A Guide for Investors
Investors Primer III: Investing in the Philippines Stock Market
1. What are stocks and equities?
A share of stock is evidence of a fractional ownership in a corporation. Buying a share of common stock is in fact buying a share of a business. An individual who owns shares in, say, Petron or PLDT has an ownership interest in that company and is called a stockholder or shareholder. This ownership is also referred to as having equity in a company, hence, stocks are also called equities or equity securities. The percentage or proportion of ownership depends on how many of the company’s share one owns.
For example, 1,000 shares of common stock in a corporation that has 100,000 outstanding shares represent 1,000/100,000 ownership interest. This means you have one percent (1%) ownership interest I the company’s plant, its building, its inventories and other assets.
2. What are stock certificates?
Ownership of a business is represented by stock certificates. When an individual becomes a stockholder of any corporation, he receives a stock certificate – a written evidence of ownership certified to the corporation. The certificate indicates the investor’s name, total number of shares purchased, the certificate number, the par value and the name of the issuing corporation.
When shares are purchased, the stock certificates will be issued either in street name or in the investor’s name. The difference is important to know since without notice form the investors all stock certificates will be issued in street name, i.e. in the name of the brokerage firm. In this way, the brokerage firm – and NOT the investor – will be the holder of the stock certificates. Only when the investor specifically asks for it will the stock certificates be issued in the investor’s name.
Stock certificates that are in the street name facilitate the transactions by brokers. When the investor decides to sell his shares, the street certificate simply be endorsed by the stockbroker. If it were in the investor’s name, the process would be lengthier since it is the investor who needs to endorse it at the back of the certificate. When shares are bought and sold frequently, it is advisable to have them issued in street name since it will facilitate the quick transfer of ownership.
3. What type of stocks can you buy or sell?
There are different types of stocks that you can buy or sell at the Philippine Stock Exchange (PSE): common stock, preferred stock, cumulative preferred stock and convertible preferred stock. The difference depends on the right and privileges which you receive as a stockholder.
The majority of securities traded in the PSE are common stocks. Common stocks are usually purchased for participation in the profits and control of ownership and the management of the company – they have voting rights. Common stock holders are entitled to an equal pro rata division of profits without preference or advantage over another stockholder. However, they have the last claim on dividends and are the last to collect in case of liquidation. Common shares can be classified into class A and class B shares. Class A shares are reserved to Filipino investors, while Class B shares are open to foreign investors as well as Filipinos. Thus, Filipinos can own both classes while foreigners can only avail of Class B shares. Both classes have the same privileges and rights, and receive the same amount of dividends.
Preferred stocks are another type of securities issued by corporations. Its name is derived from the preference given to the holders of this stock over holders of common stocks. Holders of the preferred stocks are entitled to receive a fixed minimum amount of dividends (expressed either in pesos or as percentage of the stock’s par value), to the extent declared by the company’s Board and if there are sufficient retained earnings, before any dividends are paid to the holders of common stocks.
Cumulative preferred stocks are special preferred stocks that accumulate unpaid dividends for future payment. Cumulative preferred stock has prior rights to dividends over common stock; therefore the omitted cumulative preferred dividends must be paid before the common stock dividends can be paid. Convertible preferred stocks are preferred stocks which are exchangeable into common stocks at the option of the holder under specified terms and conditions. The conversion ratio specifies the number of shares the holder receives upon surrender while the conversion price is effective price paid for the common stock when conversion occurs.
4. What are warrants?
Warrants are another type of investment which you can buy or sell in the stock market. By definition, a warrant is a security which grants the holder the right but not the obligation to buy (in the case of a call warrant) or sell (in the case of a put warrant), a stated number of underlying shares of stock at a specified price during a specified period of time.
Underlying shares are the shares, unissued or issued as the case may be, of a corporation which may subscribed to or purchased by the warrant holder upon the exercise of the right granted under the warrants. The number of underlying shares a warrant holder is entitled to buy or sell for every warrant he holds is known as the conversion ratio. The exercise period specifies the life of a warrant while the expiration date is the date at which the warrant expires. The exercise price is the stipulated stock price at which the holder can buy or sell the underlying.
Warrants can be issued in a number of ways: (a) as part of an initial public offering; (b) attached to a rights issue; (c) attached to bonds; or (d) as stand alone. In the case of debt or equity offerings, warrants are used as “sweeteners” to enhance marketability of the issuances. Under the SEC Rules Governing Warrants, Issuers or warrants may be the issuer of the underlying shares or an entity other than the company underlying the warrants and may be in the form of:
a) Subscription Warrant – a warrant which grants the right to subscribe to the new or unissued shares of stock of the Issuer;
b) Covered Warrant – a warrant which is issued by a party other than the Issuer of the underlying shares and whose performance of obligation is secured by the deposit of the underlying shares for the Covered Warrant with an independent Trustee which is a reputable commercial bank;
c) Non-collateralized Warrant – a warrant issued by a party other than the Issuer of the underlying shares and whose performance of obligation is not secured by a deposit of the underlying shares. Instead, the Issuer normally adopts hedging strategies to provide for its obligations during the life of the Non-collateralized Warrant.
Even if the trading of warrants is relatively new in the Philippine stock market, it has gained some popularity. Currently, there are eight (8) warrants listed at the PSE. The warrant holder has the chance to have the same exposure in the market, as with buying the stock itself, using lesser amounts of money and the advantage of having more time, i.e. exercise period, in which to raise money to purchase more shares (the underlying stock). Also, the investor is protected from the downside risk of the underlying stock’s price depreciation since the exposure of their money is limited to only the price of the warrants.
5. Where can you buy or sell stocks?
The stock market is the place where shares of stock are traded while the stock exchange is the organization that provides the facilities for the buying and selling of securities. The trading floor is the place where member-brokers trade daily. The Philippine Stock Exchange (PSE) is the only operating stock exchange in the Philippines and has two trading floors located at the PSE Centre in Pasig City and at the PSE Plaza in Makati City.
Trading at the two trading floors or PSE is electronically linked by a computerized trading system, the MakTrade System, which uses the single-order-book system where all the orders are posted and matched in one computer. All trade orders entered by brokers in behalf of their clients are matched with the best bid/best offer (BBO) regardless of which floor orders originate.
6. When can you buy or sell stocks?
Trading at the PSE is from 9:30 a.m. to 12:00 noon in a continuous session daily, except Saturdays and Sundays, legal holidays and days when the Banko Sentral ng Pilipinas (BSP) Clearing Office is closed.
7. Who can buy or sell stocks?
As the organization that facilitates stock trading, the PSE is not directly involved in the buying and selling of securities. It is the Members (also known as member-broker or member-firms) who can buy or sell stocks for the investors since they are authorized and licensed by the Securities and Exchange Commission (SEC) to transact business as a broker and/or dealer or securities.
A stockbroker acts as an agent or middleman between the investor and other buyers/sellers. As an intermediary, the stockbroker executes orders for clients, purchasing or selling the stocks on the stock exchange. On the other hand, a dealer acts as the principal rather than an agent – buying and selling for his/her own account.
An individual or corporation is considered a PSE Member once they have acquired a “membership seat” and have met all the set requirements for membership. Each Member is entitled to one seat which can be bought from an existing Member or from the Exchange.
8. How can you buy or sell stocks?
a) Choose a stockbroker. In choosing a broker, you must also see to it that the broker (person or corporation) is a member of good standing at the Philippine Stock Exchange. A complete listing of the PSE member-brokers can be found in various publications or from the PSE Membership Department. It is important that you trust your broker and that you are satisfied – with the services it is giving you. Broker services include market reports, advice regarding stock selection and timing of purchases and sales, trade executions, on time delivery of important documents – such as confirmation receipts – and other trading-related activities that the client may require.
b) Open a brokerage account. Once the investor has chosen his brokerage firm, a brokerage account has to be opened. This account allows the client to perform stock transactions (buy and sell shares) any time – similar to bank account which enables you to deposit, transfer and withdraw money.
Opening a brokerage account is relatively easy to accomplish and takes not longer than opening a bank account. A specimen signature card needs to be filled out, containing the: name, address (professional and private), telephone number(s), and most importantly, the client’s signature. Frequently, bank and professional references have to be submitted.
Once an account has been opened, the client may buy or sell immediately according to the trading instructions between the investor and broker. Trading instruction can vary depending on the investors’ objective – whether it is short-term or long-term, minimum or maximum value of trades (trading limit), etc. All transactions are handled confidentially and the broker will not reveal to any person the details of any purchases or sales done for his client.
c) Place your order with your broker. After opening the account, a trader will be assigned to the investor. A trader is a licensed salesman who is authorized to buy and sell securities at the PSE. The assigned trader will be your contact person for all the transactions. He/she will receive your order, most likely by telephone (unless arrangements are made), and will execute the order through the trading terminal connected to the main system of the Exchange.
Thus, when placing an order to buy or sell, you have to call your trader and give the details of your order. The trader need to know the following specifications: buy or sell order, which stock to buy or sell, the number of shares to buy or sell, and preferably also the bid price (when buying) or asked price (when selling).
d) Settle your transaction. Buying and selling transactions are settled by book-entry. This means the ownership of shares and cash is transferred electronically to the brokerage account, without the stock certificates and cash being handed over physically. The account is credited when buying shares, and debited in the case of selling shares.
The paperless or scripless trading, now in place, has eliminated the physical handover of stock certificates when buying or selling. The system replaced the scrip-based system where stock certificates are handed over for transfer for the next owner, which may take more then 3 to 4 weeks. Instead, stock certificates are simply immobilized and kept in a safe place – the Philippine Central Depository, Inc. The book-entry system clearly advantages over the paper-based system. It has dramatically reduced paper work, facilitated the trading and eliminated the loss or forgery of shares.
Currently the PSE settles trades on T+4, i.e., four (4) days after the transaction date. Therefore, payments and/or securities must be delivered to your broker on or before 1:00 p.m. of the fourth trading day following the sale. Be sure to always verify the settlement deadline with your broker for future developments.
9. What is the minimum amount you can invest in the stock market?
The minimum amount of money needed to invest in the stock market depends on the minimum amount of shares to be traded for the stock. This minimum amount will be determined by the prevailing market price of a particular stock. For each stock the minimum amount of shares to be traded is fixed and depends on the price range of the stock, as shown in the table below (otherwise known as the Board Lot Table). To determine the minimum amount of shares, the investor takes the market price of the wanted stock, looks for the price range in the table below reads the minimum amount of shares in the same row.
Table 1
Board Lot Table
Minimum Amount of | ||||||
Price ranges | Shares | |||||
| 0.001 | to | 0.0024 | 1,000,000 | |||
| 0.0026 | to | 0.005 | 1,000,000 | |||
| 0.0055 | to | 0.01 | 1,000,000 | |||
| 0.011 | to | 0.025 | 100,000 | |||
| 0.026 | to | 0.05 | 100,000 | |||
| 0.0525 | to | 0.10 | 100,000 | |||
| 0.105 | to | 0.25 | 10,000 | |||
| 0.26 | to | 0.50 | 10,000 | |||
| 0.51 | to | 1.00 | 10,000 | |||
| 1.02 | to | 2.50 | 1,000 | |||
| 2.55 | to | 5.00 | 1,000 | |||
| 5.10 | to | 10.00 | 1,000 | |||
| 10.25 | to | 25.00 | 100 | |||
| 25.50 | to | 50.00 | 100 | |||
| 50.50 | to | 100.00 | 100 | |||
| 101.00 | to | 250.00 | 10 | |||
| 252.50 | to | 500.00 | 10 | |||
| 505.00 | and | upward | 10 | |||
For example, an investor wishes to buy a stock whose market price is P100.00. This price is in the P50.50 to P100.00 price range; consequently, the minimum number of shares to be bought at a regular transaction is 100 shares. In this case, the minimum amount of the investor needs is just about P10, 000.00 (100 shares x P100.00 share price) exclusive of other charges for buying stocks.
For shares in the lowest range (from P0.001 to P0.0024) a minimum of P1, 000,000 shares have be bought. If the share price is P0.001, the minimum capital outlay is P1, 000.00 (P0.001 x 1,000,000 shares).
10. What charges will you incur in buying and selling stocks?
Brokerage commission. When buying and selling listed securities, the brokerage firm always acts as an agent between you, the buyers and sellers. His function is to execute the client’s order and to give advice when required. For the services rendered, the brokerage firm charges its clients a commission. When you buy stock, the brokerage firm adds the commission to the value of the shares bought. When you sell shares, the commission is deducted from the proceeds that you receive. The maximum fee is 1.5% of the gross value of the transaction (i.e., the number of shares multiplies by the price) plus 10% value added tax (VAT). This means that 10% is added to the brokerage commission to be paid with a maximum of 1.65% (1.5% + 10%).
Transfer fee. A transfer fee of P100.00 plus 10% VAT is charged to the buyer by the transfer agent for every security traded. The transfer agent maintains the ledgers for each issuer the company showing the details about each registered stockholder. It also has the responsibility to cancel the old certificates and change the name when the shares have been sold.
Cancellation fee. Sales transaction and/or direct transfers are subject to a cancellation fee of P20.00 per bearer certificate plus 10% VAT.
Philippine Central Depository (PCD) fees. For the book-entry-settlement system, buying and selling transactions are subject to an ad valorem rate of 0.00009174 (inclusive of VAT), without any maximum or minimum amount, in lieu of transfer fee and cancellation fee. If the client buys a PCD-eligible issue and still wants a stock certificate issued to his name, he must pay the PCD ad valorem charge, a P25.00 upliftment/withdrawal fee per request and transfer fee. Also, if a client sells a PCD-eligible issue and still has the stock certificate for delivery to the broker, he is charged with the PCD ad valorem rate and a cancellation fee.
Documentary stamp tax. The documentary stamp tax is charged to the buyer on every purchase transaction at the rate of P1.50 for every P200.00 par value of the stock being transferred or a fraction thereof.
Stock transaction tax. The stock transaction tax is charged to the seller for every sale of stocks listed and traded on the Exchange at the rate or ½ of 1% of the value of transaction, in lieu of the capital gains tax.
It should be noted that these tares are subject to changes. Please ask your brokerage firm for the current tax rates and charges.
Illustration 1: Buying securities
If we assume that an investor buys 2,000 shares of stock at a market price of P5.00 per share with a par value of P1.00, the computation for the total cost of the transaction is as follows:
| Investment cost (2,000 shares x P5.00) | P10,000.00 | ||||
| Add: | |||||
Brokers’ commission (10,000.00 x 1.5%) | 150.00 | ||||
10% VAT on brokers’ commission | 15.00 | ||||
Transfer fee | 100.00 | ||||
10% VAT on transfer fee | 10.00 | ||||
PCD fee (10,000.00 x 0.00009174) | 0.92 | ||||
Documentary stamp tax | |||||
[(2,000 shares x P1.00) x P1.50] | 15.00 | ||||
| |||||
| Total cost of the transaction | P10,290.92 | ||||
This computation will be reflected on the Confirmation of Purchase which contains the details of the buying transaction and which will be delivered by the broker to his client.
Illustration 2: Selling securities
For an investor who sells 500 shares at a market price of P20,00 per share, the computation is as follows:
| Sale proceeds (500 shares x P20.00) | Secrets to Finding High Dividend Yield Stocks4 thoughts on “How to Invest in the Philippine Stock Market”Leave a Reply | ||||
as an ordinary people like me do I have an opportunity to buy a stock?
thank you
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