Stock Market 101: Trading vs Investing

Last time, we talked about GInvest, an example of a Unit Investment Trust Fund (UITF) where instead of you actively picking individual stocks, you just passively pick a fund allocation based on your risk appetite and let the fund managers do the work for you. But what if you would rather choose the individual stock picking route? Then this blog is for you!

We know that when it comes to saving and investing, the lower the risk, the lower the possible returns and vice versa. Here are some examples of the usual vehicles that we see or hear. As a side note, I would just want to reiterate that you should have already built your foundation such as Emergency Funds and Insurance before proceeding into investments. Managed Funds are in the middle because the risk and return will depend on your fund allocation. 

With the hype around cryptocurrency nowadays, I personally don’t recommend people to jump into crypto without being able to experience the volatility of the stock market first. There’s a chance that your money will double using the stock market. But on the flip side, there’s also a chance that you can lose more than half of your capital. If your ₱100,000 loses 30% and you’re only left ₱70,000, will you still be able to sleep? If not, then the stock market and especially cryptocurrency might not be for you as you’re quite conservative. Always remember that you should only invest money that you’re willing to lose.

Stock Market

So what is the stock market? Stocks, also known as equities, represent fractional ownership of a company, and the stock market is a place where investors can buy and sell ownership of such assets

There are 2 ways you can earn in the stock market. The first is to simply buy low, then sell high of a stock, or simply capital appreciation. That’s easier said than done, you can watch this for more details. Share prices are set by many factors such as company earnings, management, economy etc. But it all boils down to supply and demand in the market as buyers place orders and a seller should match that price. With just this simple concept of buying low and selling high, you’re probably thinking of some of these questions. What should I buy? When should I buy and sell? What strategies should I use?

Trading vs Investing

There are 2 general classifications in the stock market.

Stock trading is more short term, where the primary goal is to take profits by timing the market. Traders jump in and out of stocks within weeks, days, even minutes, with the aim of short-term profits. They often focus on a stock’s technical factors rather than a company’s long-term prospects. What matters to traders is in which direction the stock will move next and how the trader can profit from that move. 

This will require a lot of time and effort, not to mention the skill. Nobody can time the market perfectly so this is not for everyone. This is why I don’t recommend it to beginners especially those with a full time job. I don’t even do this personally, as I have a full time IT job and I’m only a part time financial advisor.

The only time you gain or lose money in the stock market is when you sell shares. Even if the price of the stock goes up or down, if you don’t sell, that’s just called paper gain/loss

The other strategy is called stock investing. The goal is to gradually build wealth over an extended period of time through the buying and holding of stocks. This is more passive and this is recommended to most people. Compared to using technical analysis in stock trading, stock investing uses fundamental analysis which attempts to measure a security’s intrinsic value by examining related economic and financial factors such as balance sheet, consumer behavior, etc.

Peso-Cost Averaging

A great way to do stock investing is by doing Peso-Cost Averaging, which involves the gradual purchase of stocks, using a fixed amount of money at regular intervals. Instead of investing a lumpsum amount, the investor makes monthly ‘installments’ in selected stocks regardless of the current price of those stocks. The sample below invests ₱5,000 per month. You can read more here.

The other way of earning in the stock market is through dividends. Dividends are extra income of a company given to its shareholders. Not all companies/stocks give out dividends, which is more for stable income. This is my strategy and I’ll have a different blog on this next time. You can check this for more details on the difference of growth and dividend investing. 

No matter what you choose between trading or investing, you should have a goal in mind for why you are doing this, as this will dictate how much and how frequently you should invest. Investing for the sake of making money is not advisable as you will not know when you will sell or take profits.  

How to start

What’s great right now is that you don’t need to go to any physical branch to start, everything is done online which is very convenient and safe for our current situation. You can open an account with a stock broker of your choice which will require valid government IDs and KYC (Know Your Client) process. 

Personally, I use COL Financial for my local stocks where I do dividend investing. I also invest in index funds, which composes the top 30 stocks in PSE (Philippine Stock Exchange) in COL as they offer Mutual Funds as well. New investors for COL are on hold right now as of this writing due to the huge number of users. If you’re already an existing client of a bank such as BPI, BDO, or Metrobank etc, it would be better for you to use their platform to open your account. 

Once you’re verified and have already funded you can buy your 1st stock. Choosing one out of 330 stocks in the PSE can be intimidating. A good start is to choose blue chip companies (top 30 stocks), or companies that you’re using on a regular basis and you feel that will still be relevant for the next few years. 

How much do I need

The minimum capital amount needed is based on the price of the stock that you want to buy and its board lot (minimum number of shares you can buy). For example a stock costs ₱10 per share and the board lot is 100. So with just ₱1000 (excluding charges), you can already be a part owner of that company. The usual PSE trading hours are business days (Monday to Fridays excluding holidays) 9:30 AM until 3:30 PM, but with the pandemic it has already been adjusted to 9:30am – 1 pm. Once you buy a stock, you’ll notice that the price will change over the course of the day. 

Stocks are quite liquid as well. You can sell within seconds and withdraw to your bank in around 3 business days, compared to real estate where it will take some time to liquidate the asset. Due to the volatility of the stock market, do not invest your short term goals in it such as educational funds for your kids by next year. You can’t tell your kid that he/she should stop school first because the stock market is down as of that moment. The stock market should just be a portion of your portfolio for your long term goals (at least 10 yrs) as we can never predict the future.

Why don’t we, instead of just consuming their products and making the rich people even richer, become a part owner of these companies so we can earn from their earnings as well?

Other stock options

If picking individual stocks doesn’t suit you, you’ll like MARGe (Mytrade Affordable Retirement Guide). It’s very passive where they will be the one who will give you a playlist every month which will contain the list of stocks to buy, hold, or sell. So what you just need to do is just follow their instructions. You just need to fund ₱5,000 for you to receive the playlist which is given once per month. If you want to pick your own stocks instead of following MARGe, you can create a separate MyTrade account for this as they have different usernames.

I started with MARGe just this January 2021 and I’m investing ₱5000 per month. Note that MARGE is for retirement, so it should be focused on the long term. You shouldn’t look at your portfolio everyday to check if there’s a gain or loss. 

Another platform for the stock market is Etoro, which is intended for the global market. They offer stocks such Facebook, Microsoft, Apple. What’s great about Etoro is that you can buy fractional shares of a stock for just $50. 

My favorite feature in Etoro is called Copy Trading. Instead of you picking individual stocks, you can just copy the whole portfolio of a professional trader, which may include combinations of stocks, forex, crypto, etc. If they earn 10%, you’ll also earn 10% and the same thing happens when they lose 10%. It’s very passive so you just need to know what trader to copy, you can use this guide for beginners. 

The downside is that Etoro increased the minimum capital from $200 to $500 (~₱25,000) to start copying now due to the huge number of users like COL. You can have a feel with the Etoro platform without deploying capital by using Virtual Portfolio. 

Final thoughts

Remember not to invest in anything that you don’t understand, no matter how profitable it may be. Now that you have an idea how the stock market works, you can study more by watching Marvin Germo’s Youtube channel as he has thousands of videos on the stock market. You can also practice buying and selling PH stocks through Investagrams virtual trading. 

Investing is not about timing the market, it’s about the time in the market. We will never know when the market will go up and down, but we can be consistent in saving/investing a certain amount. If you invest in the long term, you’ll overcome the downturns.

You can connect with me through this link where you can see my other blog posts, the FB group and FB page that I created for additional learnings. You can also set up your free financial planning session with me so we can plan for your future.

 Risk comes from not knowing what you’re doing.

Warren Buffett


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11 thoughts on “Stock Market 101: Trading vs Investing

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