How to Invest in the Stock Market

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CitisecOnline Presents

“Investing in the Stock Market Today” Presented by: Juan G. Barredo Vice President CitisecOnline.com Inc.

Outline

CitisecOnline: Who we are? Building of Wealth How to pick stocks Understanding Price A Fundamental View The Technical View The Market Today Tune in & Take Charge of your Financial Future

Who We Are • CitisecOnline is the leading innovator in online stock trading • Established in 1999, actively trading online since 2001 • Managed by professionals in the financial and information technology industries • Capitalized at over Php400 Million: – Listed in the PSE in July 2006 • Also a member of the HK Exchanges (HKEx)

PART PART ONE ONE

Building of Wealth

The Rule of 72!

•Want to double your money? •To figure out how much you need to earn each compounded annually year to make your money double, decide on the number of years you plan to double it, then divide 72 by that number. 3 years = 24.0% 4 years = 18.0% 5 years = 14.4% 6 years = 12.0%

Interest Rates %

Interest Rates (91-day T-Bill)

22.00 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00

Rates have actually fallen to near all-time Lows!

19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07

0.00

Capital Market Various Instruments Stocks

Savings Pension

Investment

Bonds

Funds Capital

Economic Expansion

Market Real

Savings

Estate

Accounts Insurance Policies

Jobs =

Natural Resources Processing

Income

Manufacturing

Market Dynamics

The Stock Market

•Like any market, it is a place where people converge to buy and sell. •Instead of actual goods, shares of corporations (or Stocks) is what you buy and sell. •A share of stock represents partial ownership of a company. •A company lists its shares in the PSE to raise money to fund its growth.

The Stock Market

What is a Share of Stock?

• Part ownership of a company • Shareholders may make money through: *Capital Appreciation Where the value of stocks climb *Dividends (Cash & Stock) When a Company shares its profits • Historically, investing in stocks has been the best way to significantly build your wealth over a long period of time.

0 1,00

My Options Comparative Yields for Different Investment Instruments 2003 – 2006

45 40 35 30 25

PHISIX Top Mutual Funds 91 Day T-Bill Time Deposit Savings Account

20 15 10 5 0 2003

2004

2005

2006

PART PART TWO TWO

How to Pick Stocks

What is Price? •

“The Market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.” Graham & Dodd

• •

PRICE • That determined by Actual Value. – or the real value to which a stock can be said to be worth. • That determined by Market Value – or that value determined by market forces or opinion. It boils down to Demand and Supply. Shifts in Demand and Supply create Price movement.

Fundamental Fundamental Analysis Analysis

“Buy a stock the way you would buy a house. Understand and like it - such that you’d be content to own it in the absence of any market.” Warren Buffet

Study of Actual Value:

• Look for the Best overall value • Make sure the company is solid and its profitability is strong. • Is a Stock cheap or Expensive. • If looked upon as Cheap = BUY • If looked upon as Expensive = SELL • If things look questionable, forget it. • If you speculate, don’t buy a lemon!

Fundamental Fundamental Analysis Analysis

Top-Down Approach

• Economic Analysis • “Quality is never an accident; it is always the result of high intention, genuine effort, intelligent direction, and skillful execution.” William A. Foster

Look into the Macro View; examine your economic surroundings.

• Industry Analysis •

Break it up into industry sectors, then look for the norm and evaluate outperformers.

• Company Analysis •

Filter out the Best options by comparing company performances.

Fundamental Fundamental Analysis Analysis

The Economy

Selected Economic Indicators 2002

2003

2004

2005

2006F*

GDP Growth (%)

4.40

4.50

6.00

5.10

5.60

Ave 91-day T-Bill Rate (%)

5.40

6.00

7.30

6.40

5.3

Inflation (%)

3.0

3.5

6.0

6.9%

6.9%

Real interest Rate (%)

2.40

2.50

1.30

(0.50)

(1.6)

Average Forex (Php/$)

51.60

54.20

56.00

55.10

52.10

(210.70)

(199.40)

(187.10)

(146.50)

(125)

Budget Deficit (US$ Bil) Source: NSO, BSP *For the 1st Half ‘06

Fundamental Fundamental Analysis Analysis

The Economy

Philippines: Macro Outlook • Government is expected to achieve a balanced budget by 2008, largely through an improvement in tax take (Note: This will be achieved through implementation of EVAT and improvement in the government’s collection effort..)

•

Positive outlook for economic growth, driven by rising OFW remittances and increasing government spending (Rising OFW remittances will fuel consumption while government, which historically did not have enough money to spend on important infrastructure, will now increase spending, given the improvement in its fiscal position)

•

•

Interest rates to remain low due to the continuous improvement in the government’s fiscal position and highly liquid financial system Peso is expected to stabilize or even appreciate, driven by strong remittances and portfolio inflows

Fundamental Fundamental Analysis Analysis

Industry View

Growth Stage of Philippine Industries Turnaround

Growth

BPOs Consumer

Banks

Media Mining Power

Property Infrastructure

Maturing Telcos

Consolidation Basic Industries Utilities

Fundamental Fundamental Analysis Analysis

Industrial View

Makati (Manila) CBD Commercial Lot Prices Pesos / Square Meter

500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000

20 05

20 03

20 01

99

97

95

93

91

89

87

85

0

Fundamental Fundamental Analysis Analysis

Industrial View

Bank’s Non Performing Loans (%) 18 16 14 12 10 8 6 4 2 0 91 92 93 94 95 96 97 98 99 '01 '02 '03 '04 '05 '06

Fundamental Fundamental Analysis Analysis

• • •

A Company’s Tale

Look at a company’s ability to GROW! Watch its Earnings… earnings… earnings! Try to find its assessed value. Look for a New Story, Product or Captured ‘Niche’ Market.

Fundamental Fundamental Analysis Analysis

Looking for Value and Earnings

Look at Earnings Growth • •

Look for a company’s ability to reproduce profits. Study its Earnings growth (or Earnings / share) • EPS = Net Income / Total Shares outstanding • Inspect the % change from one year to the next

Find it’s Assessed Value • •

If I sell all the company’s assets how much can I raise? Fair Market Value • Ex: Net Asset Value, Book Value, Discounted Cash Flow • Value based on current market value of assets & earnings • Look at it on a per share basis (divide it by # shares)

The Tale of the Tape

Fundamental Fundamental Analysis Analysis

Which would you invest in? Stock “ABC” P6.10 2005

2006

Stock “XYZ” P0.86 2007

2005

2006

2007

Recurring Earnings (Bil)

3.00

3.45

4.24

1.15

1.60

1.84

(Growth)

7%

15%

23%

43%

39%

15%

EPS

0.28

0.32

0.39

0.11

0.124*

0.125*

(EPS Growth)

21%

14%

22%

22.2%

13%

0.5%

Fair Market Value * Sold new shares (dilution)

P16.50

P2.10

Fundamental Fundamental Analysis Analysis

A B C

X Y Z

ALI vs MEG: Winner is…? 9.90 (+62.3%)

1.20 (+39.5%)

13.75 (+38.8%)

1.56 (+30%)

The Tale of the Tape

Fundamental Fundamental Analysis Analysis

Which would you invest in? Stock “ABC” P6.10 2005

2006

Stock “XYZ” P0.86 2007

2005

2006

2007

Recurring Earnings (Bil)

3.00

3.45

4.24

1.15

1.60

1.84

(Growth)

7%

15%

23%

43%

39%

15%

EPS

0.28

0.32

0.39

0.11

0.15*

0.14*

(EPS Growth)

21%

14%

22%

22.2%

36%

-7%

Fair Market Value

P16.50

* Based on new Sept Earnings Disclosure

P2.20

PART PART THREE THREE

Timing your Investments

Technical Technical Analysis Analysis

Study of Market Value

“Technical Analysis is the study of Market Action, primarily through the use of Charts; for the purpose of forecasting future price Trends.” -- John J. Murphy ‘Technical Analysis of the Financial Markets’

Market Action Charts Forecasting future price Trends

The Graphic Advantage

Technical Technical Analysis Analysis

•Provides instant access to much needed information. •Clearly illustrates Trend drifts that would otherwise be overlooked. •Enables the user to cover a great deal of stock price information.

Stock:

“A”

“B”

Technical Technical Analysis Analysis

TOP

500,000 450,000 400,000

BOTTOM

350,000

Land prices and Ayala Land

300,000 250,000 200,000 150,000 100,000

•Why? •Market moves ahead as people act in anticipation of change.

99 20 00 20 01 20 02 20 03 20 04 20 05

98

97

96

95

94

93

92

0

91

•Who topped out first?

50,000

Technical Technical Analysis Analysis TRENDS UP TREND •Higher Highs and Higher Lows •Trendlines drawn by connecting lows. DOWN TREND •Lower Highs and Lower Lows •Trendlines drawn by connecting highs.

NO TREND • Sideways shift/ Consolidation • Prices must breakout to re-trend

Trends & Consolidations

Our Our Roadmap Roadmap

Our Our Map Map

“PSEi”

The Market Today

PART PART FOUR FOUR

Tune in and Take Charge of your Financial Future

How do I Start?

Computer

What you need to invest online

Internet Service Provider (ISP)

Online Broker

Online Needs

All at the Palm of your hands

• Choose an Online Broker – Direct execution and Off Hours Order Placement – Live quotes – Portfolio monitoring capabilities – Timely and useful research – Charting tools – 24/7 online service – Customer Service – Best commission rates

Stock Browsing

Task at hand

• Look for a Lead – Scan the news and broker reports

• Do your homework – Study the data – Review the basics

• Get a quote and Evaluate performance – Evaluate its demand-supply – Evaluate its Trend

• Assess your risk-reward – Identify your potential gains and maximum loss

• Create a watch list and Monitor your portfolio – Monitor your stock’s progress

Stock Browsing

Look for a Lead or Story

Morning Notes

Stock Browsing

Look for a Lead or Story…

Stock Browsing

Do your Homework

Stock Browsing

Do your Homework

*Target Price = Estimated Fair Market Value (NAV, PER, DCF…)

COL Rating:

BUY

(Upside)

SELL (Downside)

BUY – Good and solid fundamentals

1

>16%

1

>16%

SELL – Unexciting or poor fundamentals

2

9%-16%

2

9%-16%

3

< 9%

3

< 9%

Stock Browsing

Do your Homework

Sort by:

Rating: 3- Best 1- Low 0- NC

Stock Browsing

Get a Quote!

Stock Browsing

Examine its Trend!

What is the current trend? Bullish or Bearish?

Stock Browsing

Assess your Risk vs Reward (Try to maintain a 1:3 ratio)

21.95%

RISK: Support of P 7.60 PRICE TARGET: P10.00 Risk/Reward: 0.6 / 1.80 = 1:3 (1 pt risk for every 3 pts gain) GOOD TRADE!

Buy / Sell

How to Execute an Order

Note: Market trades between 9:00 AM to 12:10 PM After 1:00 PM, you can use Off-Hours Orders

Buy / Sell

Monitor your Portfolio

Stock Browsing

Reassess your Risk vs Reward

RISK: Support of P 8.10 PRICE TARGET: P10.00 Risk/Reward: 1.10 / 0.80 = 1.373 : 1 (1.37 pt risk for every 1pt gain) High Risk TRADE!

Portfolio MGT

Money Management

“This is the art of preserving one’s capital and keeping whatever one can make.” • Diversify your portfolio into 3 to 5 stocks. • Equally distribute your capital into them. • Do not play the ‘all or nothing game’. • Do not use Martingale’s System of ‘Doubling up’ after a loss! • Never trade more that what you can reasonably afford to lose. • Use the Upright Pyramid Method.

Portfolio MGT

How to Allocate funds

Money Management Styles

Realize this: “While losses grow arithmetically, profits required to recoup them increase geometrically!”

Lose 10% = you need to gain 11% to recoup. Lose 20% = 25% to recoup! Lose 40% = 67% to recoup!! Lose 50% = 100% to recoup!!!

Scale up correctly!

Remember the Plan

Uphold Discipline = Success

Use the Checklist:

• • • • • •

Look for a Lead Do your homework Get a quote and track performance Assess your risk-reward Create a watch list Plan your trades and Trade the plan

Summary Summary

1. The building of Wealth 2. The Stock Market Option 3. Understanding Price 4. A Fundamental View 5. The Technical View 6. The Market Today 7. Tuning into your Financial Future

“Knowledge born from actual experience is the answer to why one profits; lack of it is the reason one loses…”

- Gerald M. Loeb

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