Lately, I received the following question from Pradeep, a fellow reader of ours:
I noticed it is common for people to enquire about selecting a broker as Step #1 to invest in stocks, especially if they are new to the stock market. That, to me, is not the first step or a key success factor to stock investing. Here, in this article, I like to share 5 things that you need to know to succeed in stock investing and in fact, should be considered first before opening a stock brokerage account. They include:
#1: What is Stock Investing?
What is it to you?
Many people do not have a clarity on this and hence, causing them to buy, hold and sell shares aimlessly in the stock market. Here, it is helpful to assess what is it that attracted you to the stock market. Is it because you like to build up a nice portfolio to grow your wealth sustainably for the long-term or is it because that you think the stock market offers you a chance to make a quick buck?
Today, many people regard themselves to be ‘investors’ but they are not exactly investing. They could be trading or speculating stocks, believing wholeheartedly that they are investing. They fail to realise and could not tell the key differences between an investor, a trader, and a speculator.
In brief, they are as follow:
1. An investor aims to build wealth via amassing shares of good businesses.
2. A trader aims to make quick bucks from changes in stock prices.
3. A speculator is like a trader without a trading plan and relies solely on luck.
So, who do you wish to be? An investor, a trader or a speculator?
For me, I’m a long-term investor and hence, I’ll share the remaining points from the viewpoint of an investor.
#2: What are Your Investment Objectives?
Isn’t it to make money?
Not quite. In most cases, traders and speculators are into stocks as they wish to make a quick buck. Their focus is on having more money.
That is not the case for investors. This is because investors would aim to protect or to increase the purchasing power of their money while earning themselves a continuous stream of passive income from their stock portfolio. Here, the focus is on accumulating income-producing stocks that act as stores of value, which is a preferred method of building and storing wealth for investors in the long run.
As such, you may want to answer the questions below:
1. Are you in it for the long-term or for the short-term?
2. Are you in it for the money or to build wealth for the long-term?
3. Would you like to receive dividend income year-after-year for the long-term?
Take your time to think through the above. This is because, if not, you would be confused as to what stocks you should buy, how much you should buy or pay to buy them, what you should be doing if the stocks which you bought had moved up, down, or even sideways in the future.
#3: What is a Good Stock to You?
There are 900+ stocks listed on Bursa Malaysia. How do you identify a good one that you want to invest from a bad one?
This is why, if you fail to think through the above discussed at Point 1 and 2, the chances are, you will buy stocks aimlessly because you do not have a game plan to profit from the stock market. You are not investing but gambling as you don’t know what you are doing in the stock market.
I can’t say for all how you should invest. But, let me share mine.
For me, I like to convert some of my RM into a stabler currency such as the SGD to store my wealth. But, instead of having SGDs in bank accounts or FDs, to me, I prefer to own SGX-listed stocks as I can earn dividend income in SGD and grow my wealth as the businesses of these stocks continue to grow over time. Thus, I would summarise my investment objectives as follow:
1. Earn dividends in SGD, which is higher than FDs in Malaysia and Singapore.
2. Store wealth in SGD to protect against a fall in the value of RM, if it happens.
3. Compound wealth as businesses continue to expand and grow in the future.
Thus, I need to find stocks that can fulfill my objectives stated above. The ones I believe that can do so are fundamentally good stocks that have robust business models, delivered consistent growth in profits and dividends, and have tangible plans to sustain growth in the future. If a stock has the stated above, then, I will view it as a good stock and would consider an investment into it.
So, what then is a good stock to you? Could you define it easily? If not, you may want to think this through before investing.
#4: What is a Good Price for You to Buy a Good Stock?
An investment is only good if the stock is good and you get it at a good price. As such, what then is a good price to you? How do you tell if a stock is overvalued, fairly priced or undervalued?
Personally, I would use 3 valuation ratios to help me determine if a stock is now being overpriced, fairly priced or undervalued. They include:
1. P/E Ratio: Comparing stock price relative to its earnings.
2. P/B Ratio: Comparing stock price relative to its net asset value.
3. Dividend Yields: Comparing stock price relative to its dividends.
But, what if you don’t know how to use the 3 valuation ratios above?
Well, if that is the case, it is best for you to learn how to use these ratios before investing your money into the stock market. Otherwise, you would find yourself likely to buy stocks which are overpriced for you do not have the ability to tell if a stock is cheap or expensive.
That, to me, is very risky.
#5: What stocks do you have in a Watchlist?
Or, do you have a watchlist of stocks that you are interested to invest in?
Personally, I would build and maintain a watchlist of 50 stocks. This is because a good stock that is overpriced today may become undervalued in the future. We don’t know when that would happen and hence, having a watchlist allows us to keep track of the progression of these stocks. Thus, it enables us to make wiser, better, and timelier investment decisions over the long-term.
Conclusion: Are You Ready to Invest in Stocks?
If you today,
1. Couldn’t tell the difference between an investor, a trader and a speculator
2. Don’t have an investment objective or a game plan to invest in stocks
3. Cannot tell the difference between a good stock from a bad stock
4. Don’t know how to tell if a stock is cheap or expensive
5. Don’t have a watchlist of good stocks
Then obviously, you are far from ready to invest in the stock market. The best is for you to invest money, time, and effort to get educated first before investing. I strongly advocate it because many people had incurred losses and wasted time from buying into bad stocks as a result of lack of education.
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