“What is the stock market all about anyway? How is it able to give us a great return but can also wipe out our investment? Is it true that it is almost tantamount to a casino? Well not quite, but you do have to be smart about it.”

In our earlier columns we discussed in broad strokes the local banking system and the capital market which together fuel the financial engines of the country’s economy. All of us participate in this engine through our savings that we hope to grow through wise and prudent investing. Investments in securities that provide fixed and predictable returns like time deposits and bonds would be the more conventional mode. However, investing in the stock market through the Philippine Stock Exchange (PSE) can generate very attractive returns for the average investor who’s moderately aggressive and open to taking some risks. But, it can also hit you where it hurts, your pocketbook, if the stock pick you make turns out to be dud or a cataclysmic market event occurs causing the PSE to tailspin. It’s pretty much like what happened to the Boston Celtics when they paid top dollar for Gordon Hayward only to see him seriously injured within the first few minutes of the recently concluded NBA season.

What is the stock market all about anyway? How is it able to give us a great return but can also wipe out our investment? Is it true that it is almost tantamount to a casino? Well not quite, but you do have to be smart about it.

The most basic question is: what are you buying? You are buying shares of stocks of corporations that are listed in the PSE. As an owner or shareholder of the company, the value of your investment rises and falls depending on how the company performs. If the firm has a banner year and is able to pay out a hefty cash dividend, the market usually rewards the shareholders with an increase of the share price.

And why does the share price rise? Well, when investors read the PSE corporate disclosures, the tendency for other market investors is to accumulate shares of the corporation that announced its performance. This activity causes the share price to go up because of the law of supply and demand. No commodity however ever rises in perpetuity, and as more sellers unload to feed the demand, the reverse will happen inevitably. Either a temporary correction will occur or a more fundamental slow demise begins. As the company’s fortunes falter, the transient or trading stockholders start heading for the fire exits which exacerbates the price slide. The strategic investors who are able to take the long term view and are still convinced with company’s fundamentals sit tight or even take the opportunity to accumulate more shares at a lower price.

These market price gyrations cause your stock market portfolio to move up and down as well. To illustrate, at the start of 2018 the PSE Index, which is a barometer of the stock market’s performance as a whole, was at 9058. As of end June, the index is down to about 7194 for a variety of reasons. The looming trade war, oil prices and the consumption products affected by TRAIN have began to bite. As a consequence the inflation numbers are up and the peso has faltered. Foreign investors who are a major force in our stock market have left in droves seeking the temporary safe harbors of the US dollar and the developed financial markets of the Western economies. The drop in the PSE Index represents a slide in market value of about 20 percent over a period of only 6 months! That erosion is enough to scare the wits out of anybody. It is important to recognize, however, that the slide of values only translates to a real loss if you unload as the stock market skids which can happen if your investment horizon is short. The stout-hearted investors on the other hand who have the ability to take a much longer view are comforted by the fact that our economy remains fundamentally sound registering a growth in our GDP of 6.8 percent in the first quarter of 2018 and is likely to rise to about 7 percent by early next year. And as history has shown, the investors return when calm is restored. Clearly investing in the stock market is not for the faint of heart and there are a few lessons to be learned. Next week, let’s take a closer look at the nuances of the stock market and we will try to take a stab on how to mitigate the risks. Until then…one big fight!