Monday, May 30, 2011

How Money Grows in the Stock Market

People are investing in the stock market with the goal of making their money grow but how does our money grow in the stock market?

It’s been two years since I started investing/trading in the stock market and so far, I have earned through the following:

a.       Capital appreciation - this happens when the price of stocks I bought appreciates.  For example, I have bought 1000 shares of ALI (Ayala Land, Inc.) stocks at a price of 15 pesos per share and after some time the price appreciates to 16 pesos per share.  At that instant my capital increased by more or less 6% and depending on my plan, I may opt to sell my shares so I can already secure my 6% profit or I may wait for the stock to appreciate more for a bigger profit.

b.      Cash Dividend - This is the money given back to the investor as his/her share of distributed profits declared by the company.  As per my experience, most companies where I invest declare cash dividend twice a year.  For example, I have 30 shares of TEL (PLDT) stocks then they declared a cash dividend of 78 pesos per share.  That means I will be getting 2,340 pesos dividend less 10% tax, I will get a net dividend of 2,106 pesos.

c.       Stock Dividend – This is the additional stocks given by the company to its shareholders.  This is usually declared in percent.  For example, If I have 4000 shares of EDC (Energy Development Corporation) stocks and then they declared a 25% stock dividend, I will be having an additional 1000 shares of EDC stocks which I can sell right after the stocks were credited to my account.

d.      Stock Rights Offering – This is a special offering of companies to its existing shareholders wherein the offered share price is lower than its current market price.  This is usually declared in ratio and shareholders are given a timeframe to accept the offer or not.  Yes, a shareholder can opt not to accept the offer but if you have the cash to buy the offered shares, it is much better to accept the offer.  This is seldom offered by companies so it’s an opportunity to grab.  I have experienced this opportunity last year when BPI (Bank of the Philippine Islands) offered a 1:10.555 stock offering.  I have an existing 2200 shares so I was offered 208 (2200/10.555) shares at a price of 32.50.  At that time, BPI trades at 51 pesos/share so it’s just like buying the 208 shares at 36% discount which I sold immediately giving me a more or less 50% profit.

There’s really a lot of opportunity to grow your money in the stock market.  It’s high risk, yes, but you can develop your strategy to counter the risks.

Happy investing/trading everyone.

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