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Stocks 101: A Guide For Newbies

Tackle your busy life while earning money on the side by investing your money. Let your money work for you to achieve the future you have always dreamed of. Renowned investor Warren Buffett defines investing as the “the process of laying out money now to receive more money in the future.”

(Image credit: Fortune Live Media, via Flickr)

To start investing, you must know what is a stock is first.

WHAT IS A STOCK?

Whether you call it security or equity, a share of stock is a legal ownership in a business. Businesses or corporations issue stocks to gain money. It comes in two varieties – preferred and common. Preferred stock comes with a predetermined dividend payment. While, the common stock allows the stockholder an access to a proportionate share of a company’a profits or losses. It is to you to choose whichever suits you best.

HOW DO YOU MAKE MONEY WITH STOCKS?

There are two ways to make money from owning and investing in stocks. You can make money by reaping the increase in stock price or dividends. Because these two accumulate over time, just one year’s investment in a premium can yield a solid return in the next couple of decades. You can look up blue chip companies such as Coca-Cola and Disney.

The Father of Value Investing, Benjamin Graham, once said:

“The real money in investing will have to be made—as most of it has been in the past—not out of buying and selling, but out of owning and holding securities, receiving interest and dividends, and benefiting from their long-term increase in value.”

WHY SHOULD YOU INVEST?

The stock market provides high returns. You should invest to grow your wealth. However, I cannot guarantee how your stocks will perform. You need to understand that strategy application and diversification aids in growing your wealth. Diversifying your investments by including stocks along with your bonds and assets can help protect you from the inherent volatility of the financial markets.

WHAT IS DIVERSIFICATION?

To provide cushion from the risks that come with the stock market, one can apply diversification. Think of it as not putting all your eggs in one basket. In order to diversify your stocks portfolio, you may need a significant amount of money to invest. It is nearly impossible to create a well-diversified portfolio with S$1,000 alone.

This is where mutual funds come into play. Mutual funds tend to have a large number of stocks and other investments whereby it is controlled by a portfolio manager. It is more diversified than a single stock in one company. This is something that you must think about.

Sources: 1 & 2

Newbie’s Guide To Investing In Singapore

Contrary to popular belief, investing is not only for the rich and famous. Anyone can get started with an investing program. There are various ways to invest small amounts of money and to grow one’s portfolio over time. In fact, this differentiates investing from gambling. Investing takes time and effort!

#1: SET THINGS STRAIGHT

This week, I invited an insurance agent to enlighten my team about the products available in the market. She highlighted how important it is to map out one’s financial future. What are your goals? Will you keep the money for 3 years and withdraw all the earnings? Or, is the money coming from a disposable income that you can risk losing? You need to set a clear path to reach your target.

#2: FIGURE OUT HOW MUCH MONEY YOU NEED

Once you have your financial goals lined up, it is time to determine how much money you need to invest. Use online calculators such as the Central Provident Fund’s savings calculator to work out a monthly investment plan. What are the helpful strategies that you can employ to save money each month? Well, developing a budget is a good place to start.

If you do not seem to have enough money at the end of the day then, figure out what needs to be changed. Eliminate unnecessary expenses or expand your income streams. A combination of these two can help you adjust.

#3: KNOW HOW MUCH RISK YOU CAN TAKE

The next step is to identify your investment risk level. Are you willing to shell it all out just to gain high profits? Or, do you need to be as conservative as possible?

There are hundreds of investment programs that you can partake in. From bonds to equities as well as gold bars to expensive artworks, you need to narrow down your options. So, know your preferences.

Stocks gives you a hiigher return in the long run. However, it can be highly volatile in short-term basis. On the other hand, bonds are designed to create a steady stream of income. The most conservative option is the mutual funds. Think about these information.

Image Credits: pixabay.com

When things fall into place, you may open a brokerage account. Investing directly in shares and bonds or indirectly through the exchange-traded funds (ETFs) can be less costly. A mixture of investment types can help balance the potential gain and the risk.

Sources: 1 & 2

What Stock Should I Buy?

Warren Buffett once said, “it is not necessary to do extraordinary things to get extraordinary results.” When it comes to finding stocks worth investing in, we simply need to ask the right questions.

We share 3 of these questions with you, and 3 financial ratios that can help answer your questions.

What if you don’t have a stock in mind? After all, there are over 9,000 stocks on the Singapore Exchange (SGX), New York Stock Exchange (NYSE), NASDAQ and Hong Kong Stock Exchange (HKex) alone and brokers like us offer access to many more markets including Thailand, China, Indonesia, Malaysia and the Philippines.

There are tools out there that can help you identify stocks using ratios like the ones above. Click here to learn how stock screeners can help you identify trading opportunities.

You Wouldn’t Believe How Much Gold’s Price Has Fallen

Dan Gable once said: “Gold medals aren’t really made of gold. They’re made of sweat, determination, and a hard-to-find alloy called guts.”

In his own definition, gold’s essence translated to the person’s special characteristics. However, majority of the world perceives gold as a value commodity.

“What makes gold so valuable?”, you may ask. For starters, it lasts for a long period of time, it can be easily manipulated, and its appearance is very appealing.

But aside from this, gold is a rare element because no mine has an unlimited supply of it. Once all the gold is sold and spent, the mining company’s stock will fall. Any efforts to get more gold will affect the company’s wealth.

Gold’s rarity makes it more valuable than other common elements such as aluminum or iron. Its prices are not set by a single organization, rather they are influenced by the cost of production and the amount people are willing to pay for it. For instance, when the demand of gold is relatively high at a given base price and the competition is higher than expected, it is just right to increase the base price in order to regulate the demand of gold. And if not so many people are interested in purchasing gold, its price will stay closer to its actual production cost. Whether you like it or not, we are currently observing the latter statement about gold.

Gold’s price has dropped by about 1.4% last Thursday (14th April) – that is US$1,228.70 (S$1676.32) per ounce. This is in conjunction with the rising Asian shares and the strengthening of US dollar. Moreover, regional currencies weakened against the greenback after the country’s central bank set the rate of appreciation of the Singapore dollar policy band at 0%.

According to Gold Rate 24, a website that partakes information about the gold’s prices around the world, an ounce of 24K gold is priced at S$1,672.04 (US$1,226.99) while a gram of 24K gold is priced at S$53.76 (US$39.45) as of today. A substantial drop has been seen within 30 days from S$1,702.81/oz to S$1,672.04/oz.

HSBC analyst James Steel was quoted saying:

“Gold is weakening on a recovery in investor risk appetite. The sharp (equities) rally and the leveling off of gold-ETF demand recently argue for some period of price consolidation.”

Steel’s claim of the lowering investor risk appetite towards gold is supported by the figures of the world’s largest gold-backed exchange-traded fund – SPDR Gold Trust. Assets of SPDR Gold Trust fell 5.05 tones to 806.82 tones last Thursday, its lowest in a month.

The demand drop of gold affects the prices of other valuable elements such as silver, platinum, and palladium.

Sources: 1, 2, 3, 4 & 5

Investment Basics: Bonds Versus Equities

BONDS

Just like some people, organizations and governments need to borrow money in order to function. An organization may need funds to expand into new markets while the government may need money to improve the infrastructures. However, some organizations need more money than the bank can provide. This is why they have to issue bonds to the public market. After which, a number of investors can lend a portion of the capital needed. So in a sense, bonds are borrowed money with a fixed and stable rate of return.

EQUITIES

For an aggressive investor that embraces risks, consider purchasing equities. Equities are the shares sold by companies. Buying equities means you become a shareholder – an owner of a percentage of the company. But if the company gets bankrupt, an equity investor will get the last claim on its assets.

PROS

BONDS

Including bonds to your portfolio provides you periodic interest revenue for a certain length of time. Since its interest rate typically does not change, you will know what to expect.
In an unfortunate event that the company goes bankrupt, bondholders are the ones who get paid first because they are creditors with the first claim on the company’s assets.
There are various types of bonds to choose from such as government bonds, zero-coupon bonds, and corporate bonds.

EQUITIES

Since equity investors become owners of a percentage of the company, they are equipped with the highest possible returns.
You can profit it different ways such as gaining from the increase in share prices or dividend income (if the company declares dividends).
Depending on how huge your shares are, you may have power to vote in the company’s decisions and issues.

CONS

BONDS

Since the market changes and the bond’s interest rate relatively remains the same, it can lead you to getting lower investment returns.
If you are keen to sell a bond with an interest rate that is lower than the current market rate, you will have to sell it at a reduced or discounted amount that what you originally paid for.

EQUITIES

Equities are volatile and riskier than bonds. As much as equities can give you the highest returns, they can also give you greater losses.
Unlike bonds, there is no guarantee of dividend payment in equities. Based on the current market and business circumstances, the company can choose whether it pays the dividends or not.

Image Credits: pixabay.com (CC0 Public Domain)

Sources: 1, 2, & 3

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