Ways to make money with stocks

Posted on 15 December 2010

Part one of the series “How to start investing in stocks and shares”.

Investment speak

Sound like a pro in no time

Stocks and shares: These two words are often used interchangeably to denote certificates indicating you own a portion of a company. Stocks are a kind of equity instrument.

Equity instrument: Documents indicating that you own the rights of ownership to a firm.

SGX: Short for Singapore Exchange, a holding company which owns outstanding stocks from other companies. Outstanding stocks are those issued to outside investors.

Mainboard: In the SGX, Mainboard is a market catering to established companies.

Catalist: Also in the SGX, the Catalist market caters to fast-growing companies.

Volume: The amount of trading activity associated with a stock during a period of time.

IPO: Short for Initial Public Offering, it is an event where a company offers stocks to the public for the first time.

Blue chip stocks: Stocks from well-established, well-known, and financially sound companies.

Capital gains: The profit resulting from investment in stocks and shares.

IN THE stock market, stocks are often referred to as equity instruments. After investors purchase stocks or shares, they become shareholders or owners of a company.

Once the shares of the company are listed on the stock exchange, the shareholders can sell their shares in the market at any time.

There are about 774 listed companies (Mainboard and Catalist) on the Singapore Exchange whereby you can buy shares from. The volume and price are determined by the supply and demand for those shares.

There are different types of shares, including: ordinary shares, preference shares, loan stocks, and so on.

When a company issues an equity instrument like stocks, it is done through a process called an initial public offering (IPO). In this case, public investors are invited to buy “ownership” or subscribe to pre-determined prices of a company.

Two ways to make money

Dividend Payments: Investors can make money from yearly payout dividends from the invested company. Generally, bigger and established, listed companies are popular with investors because of their track record of consistently churning out profits. They are considered blue chip companies.

The company’s board of directors will reserve the right to declare dividends. Regardless of the company’s performance, the board of directors have the option to either pay out dividends for shareholders, or reinvest the profits back into the company.

At the company’s annual general meeting, shareholders also have a “voice” in major decisions like issuing dividends. However, voting rights are proportionate to the number of shares held by shareholders.

Note that the dividends received by shareholders are taxable as part of their taxable income. However, capital gains from shares are not taxable, and losses cannot be deducted as expenses from your personal income tax.

Capital Appreciation: When you buy a share at a low price and sell at a high price, you can make money through capital appreciation. The movement of share prices are dependent on a variety of different macroeconomic and microeconomic factors.

In terms of the macroeconomic factors, the stock market is dependent on how well the global and local economy performs. Good profits from companies tend to translate into good share prices. Stock markets tend to move ahead of the economy and therefore investors should pay particular attention.

Another factor that will affect stock prices might be rising inflation as it eats into companies’ earnings by raising costs. Inflationary pressures also signal an overheating economy that will prompt authorities to raise interest rates to cool the economy down.

The stock market usually moves in the opposite direction of interest rates movements. Falling interest rates make shares look attractive as other traditional investments like bonds, or fixed deposits offer low returns.

Microeconomic factors deals with the actual performance of the company, hence the importance of finding promising companies through the process of fundamental analysis. The criteria for analysing a company’s performance include financial ratios, nature of business, quality of management, and growth areas.

Got any queries about investment and financial planning? Do email us or comment below to tell us your concerns.

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Elizabeth is the lifestyle writer for New Nation. She enjoys obscure indie films and music no one understands and has a tendency to pepper celebs with inane questions using a fake Angmoh accent. She has a dislike for Jack Neo films (and all mainstream fare).

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  • Landon Leo

    Pardon me, but I would like to point out something majorly lacking :

    It makes little sense to go straight into ‘Ways to make money with stocks’ without a series of prerequisite articles to lay the mental foundation for the reader. This article IMO is already attempting to bring execution onto the table right from the start, which is extremely risky for any young investor. The phrase ‘Ways to make money’ by itself has a very strong draw on the internet (just do a google search and you will know). Yet 90% of investors/traders lose money regularly.

    Therefore one MUST understand the true nature of markets 1st (regardless of type, although there are variations, but the main concept remains the same). Like any other profession, one studies and understands its true nature before dwelling on the execution. Lets take an example of a medical doctor. A doctor must go through many years of study and internship in order to understand the truth nature of the human body. This means understanding almost every part of the body functions, both at a micro and macro level; systems and sub systems and how do they relate to each other, body anatomy, basic and advanced biology… etc.

    And it is funny that statistically speaking, more people fail in the market than fail in their respective day professions (medical doctor in this case). As for people who are already in the financial sector, that is another story to tell.

    So what is the market? What is its true nature?

    The stock market, like every other market, is a mental game of finances. Where money crashes. The basic rule of this game = money makes money when you MENTALLY KNOW timing is right.

    Why this? You just have to look at the true motives of the participants. The motives of the market participants define both its existence and purpose. No motives, no market. Simple.

    The bottom line this that ANY investor is only interested in making/taking/legally stealing/robbing more money by using money itself through the company. He/she is not exactly interested in the company’s performance and welfare.

    Unfortunately, the company is also thinking the same lines. The stock market is the perfect place to raise funds without the risk of business bank loans.

    Is the company exactly interested with their investor’s welfare? No.

    Is the company interested in taking the investor’s money as soon as possible (for whatever motives one can imagine)? Yes. The main difference between a stock investor/trader VS say a basic venture capitalist is CONTROL. Surely one does not want to put one’s money somewhere where control is extremely lacking other than a buy/sell button?

    There’s a whole lot more, but I hope this helps as start.

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