/404/how-stock-market-works.html
5 of 11 5/15/2014 11:44 AM
Jonha Says:
May 7, 2010 at 9:28 am
Pareho pala tayo! Wala akong muwang sa ganito pero sabi nga ni
Warren Buffet, Why invest in real estate when stock market is easy.
Mukhang madali lang talaga kapat you know the basics. Sa una lang
medyo nakakahilo siguro but eventually when you learn how the game
works madali nalang magpatuloy. Salamat dito kay Tyrone for this very
informative post. Exactly what I needed.
Cheers!
Jonha
Reply
RmR Says:
December 16, 2010 at 4:58 pm
madali lang po sa stock market. mga kasambahay at driver nga ni bro
Bo Sanchez is into stock market din. pwede rin po nyo subukan muna
maglaro sa stock trading game ng PSE sa website nila(real time) you
can buy & sell stocks using your start up capital of 1M. pero iba pa rin
thrill pag actual na. newbie in stocks po
Reply
Jehzeel Laurente Says:
March 12, 2009 at 6:10 pm
i was enlightened ng konti. Ganun pala yung nakikita ko sa big screen sa may Ayala
Ave. Yung mga current stocks blah blah blah ng isang company, Tapos may value
doon at kung tumaas ba or bumaba ang stocks ng isang company (tama ba?
stocks ang tawag? or stock value? hehe). Di ko yun ma gets dati at nag tataka ako
bat pinapalabas doon yung mga number2x na di ko ma gets. Para pala yun sa mga
public stock holders at mga taong may paki alam sa stock market
sana ma22nan ko din to ng maigi. Magbabasa pa ako ng articles mo idol hehe
Reply
Ada Says:
November 10, 2009 at 8:26 pm
Sounds like you want to try this. Pasok ka na ba dito? hehe sabay tayu
LOLs
Reply
Jhesqi Says:
April 23, 2009 at 12:07 pm
Nice and informative post on stocks. Nag-blog din ako about the stock market in the
Philippine view. Bisita ka din if you have some time
Reply
How Stock Market Works | Millionaire Acts http://www.millionaireacts.com/404/how-stock-market-works.html
6 of 11 5/15/2014 11:44 AM
Reps Says:
June 24, 2009 at 5:15 pm
now it clears my minds about basic stocks, youre my on-line mentor. i have no one
to ask ideas about stocks but through the net and yours is an unselfish serving of
heaps and heaps of info about stock essentials, daghang salamat! added your site
in my fave list hoping to start in stocks within this year.
Reply
Renz S. Says:
March 5, 2013 at 11:48 pm
ako pod ako na sya gi-add na favorite list.. daghan salamat talaga
Tyrone. I hope you will be reps and myselfs mentor.. mahirap ang
landas ng financial freedom and financial literacy if mag-isa ka
lang and walang taong magaling na magtuturo sa yo o di kaya mag
guguide Mentor us naman
Reply
Tyrone Says:
June 24, 2009 at 5:25 pm
Hi reps, thanks a lot for the visit. I always try to write articles in a way that can easily
be understood by my visitors.
Reply
Crystel Says:
October 12, 2009 at 8:50 pm
Hi,
Thanks for sharing your wonderful knowledge. Glad to have people like you online.
Stock-trading sounds french to me and with your websites help, I can always go
back and read all over again until it gets down to my head.
Many thanks.
Reply
Dawn Says:
December 9, 2009 at 7:26 pm
Now I know why so many people love this site
Reply
Ricojake Says:
December 31, 2009 at 9:46 am
add ko lang po: blue chip status depends on market capitalization. the bigger the
market cap the it is perceived as blue chip.
Reply
Karlgene Says:
February 12, 2010 at 12:57 am
very informative. just as I needed someone to ask about stock trading then i found
your site it made my decision making easier still need to learn more. i appreciate
your time and effort in putting up this article =)
Reply
Hoshi Says:
April 8, 2010 at 11:32 am
hmm this post is gonna be one of my references for my plan to invest in stock market.
thanks! i like it!
Reply
Jonha Says:
May 7, 2010 at 9:39 am
Tyrone,
Kung may schedule talaga ang selling at trading like day trading, kailangan ba
talagang tutok ka sa computer neto buong araw? Hindi ba pwede na part-time or
How Stock Market Works | Millionaire Acts http://www.millionaireacts.com/404/how-stock-market-works.html
7 of 11 5/15/2014 11:44 AM
may pagka passive income lang itong stock investing?
Reply
Tyrone Says:
May 7, 2010 at 9:48 am
You dont need to be necessarily in front of the computer. You can
invest for passive income in the stock market by buying long term and
blue chip stocks which gives dividends.
Reply
Jonha Says:
May 7, 2010 at 9:51 am
Tyrone,
So for a start, do you suggest to buy blue chip stocks and
hold it for a long term than short terms? Do you think its
best to start with Citiseconline?
Reply
Tyrone Says:
May 7, 2010 at 10:13 am
Yes, I would advise that. Citisec is I think the
best when it comes to providing the most
detailed information to its stock traders.
However, personally, I chose BPI Trade
because of the convenience it brings me by
linking my own BPI savings account to my BPI
trading account. You can transfer funds
easily online. Transfer sales proceeds of your
stocks from BPI Trade to BPI Savings. Vice
versa, you can also transfer funds from
savings account to trading account to fund
your stock market trading.
Reply
Belle Beauty And The Beast Says:
June 29, 2010 at 1:30 am
Hey friend Ive really had a blast reading up your blog Ive found them rather cool,
Cant wait for your next post!
Reply
Leon Says:
August 17, 2010 at 4:27 pm
THANKS
Reply
SpaPOT Says:
August 24, 2010 at 4:54 pm
wowi expect more tutorials to come..
great job..
Reply
Henry Says:
September 4, 2010 at 10:55 am
I see ganyan pala yun parang yung nababasa ko din d2.
http://www.pesorepublic.com/db/stocks-and-stock-trading/
Reply
Ela Says:
September 23, 2010 at 10:22 pm
thank you so much! this is very helpful
How Stock Market Works | Millionaire Acts http://www.millionaireacts.com/404/how-stock-market-works.html
8 of 11 5/15/2014 11:44 AM
Reply
Ryan Says:
September 30, 2010 at 12:37 pm
this is helpful
may nakita din akong discussion about stock market here..lalo na sa mga pinoy na
gusto mag invest sa stocks
http://www.pesorepublic.com/db/stocks-and-stock-trading/
Reply
Emmanuel Says:
October 15, 2010 at 1:33 pm
hi tyrone,
Is there an investment club here in the philippines, where you can learn and earn at
the same time?
Reply
Tyrone Says:
October 15, 2010 at 5:58 pm
I know a legitimate one. But its a multi level marketing system.
However, their products are all investment and financial products.
Reply
Tommyboy Says:
August 13, 2012 at 6:23 pm
what mltilevel company is this?
Reply
Dexter | Techathand Says:
March 15, 2011 at 2:50 pm
Need to check and I will try this one
Reply
RChavez Says:
November 27, 2011 at 6:56 pm
As part of my investing plan, I started learning about stocks just this month of
November and I found your site. So far, I find your site very informative and most
relevant. Im thinking of sharing your thoughts on my blog with a link back to your
site. Thanks for educating novices like us online. Grace and peace!
Reply
Artsforrent Says:
February 24, 2012 at 11:12 pm
I just started investing in stocks this year, and I am really looking for some pointers,
found what I have been looking for. Thanks for the very informative post
Reply
Tyrone Classmate Says:
March 19, 2012 at 7:16 pm
Hey classmate (hulaan mo na lang kung sino hehe),
May alam ka bang mga training ng stock market? Something like this pero hindi ko
mapupuntahan iyan e
http://www.beeconomic.com.ph/deals/metro_manila/ivision-philippines
/716003288?nlp=&CID=PH_CRM_1_0_0_79&a=715827912
It might make a good blog post. Looking forward to read it when you have the time.
Thanks!
Reply
How Stock Market Works | Millionaire Acts http://www.millionaireacts.com/404/how-stock-market-works.html
9 of 11 5/15/2014 11:44 AM
Kcc Says:
May 16, 2012 at 11:16 am
Ayala Corp. (AC) declared to give 20% stock dividend declaration ex-date June 1;
payment date July 31. Cash dividend of Php 5.75 per share ex date September 1,
payment date October 30.
- As an investor, if you want to take advantage, acquire as much stock as you can
before the ex-date. If the investor bought 100 shares of AC before September 1, the
he/she will have 120 shares by June 1.
I think theres an error here. I presume you shouldve bought before June 1 so youll
have 120 shares by July 31.
Reply
Pinoy Investing Says:
July 8, 2012 at 12:12 am
pretty covers the terms we have in our initial encounter with stock market
investments
Reply
Alvin Says:
August 14, 2012 at 11:04 am
Hi Tyrone,
The company I am working right now has this program called Employee Stock
Purchase Program (ESPP) wherein the company deducts 1~10% from our gross
income and invests the accumulated amount every six months to purchase stocks of
the company (Wdc). Do you think this would be better than say using Citiseconline
or BPI Trade?
Reply
Tyrone Solee Says:
August 15, 2012 at 1:34 am
Hi Alvin,
It can be good depending on the performance of your company. In
this situation, you dont have control over which stocks to buy because
the company is investing in your behalf and they are only buying their
own stock. The company is bias in this case. All eggs are in one basket
which is the stock of your company. What if the company does not
perform well? What if there are major issues affecting the stock of the
company?
I would say it is still better to diversify your investments in several stocks,
not just in one stock alone. In this case, I think it is better using
Citiseconline or BPI Trade.
Reply
Vicky Says:
November 5, 2012 at 7:10 am
At last I got some ideas. I am so desperate in looking this kind of info.
Thank you Uncle Tyrone. Now I have to start hunting on where I put my small hard
earned money. Any suggestion po.
Thank you very much.
Vicky
Reply
Tyrone Solee Says:
November 5, 2012 at 9:22 am
If youre a newbie investor and dont have much time monitoring your
investments, I suggest to invest in mutual funds and unit investment trust
funds.
Reply
Rod Says:
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November 11, 2012 at 1:47 am
hi sir tyrone, can u clarify more on fluctiations..
The movement of stock prices is also subjected to fluctuations. This is also
dependent on the price of a stock. Here in the Philippines, a stock with a price of 101
and up per share is subject to a fluctuation of 1.00. It means that it can move to a
multiple of 1, lower or higher, but it cannot move 0.25. Therefore, you cannot buy or
sell it at 101.25 or 101.50
Are there rules in selling ur shares at a price? for eg u buy 1000000 shares at a price of
0.01 then sell it lets say 0.011, is this possible?
newbie here tnx
Reply
Jone Such Says:
May 20, 2013 at 1:51 pm
An initial public offering (IPO) or stock market launch is a type of public offering
where shares of stock in a company are sold to the general public, on a securities
exchange, for the first time. Through this process, a private company transforms into
a public company. Initial public offerings are used by companies to raise expansion
capital, to possibly monetize the investments of early private investors, and to
become publicly traded enterprises. A company selling shares is never required to
repay the capital to its public investors. After the IPO, when shares trade freely in the
open market, money passes between public investors. Although an IPO offers many
advantages, there are also significant disadvantages.^,..
Reply
Arby Says:
January 29, 2014 at 12:38 am
I just stumbled into your blog today and in few hours of reading, Ive learned a lot!
This has just given me more confidence to finally start in stocks.
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How Stock Market Works | Millionaire Acts http://www.millionaireacts.com/404/how-stock-market-works.html
11 of 11 5/15/2014 11:44 AM