New Year, New You! Am I right? Is investing one of your resolutions this year? If yes, and you’re not sure how to do it, don’t fret, we have the ultimate guide to start investing!
In this particular guide, we’ll be sharing with you a systematic and logical approach on how to get started!
Stocks or Shares? I can’t tell the difference!
According to Investopedia, Stocks (also known as ‘shares’ or ‘equity’) is a type of security that signifies ownership in a company. When a company goes public, its shares can be bought on a stock exchange through a broker. (I will go through more of this later on) This means that when you own shares of a company, you are actually owning part of the company!
The stock market is a place where stocks of various companies are traded. Anyone can buy and sell stocks on the stock market through brokers. Brokers are the middleman who help you buy and sell stocks on the stock market. Once you create a brokerage account with a broker, you will be able to have access to a brokerage platform in which you can then trade.
Below are some brokerages firm you can explore:
- UOB Kayhian
- DBS Vickers
- OCBC Securities
- Thinkorswim (Tdameritrade Singapore)
- Interactive Brokers
Here’s What You Need to Know Before Finding a Broker
Different brokerages have different commission fees but most of them are relatively about the same. US Brokerages like ThinkorSwim only allows you to buy US listed Stocks. However, if you want to buy stocks from Singapore and around the region stocks, you can explore the first 3 above. Brokerages like SAXO allows you to buy stocks from all over the world. This is definitely a more convenient brokerage to use but take note that some might cost a little more. There are mainly 2 types of brokerage charges – a commission fee for every trade placed, and a holding fee. Be sure to check out the fees before registering with any!
Importance of Investing
Inflation is about 2-4% every year. Leaving money in the bank generates close to 0% interest. This means that we are actually losing 2-3% every year! Let me introduce to you the rule of 72. It states that if we take 72 divided by the inflation rate, the number calculated will be the number of years it takes for the value of your money to be halved! Don’t ask me how I derived this… It’s some scientific maths… Go google it!
So let’s calculate the number of years for the value of your money to be halved if you don’t invest. 72/4 = 18. 18 YEARS!!!! In 18 years, your money will be halved!! What are you waiting for? Start investing already!!
Besides inflation, Financial freedom is also something that I believe most people would want to achieve. Financial freedom is when your
PASSIVE INCOME > EXPENSES
Once you achieve financial freedom, you are awarded with the option to retire and not work. You can live the life you want… Travel the world, quit your job, etc.
Okay now that you know why we need to invest, let me explain how to make money from stocks!
2 Ways to Make Money from Stocks
- When the price of a share increases by x dollars. You make X dollars. Simple as that. For example, you bought Share A is currently at $5. 1 day later, you sell the share at $6. Congrats, you made $1.
- Some companies pay out dividends to their shareholders. They can be paid out every quarter, or biannually. It depends on the company. However, not all company pays dividends.
2 Main Ways to Go about in the Stock Market
There are 2 main ways to go about in the stock market –Fundamental Analysis (FA) and Technical Analysis (TA).
Technical Analysis is the study of pattern and trends using certain indicators such as moving averages, MACD and bollingerbands. (Don’t worry if you don’t understand these terms for now!)
People who use technical analysis to buy and sell shares are called traders. Traders study trends and patterns which will indicate whether the share price will go up or go down. This will affect their buy or sell decision. They can buy and sell shares within days or even up to minutes. Traders place lesser emphasis on the fundamentals of the stock. Meaning to say that they do not study the underlying company. A trader aims to make profits short term.
Fundamental Analysis is the in-depth study of the underlying business behind a stock. People who uses fundamental analysis to purchase a stock, is known as an investor. An investor thinks a much longer term compared to a trader. The investor studies the financials of a company by looking at the company’s annual and quarterly report. Apart from the numbers, the investor also looks at the qualitative aspect of the company. If the investor deem that the company will be earning more money few years down the road, he buys the shares of the company. Simple as that.
One of the world richest investor, Warren Buffett is a Value Investor. He studies the qualitative and quantitative aspect of the company and only buys wonderful companies at a discounted price. (Meaning to say if company A’s share is worth $1, Buffett will only buy the share at $1 or below.)
What analysis do I use? I aim to follow in Buffett’s way of investing – Value Investing. If Buffett makes billions using this methodology, why not follow him?
What is an indicator that stocks will go up?
There are many things that will cause the price of stocks to go up. News, earnings, share buybacks etc.
I would like to raise a quote here by Benjamin Graham, the father of Value Investing.
“In the short run, the market is like a voting machine. In the long run, it is a weighing machine.”
In the short run, there are many things that can cause the share price to rise. Positive views by research analyst on Wall Street, company beating earnings expectation in the quarterly reports and speculation. Put it simply, the share price moves based on emotions and speculations in the short term. When the overall market is feeling positive about a stock, the share price will go up, vice versa.
In the long run, the share price goes up as the value of a company goes up. When a company generates more cash, it is obvious that the company’s worth would increase as well. This causes the share price of a company to go up. The proper study of a company is so important, as holding a stock long term is not an easy feat as the investor has to weather the up and downs of the stock and maintain his conviction.
This is Apple’s share price in the short term (5 days here). You might think that Apple is not doing well because its in the red but HEY look at the next picture!
Apple is in fact an amazing company! In the long term, Apple grew from $1.85 in 2004 to about $156 in 2018 (as of writing). You would have made close to 100 times your money! This is INSANE.
The beauty about investing is that it allows your money to grow while you sleep.
Here are the steps you need to take to start your investing journey:
- Get yourself EDUCATED (go for a course – it saves you a lot of painful mistakes)
- Read Books on Investing (I have included a list of books to read down below)
- Create a brokerage account
- Find a community of Investors (Feel free to connect with me)
- Compound your wealth
Read this if you know nothing about stocks yet:
- Gone Fishing with Buffett by Sean Seah
- Rich Dad Poor Dad by Robert Kiyosaki
- Little Book that Builds Wealth by Pat Dorsey
Read this if you know a little bit more on stocks:
- Security Analysis by Benjamin Graham and David Dodd
- The Intelligent Investor by Benjamin Graham
- 5 Rules on Successful Investing
- Buffett and Beyond by Pat Dorsey
- Berkshire Hathaway Annual Reports
- Buffettology by Mary Buffett
- 100 Baggers
If you found this ultimate guide really useful, why not put what you’ve just read to good use by joining our complimentary value investing masterclass? To help you get a head start, you can read one of our previous article that is similar in nature on how to start investing in Singapore or how to make money of dividend stocks.
Yes, while we agree to a certain extent that knowledge is power, you wouldn’t be making any profitable returns simply by reading investing related content. True power is applied knowledge when you’re able to apply what you’ve learned to get results!
So take advantage of this new year and make it your resolution to start investing early and see positive results before the year ends!