It's also a good reminder especially for newbies just starting to invest with all the commotion we're seeing at this time.
Read on and be guarded!
Have fun investing (carefully)!
Omeng
***
Be wary about investing in stocks. Like any other activity where one
can lose money, the stock market is not for the faint of heart. The
usual cycle runs like this: An economic boom emerges on the horizon, big
investors bet early and accumulate stocks, prices start a dizzying
climb, small investors join the fray and buy stocks somewhere near the
peak, big investors who bought early start selling at a profit, and—with
more sellers than willing buyers in the market—prices tumble. More
often than not, small investors are left holding on to stocks bought
expensively because they knew very little to begin with, many of them
merely lured into playing by relatives or friends of friends who had
bragged about making a “killing” in stocks.
Seasoned investors or players make money in stocks, but many
others take a hit in varying amounts. Small investors can lose a few
hundred to a few thousand pesos. Bigger investors can lose by the
hundreds of thousands up to a few million pesos. Economies, on the other
hand, can lose billions of dollars. Here’s an interesting piece of data
on the magnitude of market losses at the macroeconomic level. Last
week, it was reported that Japan’s stock market capitalization was down
$577 billion since the high of May 22. This is more than double the
Philippines’ $260.24 billion (P10.93 trillion) market size at end-2012.
Locally, the market capitalization of companies listed on the Philippine
Stock Exchange (PSE) has fallen to P10.78 trillion as of last Friday.
The reason for the current global decline in emerging markets is
that the improvements in US employment and housing led institutional
investors to believe that the Federal Reserve Board (the central bank of
the United States) will reduce its so-called quantitative easing
measures aimed at resuscitating the world’s biggest economy. Prospects
of an economic recovery in the United States are starting to sap funds
away from emerging markets.
Brokers and analysts are convinced that the market’s bull run
will extend at least all the way to the end of the Aquino administration
in 2016. What they are not saying is that a lengthened market climb is
usually interrupted by declines in prices—usually referred to as
“corrections”—when those who have made substantial paper profits for
buying earlier cash in on their gains. Some of these “corrections” may
be marginal, but others can be as sharp as the one experienced by the
local market in the past three weeks.
The local stock market has been rising
since 2009. The four-year rally has driven the PSE index’s valuation to
19 times the estimated profits for 2013, reportedly the highest
price-earnings ratio (PE) among emerging and developed markets. This
compares with the five-year average PE ratio of 13 times for local
stocks.
The PSE index or PSEi is an indicator of
the general movement of stock market prices. It ended 2008 at 1,872.85
points. In 2009, the PSEi gained 63 percent to end the year at 3,052.68.
It added another gain of 37.6 percent in 2010 as it closed at 4,201.14.
The following year was not as exciting, with the PSEi adding only 4.1
percent to close at 4,371.96. It came back strongly last year, adding 33
percent to end 2012 at 5,812. Last January, the PSEi began a rapid rise
to a peak of 7,392.20 on May 15, or a gain of 27.19 percent in less
than six months. From the end of 2009 to the stock market bull run’s
peak last May 15, the PSEi gained a whopping 294.7 percent. The downturn
in the second half of May through early June has cut the PSEi to
6,701.95, although this was still up by 15.3 percent from end-2012.
It is true that many people will continue
to make money by investing in stocks. Returns from stock investments can
beat yields on bank deposits anytime, or even the rates offered by the
relatively safe government securities. But there are risks involved. A
company with very solid credentials today can collapse under the weight
of an impending economic downturn tomorrow. The 1997 Asian financial
crisis and the United-States-led subprime crisis in 2008, which dragged
the global economy to a recession, are testaments to this fact.
Many stockbrokers are saying that the
recent sharp downturn is a “perfect opportunity to come in,” but
would-be investors really need to be most discerning. Seeking expert
advice from licensed and reputable stockbrokers is the best way to
start.
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