How to invest in Stocks
In the recent survey, it was found that Singapore youth are not confident about financial future. Eight out of 10 are not confident about their current financial situation, while nine out of 10 feel they are not financially ready for the future, according to the survey conducted by Nielsen.
Most cited lack of financial literacy skill in terms of investing and financial planning as one of the main reasons for the pessimistic outlook.
Well, the good news is that financial literacy can be easily obtained and mastered if one puts in the effort and determination to learn. Here at Wealth Directions, we aim to make the learning journey as simple and enjoyable for any beginners that are eager to start their stock investment journey.
To begin, I will highlight 5 essential steps you need before you even open a stock trading account.
5 essential steps to start investing in stocks
1) Know why you are investing
Be very clear of the reason on why are you embarking on this investment journey. It is not good enough to say generic terms like “I want to make my money work harder for me” or “I want to be a millionaire”. Instead, but as precise as possible. Because you will face many obstacles and lose money along the way. So if you are not clear of your objectives, very likely you will lose faith and fall to the wayside. Some good investment objectives you can consider are:
- I want to double my stock investment of $XXX by 5 years.
- I want to grow by retirement fund to $XXX when I reach 50 years old.
- I want to have passive income of $XXX very month by 45 years old.
This is what I considered as the most important step as you will very soon realized that there are hundreds of investing strategies out there with thousands of stocks to pick from. Each strategies or stocks will give you different results. So unless you are 100% sure of what you are looking for, you most likely will get confused and lost.
2) Understand the Type of investment strategies
Once you are set on your investment objectives, the next step is to explore the different stock investment strategies out there and pick the one that will be the best alignment with your objectives. As one tries to explore the different investing strategies, beginners will be totally confused as terms like value investing, swing trading, options trading, momentum investing etc. will be popping up everywhere. So where do you begin?
To help you navigate the investment landscape, you should ask yourself this question. How much time are you willing to spend managing your stock portfolio?
If you can afford greater than 6-8 hrs a week, you can look at “active” trading strategies. An example of “active” trading strategies includes Swing trading, Options Trading, Position trading, momentum trading etc. Typically, investors that pick these kinds of strategies aim to generate cash flow out of their trades to supplement their daily expenses. Obviously, when you employ these kinds of strategies, it calls for close monitoring of the price movement and do lots of buying and selling frequently.
But if you can only afford maybe 2-4 hrs a week max, you should only consider “passive” investing strategies. An example of “passive” investment strategies includes value investing, Dividend investing, fundamental investment etc. Investors who employ these kinds of strategies have a longer investment time horizon and don’t mind riding the ups and downs in the short term to get a bigger return in the longer term.
I see so many beginners going after the strategies that give them the highest possible return but didn’t really understanding what it takes. This will result in a mismatch of expectation and effort required.
3) Start with a diversified portfolio
The best way for a beginner to get their feet wet in the investing world is to start off with a well-diversified low-risk Exchange Traded Funds or ETF in short. In specific, go for an Index ETF which mimics the movement of a Stock Exchange Index. An index ETF works by buying and selling the same basket of stocks that made up of the Exchange index. So investors only need to buy one counter instead of having to buy 30 or 20 different stocks. The best thing is ETFs behaves like any other stocks which can be bought and sold on the exchange.
For Singapore case, there are 2 Index ETF that are listed on Singapore Exchange (SGX) that tracks the performance of the STI. They are:
- SPDR® STI ETF (SGX:ES3) that has been listed since April 2002
- NIKKO AM Singapore STI ETF (SGX:G3B). That has been listed since February 2009.
Over a ten year period, the STI generated a 64.7% price return without dividends. This meant that before dividends the annualized price return of the Index over the 10 year period was about 5.1%. But if you add in the dividend paid, the STI ETF returned close to 8.5% on an annualized basis.
The result is pretty good considering the fact that if you put that some money in the bank, the most you will get is about 1-2% per year.
The best thing about investing in STI ETF is that you will be able to participate in the ups and down of the stock market without exposing yourself to risks associated with a single stock pick: like seeing your investment goes to zero.
But be warn that Index investing is not a “sure bet” of getting a profit. Because the market moves in a cycle and if you invest in the down cycle, you may not see your profit till the market recovers. This may take months or years.
4) Set aside a small percentage of investment money
If you want to try a little stock picking, set aside a small percentage of your investment money to begin with. A good guideline to follow is 10% to 15% of your portfolio or an amount that will not cause you to lose your sleep at night if you lose it all.
Why not more than that you may ask. Well, the answer is pretty simple, stock picking is inherently risky. If you commit too much of your investment capital to it, it will affect your buy and sell judgment. Buying and selling of any stocks should be objective and never emotional.
Use the small percentage of investment money to try out the different strategies to see which one suits you most. Think of it as tuition fees to learn the rules of the trade and to strengthen your psychological defense against the ups and down of the market.
Only when you are more comfortable with your strategy, then increase your portfolio investment value.
5) Learn how to Invest
Pick up a few investment books to learn more about investing. Here are some good books for beginner investors:
- “Rich Dad, Poor Dad” (2000) by Robert Kiyosaki
- “Think and Grow Rich” (1937) by Napoleon Hill
- “What your school never taught your about Money” (2011) by Dennis Ng
- “Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School” (2011) by Andrew Hallam
The first two are internationally recognized authors and their books are sold all around the world. The last two are not that well known, but they are Singapore-based authors who made millions in the stock market. Those books are easy to read and It will provide you more local context when it comes investing in Singapore.
If you prefer a classroom type of learning, do check out the various courses conducted by SGX Academy. Most of the sessions for beginners are free of charge.
If you prefer to attend a more comprehensive investement course designed specifically for beginners, you may want to consider our course by Kenneth Tan. We have regular free preview sessions, so you can to meet and ask questions to the trainer directly. To learn how you can benefit from proven investment strategies, click here for details.