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Ways to make money with stocks

Ways to make money with stocks

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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.

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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.