The Essentials of Stock Investing

By: Ooi Kok Hwa

Stock investing has, in recent years, grown to become the hottest investing vehicle to grow personal wealth. However, during a stock market decline, many lose a big portion of their hard earned money in the stock market. Try asking friends around you, it will be difficult to find someone who does not invest in stocks. However, if you ask further, you will also find that many of them actually do not know what they are investing in. Some of them would even confess to you that the reason they buy a particular stock is simply because “others are buying”, without even knowing the fundamentals of stock investing.

Setting your financial goal
Making an investment is basically getting your money to work for you to achieve a financial goal. Stocks are the tools for you to get your money to work for you. Therefore, before you even start investing, you will have to determine your financial goal by asking your self questions like “What kind of return am I looking for based on my financial needs?”

The goal that you set has to be realistic, reasonable and measurable. For example, having a return target of 8% per year is considered a reasonable and measurable target while having a return target that says “I want to earn a return that is higher than my friend’s” is not specific enough.

Considering the risks and returns
When we talk about investing, risks and returns always come hand in hand. The amount of return that you are expecting is largely dependent on the amount of risks that you are willing and also able to take.

The simplest way to define risk is basically the probability of losing the money that you invest in. The higher the risk, the higher the expected return which comes in the form of the premium you are being paid to assume the higher risk. However, the level of risk that a person can absorb largely depends on the stage of life the person is currently in and his financial situation. A 30-year old young professional will be able to assume higher risk compared to a retired person who is relying on the savings that he has. On the other hand, a person who has high disposable income and savings will have a higher risk tolerance level compared to a person that has little or no savings.

When are stocks suitable as an investment?
In general, stocks are more suitable for intermediate and long-term investments, due to the nature of the stock market which fluctuates over a short period of time. Therefore, if you have short-term financial needs, make sure you set aside the amount of money required in short-term bank deposits before you invest in stock market. Never rely on stock returns in the short term, as when you urgently need the money and have to sell the stocks that you hold, the market might be at a down trend. Forcing to sell under such a situation might cause you ending up with losses.


Investing vs speculating
Another important point to note is that you have to differentiate between investing and speculating. Some people might seek short-term quick profits by trading on certain hot picks in the market. However, stock trading requires skills and high level of discipline. Unfortunately, most investors try to gain from the stock price movement by betting on certain information that they have obtained or some market rumors which they believe will lead to favorable price movement. This type of trading is accompanied by high risk, where you might either end up with good profit or get burnt.

When you see your friend earning a windfall from speculating, do not envy him! Research has shown that in the long term, those who speculate tend to have lower or even negative return whereas those who set appropriate financial goals and stick to their targets achieve a much more satisfactory result. Most importantly, as an investor, you must have the discipline to adhere to the goals that you have set. Never be greedy - we can never beat the market by constantly hoping to buy at the lowest and sell at the highest.

Buying stocks are like buying businesses. You should focus on the business and must have long-term view on the stocks that you have purchased. You need to purchase stocks that pay good dividend and have strong potential growth in business so that you can get higher capital gain. As long as the stock that you purchased performs up to your expectation, you may consider holding it for a long period of time.

Mr. Ooi Kok Hwa of MRR Consulting is licensed under the Capital Market Services Act 2007. The views expressed in this article are those of the writer and do not necessarily represent the official views of SIDC.