Investment 101: Getting to know shares
Welcome back to another blog post in this investment series! In my previous posts, we’ve talked about unit trust and bonds. Today, we’ll be talking about shares and the stock market! Investing in the stock market can be daunting and it definitely has its risks. However, as the 100 minus age rule of thumb suggests, when we’re younger we can afford to invest more heavily in equities (shares or equity funds).
The returns we earn on fixed deposits (FD) are low and simply aren’t enough to beat the effects of inflation. Hence, we need to invest our money elsewhere to earn higher returns. The stock market is certainly a great place to consider.
So, let’s dive right in.
What is it?
Shares are issued by companies to raise money to finance business projects or expansions. When you buy shares, you are essentially buying a share of the company, so in some small way, you are part owner of that company. However, it’s usually the majority shareholders who have greater say in the company’s important decisions.
What is the minimum investment?
This depends on the current market price. Shares are usually purchased in lots. The typical lot size is 100 shares. The minimum investment will be 1 lot, i.e. share price x 100. However, it may not be particularly worthwhile to buy just 1 or 2 lots. For example, my trading account charges a flat-rate brokerage charge of RM 9 for transactions between RM 1,000 to RM 9,999.99. Hence, at times, buying 2 lots may incur the same brokerage charges as buying 10 lots. In such case, buying 1 or 2 lots per month may not be the most cost-effective investment strategy. It may be better to save up and buy more lots at one go. Of course, all this ultimately depends on the fee structure of your trading account, so do check it out.
What are the fees or charges involved?
Buying and selling shares involve brokerage charges which depend on the trading account used and the transaction amount. In Malaysia, you also incur stamp duty and clearing fee.
How do you earn return?
First, through share price appreciation. You may purchase shares of company X for RM 1.20 per share and one year down the line, the share price increases to RM 1.70, so you decide to sell your shares and earn a profit. Second, through dividend payments. Companies often pay out a portion of their profits to shareholders in the form of dividend.
What are the main risks involved?
Companies could declare bankruptcy. Keep in mind, you are part owner and paying you back is not the company’s top priority. It focuses on paying others such as bondholders first. Hence, bonds are considered somewhat safer compared to shares.
How actively do I need to be involved?
The share market can be quite volatile. If you’re looking to earn short-term returns, monitor the share prices closely and when the prices have gone up, sell to reap a profit. If you’re interested in long-term returns, consider blue-chip stocks that you can hold and earn dividends on.
Oftentimes, the hardest thing to do is to hold on to good stocks during bad times. In times of crisis, share prices start to fall, and we panic. However, it’s natural for the stock market to have its ups and downs. The market usually recovers over time. If you’ve done your research and you want to hold on to certain blue-chip stocks issued by stable companies that are good dividend payers, then avoid making the emotional decision to sell.
You have complete say in exactly what sector or company to invest in as opposed to unit trust or mutual fund where the fund manager decides what to invest in.
Performing companies may provide handsome dividend payments.
Choosing the right shares can be tricky as it requires understanding the market and company fundamentals.
More experienced investors who have done their homework on the specific companies they want to invest in. Beginners could opt for a few lots of blue-chip stocks and hold on to them. Blue-chip stocks are shares of large, reputable, and financially stable companies. For example, shares of the Nestle company are considered to be a blue-chip stock. These stocks often provide regular dividends for investors.
Despite this, avoid investing all your money into one stock. Even the most stable companies have some risk of going under given the right set of unfortunate circumstances. So, always diversify your investments across different companies and sectors. For example, consider investing across healthcare, F&B, and banking sectors as opposed to different companies within the same sector. This way, even if one sector or industry suffers, other sectors may still perform and your passive income in the form of dividends can be preserved.
Unlike FD, investing in the stock market doesn’t guarantee returns. There is a chance of making losses. So, always ensure to invest surplus money that you can afford to lose. Of course, no one wants to lose their money, which is why it’s important to research and read up to choose the right stocks. However, no one can really time or predict the market perfectly and the risk of incurring losses are there. It’s best to be aware of this.
Also, doing research is important to make informed choices. Before investing in a particular stock, you may want to read up on the industry outlook and check out the company’s financial performance. Additionally, you can refer to key financial ratios such as price-to-earnings ratio to analyse and compare companies in the same industry. Click here to learn more about these financial ratios. Proceed to invest once you feel comfortable that the industry and company are promising and sound.
To start trading shares, you will first need to open a trading account. In Malaysia, there are numerous options to choose from. Click here for a comparison of different share trading accounts and their brokerage charges. Rakuten Trade is a pretty cool platform because the entire account opening process can be done online and the brokerage charges are relatively low.
Do explore the trading accounts available to you and compare the charges before opening an account.
I hope this post was helpful to you. Stay tuned as we'll be discussing another interesting investment option next month: robo-advisors!