It’s a simple question. The answer, however, is not.
I’ve been asked this question countless of times. The last time it happened was just a few days ago via email. I took some time to ponder. I can sense that the questioner is expecting me to spill the beans, dishing out stock recommendations.
What followed was a lengthy reply consisting of 5 golden nuggets to what considerations the questioner should make first before investing in stocks. They include:
#1: Different Individuals, Different Styles
First, we must understand that there are many different participants in the stock market. They have different financial status and have different objectives on how they can best profit from the stock market.
For instance, individuals who view that stocks are long-term investments would buy stocks differently from people who are short-term traders. Long-term investors may adopt value investing principles to pick stocks. Meanwhile, short-term traders rely heavily on technical analytical skills to determine what a good stock is.
|Skills||Value Investing||Technical Analysis|
#2: Different Methods, Different Measures of Profits
If you are a long-term investor, you will measure the success of your investment differently from a short-term trader.
Let us start with a short-term trader. Usually, they rarely hold onto a stock for more than three months. Traders measure their success based on their probability of making winning trades. For example, a trader has 60% winning ratio if he made 6 winning trades for every 10 trades made. Thus, the objective of a trader is to improve his ratio of making winning trades.
Meanwhile, there are two main types of long-term investors. The first category is known as dividend investors. Their success is measured based on their dividend income and dividend yield from their portfolio. As a result, dividend investors would invest in stocks that pay high dividend yields.
The second type is known as growth investors. They intend to enjoy capital appreciation over the mid-to-long term. As a result, growth investors may choose stocks that are currently investing their financial resources to grow their profits consistently in future years.
|No.||Types of Stock Market Investors||Measure of Success|
|1||Traders||Probability of Winning Trades|
|2||Dividend Investors||Overall Dividend Yield|
|3||Growth Investors||Capital Appreciation over the Long Term|
#3: Same Stock, Different Returns
I asked my friend this question.
‘If I say, ABC Bhd is a good stock to buy.
Would you buy it today?’
He paused for a moment. Then, he replied,
‘I don’t know.’
Here, I’ll explain the significance. Let us assume that my friend decided to buy ABC Bhd now at a certain price. His return on investment would differ from another investor who bought ABC Bhd yesterday at a different price. Of course, it applies to another investor who will buy ABC Bhd at another price at a future date.
Next, let us assume that there is another investor who bought ABC Bhd at the exact same price and the same time with my friend. Their returns from ABC Bhd would differ if that investor decides to sell it at a different time and price from my friend. This is despite buying, holding and selling the same stock.
Therefore, in addition to ‘What stocks to buy?’, I believe all of us should consider ‘When should we buy and sell stocks?’ first before investing. This is because the time you enter and exit the market has a great impact on your personal investment returns.
#4: Different Resources for Different People
Today, we are blessed with multiple platforms to learn how to profit from the stock market. To name a few, they include books, seminars, workshops, financial dailies and analysts’ or brokers’ reports.
So, you may ask, ‘Which of these resources are suitable for me?’
Here’s a tip. First, we must understand that there are writers who write for long-term investors and writers who write for short-term traders. The key is to know yourself first and rightly divide their writings. In short, a trader may not read resources written for long-term investors.
Let us assume that you haven’t made a decision between long-term investing or short-term trading. You’ll not be able to determine which information is suitable as all resources presented seem good. This will lead to confusion which may cloud your decision on what stocks to invest. Ultimately, it could result in inconsistent results from your investment portfolio.
#5: Investing is a Lifelong Journey
If you are new to investing, I would say that investing is a lifelong journey. It requires constant learning and growing to become better investors. Your investment returns would improve gradually over time as your set of investing skills improves.
If you are interested in learning more, you may check out InvestSmart®, an investor empowerment initiative by the Securities Commission Malaysia (SC)
This article is sponsored by Securities Commission Malaysia, under its InvestSmart Initiative.
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Stock 101 Quiz