In my previous blog Look for the MONEY, I showed a way to find where the MONEY is.
Time to reap what you planted! Yahoo!
Here comes the reason why anyone would spend time exploring the stock market!
In the first place, you invest in something because you hope it would do something good to you in return. It’s all about seeing potential of a company to make your money work hard for you.
So let’s now discuss how one exactly makes money in the stock market.
Time to open wide your pocket now. J
Welcome to the world of sharing!
Here’s the bottom-line: You earn when your company earns.
It’s that straightforward. It’s also flexible.
You lose when your company loses.
It’s pretty obvious. For a company to have something to share with its shareholders, it must be able to generate the money first by itself in the form of company profits.
So assuming your company is successful in achieving their target earnings, there are primarily two basic ways of blessing their shareholders, either through price appreciation and/or giving dividends.
The most common is through price appreciation, or prices getting higher and higher. This is just where the old rule “buy low, sell high” originates. Just like all people into retailing, they buy something and try to sell it at a higher price, the difference of which becomes the gross profit.
Investors that are really after capital appreciation are often called growth investors. They invest in companies which they believe have the greatest potential for growth to fuel their dream of stocks’ price rocketing up.
You might ask why and how stock prices fluctuate. There are actually a lot of factors, but ultimately they all boil down to the power of undisputable Law of Supply and Demand. All these seemingly complicated influences, from the crisis gulping the big foreign markets up to the controversial love-life of our dear bachelor president, effectively make their contributions in the active oscillation of stocks’ prices through the language of supply and demand.
As an example, I bought few shares of Meralco (MER) when it was at Php 200 per share last December 7 2010. Just one month after I sold them when it reached as high as Php 248.8 per share on Januay 4 2011. That’s a whopping price appreciation (more than 20% ) in less than a month.
Different stocks definitely experience different degrees of price appreciation within the same trading period. Same company stock can also display different extent of appreciation within the same length of trading period, depending on the sentiment of the general market and the trading public. So the spectacular performance of MER in the above illustration doesn’t necessarily imply that it would do the same in the coming days. In fact, it can just remain steady around a certain price for a long period of time before making another new high or new low.
So learning how to choose stocks that have more probability of making relatively bigger leaps in prices can be quite rewarding. Capital appreciation is often the earning method preferred by active traders who watch very closely the market every single trading day.
The second way of making money is by receiving dividends.
Before, I only knew one sole meaning of the word dividend, and that goes way way back to my elementary school moons in my Math class, which when partnered with divisor, results to a quotient.
But when it comes to the stock market, dividend interestingly takes an opposite role.
Instead of division and breaking something into pieces, dividends multiply, and grow your money effortlessly.
Investors who go for this option of earning money are often called income investors.
They are the type of investors who choose companies that have strong reputation of giving generous dividends consistently, which serves as their regular income.
These dividends can be given either in the form of cash or stocks.
What’s the obvious difference?
By cash dividends, you receive part of the company earnings in cash expressed per share.
For example, the picture below shows Metrobank declaring a cash dividend of 1 peso per share.
This means that if you have 2000 shares by the time its stockholders are identified, you’re entitled to 2000 pesos (2000 shares x 1 peso per share) cash dividend. It automatically adds to your investment capital on (or after) the mentioned payment date. Take note however that cash dividend in the Philippines is subject to a 10% withholding tax (see actual received below).
The second form of dividends is stock dividends, which is the type that gives its shareholders additional company shares for free. Once it adds to your portfolio on (or after) the payment date, it functions just like any ordinary stocks you have, which means you can sell it just like any stocks you have previously purchased.
As an example, the picture below shows a 100% stock dividends declaration to its shareholders as of record date May30 2011.
This only means that if you originally have 50 shares as of the record date, you would receive additional 50 shares come payment date. After that, you can sell it anytime to convert them to your profits.
Please bear in mind that these two types of dividend declaration can have significant impact to one another.
As an example, a common scenario is seen when a company declares dividends. This announcement, once it reached many market participants, often shifts the attention of the trading public to that particular stock until the day before the deadline of getting the shares to be entitled for the dividends, (the EX DATE), pushing the prices higher.
At this crucial day before the EX-DATE, the stockholder then is faced with two options: to sell the heated stock whose price had already increased (grabbing the capital appreciation), or to keep it and receive the dividends later on. Take note however that if you decide to avail of the dividend, its stock price usually goes down on the day of the EX DATE after all the dividend excitements come into a halt.
Note that while all stocks have possibility of attaining price appreciation, not all companies declare dividend. In fact they are not required to make one. Some already have the trademark of giving consistent generous dividends while others really don’t declare at all. It all depends on the decision made by the company’s board of directors if they’re going to re-invest their earnings (as retained earnings) or share it as dividend. So checking dividend history of stocks can be quite useful if you’re aiming for this way of generating money. You can easily access this information in the dividend section of the PSE website.
Lastly, another way to make profits (indirectly) is by availing of Stocks Rights Offering (SRO). SRO is the option given to the present stockholders to buy limited additional shares of that stock at a price lower than its market price. Since the buying price in this entry is less than the present market price, buying through SRO has already capital gain advantage attached with it, which becomes realized once sold.
So there! Let your money make even more! Then treat me when you’re done! WhahaJ
Have fun investing!
For your dreams and passion!