Tag Archive | "stocks"

A cautionary tale

A cautionary tale

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With a bigger appetite for risk comes a higher possibility of failure.

By Alex Lew

Photo credit: reason.com

THE banking and investment careers are the aspirations of numerous young adults. Why so? I suspect it has to do with the promise of wealth and the opportunity to learn about investments.

Regardless of one’s personality, lifestyle, background or interests, investing is certainly an intriguing topic. Let’s start by discussing the dictionary definition of the root word “Invest”.

It says, “To put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.”

To invest, one needs to commit time and money into an instrument that will either appreciate in value or return an amount to the investor.

An investor should expect to sacrifice current consumption for a greater amount of return in time. The longer the period of time, the greater the sacrifice and therefore, the greater the expected return. All investors should be entitled to such expectations.

This opposes the claim by speculators and gamblers that they are able to generate a return without reasonable sacrifice of time or capital.

Often, we see “get-rich-quick” schemes on newspapers and on the Internet. They seem to suggest that there are ways for an individual to generate super returns within a short time with little capital committed.

However, only 4% of diversified US stock mutual funds have beaten the performance of the S&P500 index over the past 10 years.

If professionals cannot beat the market consistently over a significant period of time, why would young investors think they realistically can?

Let’s return to the basics of prudent investing. It all starts with savings and watching out for one’s consumption pattern. If one saves a significant amount of the gross income and invest into a diversified fund or a low cost exchange traded fund, the returns over one’s entire adulthood can be amazing.

If one saves $500 per month over 30 years and commit the money into a market replicating fund which generates 6% over 30 years, the individual would have close to $3 million!

Am I discouraging investing in single stock? Definitely not! My intention was to show the importance of investing consistently with a reasonable basis.

Photo credit: perculaclown.net

What is reasonable basis? Let me explain. Returns are unpredictable. All we know is that the market grows at a certain rate and the rate becomes more consistent the longer the time period. What we can control is the cost/expense of our investment and the level of diversification of our portfolio.

So, there is absolutely nothing wrong if you trade with a low cost broker and diversify your risks prudently – globally and across sectors and instruments.

A tip: young adults should be slow to action, patient in understanding and quick to listen and read.

Finally, the concept to investing may be applied not only to money, but to education, emotional stability and relationships. If you commit time and effort to studying and maintaining healthy friendships, the returns will likely be greater satisfaction!

Alex Lew is not a professional financial advisor. Readers should take advice from a qualified F.A before purchasing any instruments.


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.

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.