TUTORIAL: What are Stocks and How to Trade in the Philippines?
What are “Stocks”? What’s the difference with “Securities”?
Simply speaking, stocks are shares of ownership in a company. When you become a stockholder or shareholder of a company, you become a part-owner of that company. That means you earn the rights afforded to stockholders, including the right to vote and be involved in important matters affecting the company, and the right to receive dividends, among others.
Securities, on the other hand, is the umbrella term referring to a proof of one’s ownership or indebtedness in a company. Stocks are an example of securities.
Other examples are Treasury Bills (T-Bills) and Commercial Papers, which are considered as short-term and are traded in the money market; and Stocks and Bonds, which are long-term in nature and traded in the capital market.
What types of securities can I buy in the stock market?
Most of the issues listed in the Philippine Stock Exchange (PSE) are Common Stocks. Other types of securities, however, are also traded such as Preferred Stocks, Warrants, PDRs, and Bonds. These are explained below.
1. Common Stocks
Common stocks are the stocks we’re generally familiar with. These are typically purchased for participation in the profits and control of ownership and management of a company.
Holders of Common Stocks have voting rights. They are also entitled to a distribution of profits as declared by the company’s Board of Directors. However, common stockholders have the last claim on residual earnings and the last to collect in case of corporate liquidation.
2. Preferred Stocks
Its name is derived from preference given to the holders of these stocks versus holders of common stocks. Preferred stockholders are entitled to receive dividends, to the extent agreed upon, before any dividends are paid to holders of common stocks. However, preferred stocks usually have a specified and limited rate of return or dividend and a specified limited redemption and liquidation price. Common stockholders, meanwhile, are last to collect but have rights over all residual or remaining assets of the company upon liquidation.
3. Exchange Traded Funds (ETF)
An Exchange Traded Fund or ETF is a tradable investment security that tracks a basket of assets. As an “open-end” investment company, an ETF can issue and redeem shares to the public anytime. The “basket of assets” that it tracks could be an index, such as the Philippine Stock Exchange index or PSEi.
Learn more about Exchange Traded Funds in our ETF Primer: What are Exchange Traded Funds (ETF)?
A Warrant, normally issued on a detachable basis, allows its holders the right, but not the obligation, to subscribe to new shares at a set price during a specified period of time. A corporation can issue warrants as a means to raise additional capital, usually as an attached security to an issued bond (to make the bond more attractive), but is detachable and tradable separately in the securities market.
5. Philippine Deposit Receipts (PDRs)
A PDR is a security which grants the holder the right to the delivery or sale of the underlying share, and to certain other rights including additional PDR or adjustments to the terms or upon the occurrence of certain events in respect of rights issues, capital reorganizations, offers and analogous events or the distribution of cash in the event of a cash dividend on the shares.
Simply speaking, it’s a negotiable security allowing local investors to invest, through the local exchange, in a foreign company traded in a foreign exchange.
PDRs are evidences or certificates of ownership of a foreign/foreign-based corporation. It is similar to a financial derivative, in the sense that its value is based on an underlying asset. In the case of PDRs, the underlying asset is the original company’s stock traded in the exchange. PDRs also provide an option to the investor to exercise a right to convert to the underlying stock itself.
6. Small-Demominated Treasury Bonds (SDT-Bonds)
SDT Bonds are long-term and risk-free debt securities issued by the Bureau of Treasury (BTr) of the Republic of the Philippines. The bond is a certificate of indebtedness of the Republic of the Philippines to the owner of SDT-Bonds.
Where can I buy shares of Stocks and/or Bonds?
In the Philippines, the only operating stock exchange is the Philippine Stock Exchange (PSE). Its main function is to facilitate the buying and selling of stocks and other securities through accredited trading participants.
The PSE’s trading hours are from from 9:30 a.m. to 3:30 p.m. everyday except Saturdays, Sundays, legal holidays and days when the Central Bank Clearing Office is closed.
Learn more about stock trading in the Philippines below!
- How to Invest in Stocks: Complete Guide for Filipinos
- Tutorial: How to trade stocks in the Philippines
- Stock Rankings: Top PSE Stocks to Buy
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