Investing means to commit (money or capital) in order to gain a financial return: invested their
savings in stocks and bonds.
How to start investing?
First, you must ensure you have enough savings of at least 3-6
months of your monthly salary for
investment before you decide to invest in the stock market.
Make sure you have some cash funds
that are not meant for investment in case of emergency.
Convenience
With the advances in technology, you can trade anywhere at any
time as long as the markets you
trade in are open. You can also monitor and manage your
investment online should you decide to
trade online.
Know your objective for investing
Keep your objective clear – whether it is for your children’s
education or for your own future
savings, your investment should be focus on stocks that offers
good capital growth. Meanwhile, if
you are investing for your retirement fund, you should focus
investing in stocks that offers a
consistent income stream.
Know your risk appetite…
Are you a high risk taker or low risk taker? Investing in stocks
that provide high returns tend to
have higher risk while stocks which have steady growth (low
risk) may provide with lower
investment returns. You can also diversity your investment by
having a mixture of high to low risk
stocks.
Discipline
You must be disciplined in your investment plan/strategy and
stick to it. If your stock is losing
money, ensure that you have a stop loss strategy in place
(between 3-5% is recommended,
depending on your risk appetite).
Do not put all your eggs in one basket…
Learn to manage your risk. Never put all you money onto one
stock. Always diversify your
investment so that you can still have some investment returns if
one of your investments turns out
bad.
Know what you are getting into
You should always research the company you invest in – what
business are they in, competitive
edge of the company, how do they generate income, the
company’s business cycle, whether they
are a financial stable company. You should study the
fundamentals of the company to ensure that
you are investing in a financially sound company. You can also
look at technical studies to
determine the best entry and exit points in your investment.
Basic
Investing
Guidelines
Say ‘NO’ to rumours
Never buy a stock based on rumours. The stock could be
subjected to speculative play, which
normally ends very fast. You could end up in the losing end
once the speculators exit the stock.
Volatility
Do note that the stock market is a volatile place. Stocks may be
affected by regional and/or global
markets, economics news, cancellation of contracts,
commodities prices, political stability and etc.
Beside the returns of your investment…
The company may reward shareholders through dividends,
bonus issues, right issues and etc.
How do you select stocks?
Again, it depends on your investment plan and risk appetite.
You can choose to invest in (i)
developing companies (just started its business – high risk), (ii)
growing companies (strong growth
in sales and profits – huge potential returns), (iii) maturing
companies (growth not as exciting as
growth stock, potential return lower – low risk) or (iv)
declining companies (unable to grow as fast
the economy/industry growth rate – high risk, low returns). It is
best to invest in companies that
have high demand in products or services, low debt to equity
ratio, efficient management of
shareholders fund and ability to survive the ups and downs of
the market despite increase in
competition.
Fundamental Analysis
A method of evaluating a security by attempting to measure its
intrinsic value by examining related
economic, financial and other qualitative and quantitative
factors. Fundamental analysts attempt to
study everything that can affect the security’s value, including
macroeconomic factors (like the
overall economy and industrial conditions) and individually
specific factors (like the financial
condition and management of companies). The end goal of
performing fundamental analysis is to
produce a value that an investor can compare with the
security’s current price in hopes of figuring
out what sort of position to take with that security – i.e.
underpriced – buy, overpriced – sell.
Fundamental analysts use real data to evaluate a security’s
value – such as financial statement to
evaluate stocks.
Technical Analysis
A method of evaluating securities by analyzing statistics
generated by market activity, such as past
prices and volume. Technical analysis does not attempt to
measure a security’s intrinsic value, but
instead uses charts and other tools to identify patterns that can
suggest future activities. Technical
analysts believe that the historical performance of stocks and
markets are indications of future
performance.
Dividends
A cash payment from a company’s earnings, announced by the
company and distributed among
shareholders – i.e. dividends are an investor’s share of a
company’s profits.
Basic
Investing
Guidelines
Dividend Yield
Shows how much a company payout in dividends each year
relative to its share price. In the
absence if any capital gains, the dividend yield is the return on
investment for a stock. Dividend
Yield is calculated as:
Dividend Yield = Annual Dividends per share
Price per share
High dividend yielding stocks are preferable for long term
investors as they can accumulate
dividend payouts on top of the gains from the share price
performance.
Earnings Per Share (EPS)
The portion of a company’s profit allocated to each outstanding
share of common stock. EPS
serves as an indicator of a company’s profitability.
EPS = Net Income
No. of shares outstanding
It is more accurate to use a weighted average no. of shares
outstanding over the reporting period,
because no. of shares outstanding can change over time.
Meanwhile, diluted EPS expands on
basic EPS by including the shares of convertibles or warrants
outstanding in the outstanding share
numbers. The company that is more efficient of using its
capital to generate income would be a
better company. Investor should invest in stocks that offer
positive EPS and/or higher EPS.
Note:
Earnings manipulation will affect the quality of earnings
number.
Price-Earning Ratio (P/E Ratio)
P/E Ratio is a valuation of a company’s current share price
compared to its per-share earnings.
P/E Ratio = Price per share (Current share price)
Earnings per share (EPS)
High P/E suggests that investors are expecting higher earnings
growth in the future compared to
companies with lower P/E. It is most useful to compare P/E
ratios of one company to other
companies in the same industry – i.e. peer comparison, to the
market in general or against the
company’s own historical P/E.
It is referred to as the “multiple”, because it shows how much
investors are willing to pay per ringgit
of earnings. Eg. If Company XYZ is currently trading at a P/E
of 10x, it means that an investor is
willing to pay RM10 for RM1 of current earning. In other
words, the higher the P/E, the more
“expensive” is the stock.
Note:
Avoid just using P/E valuation to determine whether you want
to invest in the stock.
Basic
Investing
Guidelines
Return On Equity (ROE)
The amount of net income returned as a percentage of
shareholders equity. ROE measures a
corporation’s profitability by revealing how much profit a
company generates with the money
shareholders have invested.
ROE = Net Income
Shareholder’s Equity
This ratio is useful for comparing the profitability of a
company to that of other firms in the same
industry.
Return On Investment (ROI)
A performance measure used to evaluate the efficiency of an
investment or to compare the
efficiency of a number of different investments.
ROI = (Gains from investment – Cost of investment)
Cost of investment
Investor should invest in stocks that offer positive ROI and/or
higher ROI.
Note:
This ratio depends on what you include as returns and costs.
Debt-to-equity Ratio (or Gearing)
A measure of a company’s financial leverage calculated by
dividing its total liabilities by
shareholder’s equity. It indicates what proportion of equity and
debt the company is using to
finance its assets.
Debt-to-equity ratio = Total of interest bearing liabilities
Shareholder’s equity
Company with lower gearing is better – i.e. less than 1x net
cash while company with gearing more
than 1x has higher borrowings compared to its cash & bank
balances. A high debt-to-equity ratio
generally means that a company has been aggressive in
financing its growth with debt which in
turn can result in volatile earnings as a result of the additional
interest expense.
Note:
This ratio depends on industry – some industries are more
capital intensive (e.g.
manufacturing, construction) and therefore may require
borrowing more in order to generate higher
income.
Price-to-Book Ratio (P/B Ratio)
P/B Ratio is used to compare a stock’s market value to its
book value. It is also know as price-
equity ratio.
P/B Ratio = Current share price
Total Assets – Intangible Assets & Liabilities
A lower P/B ratio could mean that the stock is undervalued.
Therefore, investors should invest in
stocks that offers high P/B ratio.
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