(If you want a quick guide for beginners how to start investing in the Philippine stock market, you can download your free ebook here.)
Investing in the stock market primarily offers its investors two ways to earn money.
These two are called (1) Capital Appreciation and (2) Dividends.
Thus asking how much you’re gonna earn will depend on how good you are in maximizing these two means of making your money work hard for you.
Let’s tackle the first one.
Capital appreciation, as the term suggest, means that your investment capital has appreciated or gone up due to the increase in price per share of your stocks.
There are two things to remember when it comes to capital appreciation.
First, capital appreciation in stock market is never guaranteed.
An investor should not expect that his investment in the stock market will surely appreciate after some time, even after a long time actually. There is simply no such thing!
Ultimately, the price behavior of any stock, whether it will go up or down, will depend on the prevailing supply and demand of the stock each trading day.
Second, capital appreciation can also turn to capital loss. This could happen when investors lose confidence in the future of the company which translates to investors selling their shares ultimately pulling its stock price down. This is the main risk involved in stocks investing.
Unlike capital appreciation, dividends as a way of earning from the stock market is easier to managed. Briefly, giving dividends is one way for the company to actually share a part of its earnings with its shareholders. This could be in the form of cash or additional stocks, credited directly to the account balance (if cash dividend) or stock portfolio (if stock dividend) of the investor.
One thing to note about dividends is this is also not guaranteed.
Whether a company will give dividends or not will depend on the decision of its board of directors usually done on an annual basis. There could also be rare instances when a company cancels its dividend payout already announced.
An Actual Example
Let’s see how this translates to an actual example.
Cebu Air Inc (stock code CEB), the company operator of the leading brand in low-cost air travel in the Philippines, is a company that is enlisted in the Philippine Stock Exchange. That means its shares can be bought through our own Philippine stock market. (If you’re flying with Cebu Pacific Air Buses, you can probably get part of your airfare by buying shares of this company and making a profit out of it).
Let’s talk first in terms of dividends.
Luckily, CEB is one of those companies that give out dividends.
Its board of directors has declared the following dividends in the year 2016.
Since I had shares of CEB as of record date, I was part of the list of its shareholders eligible to receive this dividend (total of P2.00/share).
This is already clean money for me!
Below is the dividend notification sent to my email.
So far so good for dividends!
If you want to learn more about dividends and how to earn it, you can follow this blog post.
Now let’s examine how it fares when it comes to capital appreciation.
For the purpose of illustration, we’ll check its price history in the same period of the previous year, starting from August 19, 2015, when its price was at 90.30 pesos per share.
Imagine you’re investing at this point, your 10k capital could buy (10,000/90.30) = 110 shares including all fees and commissions.
But what happened in the next six months could be the total opposite of what you’d expect as its investor.
Instead of making capital appreciation, it turned out to be a case of capital loss, with its price slowly sliding down to 82.55 after six longs months of waiting. Certainly not good if you need your money back for some reason – you’d be selling at 8+% loss.
What happened after another six months, up to today, Aug 15 2016, is, however, a totally different story.
After struggling to reach its original price, gaining a little momentum in mid-May of 2016, and consolidating at around 95-100 pesos level from June to July, it finally had its breakout end of July and reached new highs in the last 52 weeks.
So imagine you didn’t sell when you had 8+% loss, and instead hold your investments, then you’d have earned a nice 32% (plus the Php 2/share cash dividend!) That’s certainly way bigger than what the banks could offer!
You could see the entire picture of what happened during that 1 whole year period
Hindsight is always 20/20
But before you get excited with these figures, we have to remember that we’re doing all this calculations in hindsight. In other words, nangyari na! It’s easy to brag these gains when everything had already happened. It’s a totally more difficult decision-making process when you deal with the actual present market conditions.
Also, one needs to answer the question of what would be a better decision – selling the shares now if one believes the price will go down, or holding it even longer if one believes that there’s more room available for the price to continue inching up.
These questions, in turn, is related to the timeframe consideration and market timing expertise of the person investing. So we’re back here to the basic foundation of investing – drafting the goals, knowing the time horizon, and coming up with the investing (or trading) strategy of the person given his personality, skills, capital, and goals.
There you have it –the factors affecting your possible returns/loss as a stock investor.
Your strategy is up to you
Of course, your actual strategy can deviate from the one discussed above – which is merely a BUY-and-HOLD strategy.
Another strategy, for example, is the monthly buying of its shares, in effect accumulating shares of a great company especially when its price was down. By regularly buying shares especially when the price is down (as long as the reason for sell-off is unwarranted), one is able to maximize the returns with the cheaper levels the stocks are bought.
See for example the actual returns of this strategy coming from Truly Rich Club of which I’m a long-time member. They do this with their strategy called Strategic Averaging Method. You can learn more about it here.
(You can check what’s inside Truly Rich Club here.)
So going back to the question – How much can on earn investing in the Philippine stock market,
we found out that the answer will depend on
(1) the skills of the investor when it comes to market timing – this affects capital appreciation.
(2) the time horizon of the investment
(3) the dividend rate of the stock (if there’s any)
(4)the capital/financial resources the person has
(5) and the specific strategy to be employed (as a way of maximizing the three above).
Just remember that the time horizon put into investment won’t directly translate to better performance. In other words, even if one is invested in as long as ten years or more, if the stock price doesn’t follow an uptrend and improve over time, the long time horizon one is invested is useless. The longer time only allows the investment to ride the short-term fluctuations in its long-term uptrend (if this turns out to be the case), ultimately rewarding its smart investors.
You can also watch the video below so you appreciate better these factors as they play in an actual scenario in the Philippine stock market.
Have fun investing,
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