I was inspired to write this post after meeting a former financial adviser who resigned from a local investment company. Many of her clients who had lost lots of money accused her of participating in a scam. From my point of view, it did seem like a scam because she was instructed by her bosses to inform individual investors only of the advantages and benefits of stock investments. That got me thinking that to this very day, a number of well educated Filipinos still don’t have a basic understanding of what stock trading is.
Trading is a concept Filipinos should explore. In a country where finding high paying employment opportunities is difficult, it’s a good idea to explore other possible sources of supplemental income like stock trading.
I am not a financial expert and many aspects about stocks and trading are still foreign language to me but I have researched and written about trading in the past so I can say that I do have some basic insights about it. If you’ve only just heard of this term, basic concepts are worth exploring first. Of course, it’s important to understand that what I have written here based on my limited knowledge should never be given priority over expert advice or opinion.
What is Trading
Trading is actually a very broad term. A dictionary will most likely tell you that it is the act of buying, selling or exchanging items. So this can mean almost anything. In a lot of circles however, the term is understood to mean the buying and selling of financial instruments.
Again, financial instruments come in many different complicated forms. For purposes of this post however, it is best to attempt to define by citing some examples. In other countries, examples of instruments traded are stocks, commodities, options, CFDs and currencies. These are traded in what is known as markets.
Stock Trading
Experts say that for beginners, it is best to start investing first in one market, specifically the stock market, before exploring other investment markets. Stock trading is very complicated but the other markets are even more complicated to learn. If you know nothing about investing and you start putting your money on different markets, your inexperience will make you lose cash quickly.
Stock trading is the buying and selling of shares of publicly traded companies. When you buy stocks, you become the owner of a small part of a company. There are different ways to make money from stock ownership but a basic example is by selling your shares for a higher price than when you bought it.
To make trades, you need to contact a stock broker. You can instruct your stock broker which stocks you want to buy or sell. You can get a list of brokers from The Philippine Stock Exchange.
Trading for Profits
Yes, people can make millions from the stock market. Probably one of the most popular high earners is Warren Buffet. In the Philippines, most big time businessmen make huge profits from the stock market. Senator Manny Villar comes to mind. News of his market profits came to light a few months back when he was still running for president.
What you need to keep in mind is that the stock market can’t always make you rich quickly. If it could, everyone would be trading stocks. One source cites that in his country, 80% of investors lose rather than win in stock trading. The brutal truth is that investing in the stock market is very risky. This is especially if you do not know what you are doing. You should also expect to encounter some losses at some point in your trading career. Loss is a normal part of trading and some traders even end up losing everything.
What I am trying to stress here is that investing in stocks has huge risks and this is something that you need to accept and understand before you invest your lifetime savings. Do not invest in the market if you have very little money saved up and it is also a bad idea to invest everything you’ve got. Furthermore, if you are new to trading, do not quit your job for it. The market is unpredictable and there is simply no guarantee of profits.
One good way to limit the degree or magnitude of losses is to prepare a trading system or trading plan. This is simply your personal set of rules and guidelines that you should commit to follow when you trade. A good beginner’s introduction to trading systems can be found in Free Trading Systems.
Managed Accounts
For people who aren’t keen on learning investment concepts, terms and techniques, it is best to invest in what is known as managed accounts. This is what Bo Sanchez suggests in his book 8 Secrets of the Truly Rich.
The idea behind managed accounts is that an investor pools his money with the money of other investors and an account manager invests this pool in stocks and/or in a variety of other financial instruments. High risk account types are invested in various markets.
The reason why managed accounts are good is that they help protect investors from their own inexperience. Also, these accounts are ideal for people who don’t have time to place trades on their own or monitor their trading portfolio.
Banks have products that are structured around the idea of managed accounts. Other financial institutions also offer this kind of arrangement. Sanchez suggests looking at the list of account or fund experts in the Investment Company Association of the Philippines.
That being said, it is still very important to keep in mind that even if you invest in a managed account, risks are still ever present. You can still lose your money in an investment. This is again because there is no clear guarantee of where exactly the stock market is headed. Because it is unpredictable, account managers cannot predict which investments will make profits. This is probably the reason why some investment companies are being accused of scamming because investors are not made aware from the very beginning of the risk of loss.
Summary
Trading is indeed one of the best ways to get rich but you should remind yourself again and again and again that stock trading or any other form of investment trading is not a get rich quick scheme. It requires a lot of effort on the part of traders and an even greater acceptance for the reality of loss. Don’t believe someone who says that you will always profit from the markets. Invest a portion of your stashed cash only if you clearly understand the risks.
