If you are just starting out, investing in the stock market can feel intimidating. It might even feel this way even if you’ve been investing for some time.
Investing in the stock market has the potential to unlock a world of possibilities, offering you a stream of passive income to enhance your financial freedom. Whether your goals involve planning for retirement or covering daily expenses, we’ll guide you through five essential aspects of investing that you need to know.
So, let’s set out on this adventure together, empowering you to make informed decisions and achieve your financial aspirations.
We’d like to journey with you as you navigate the stock market with confidence and embrace the opportunities that lie ahead. Let’s get started!
1. Start as early as possible
Ideally, you should start investing as early as possible.
The beauty of starting early is that you have more time with which to compound your money.
You may have heard the phrase “It is time in the market that is important rather than timing the market”.
By allocating your money to strong, well-managed businesses, you can grow your money by leaps and bounds over years and decades.
Do not be discouraged even if you may be in your 40s or 50s. It is never too late to get started.
The important thing is to have the resolve to start as soon as you can as every day that passes is a day that you could have grown your capital.
Take the example of two people, A and B, who are of the same age.
A invests S$10,000 a year from age 25 and does so for the next 40 years.
B does the same but only starts this process at age 35 and invests S$10,000 per year for the next 30 years.
Assume that both of them enjoy a similar return of 7% per annum by investing their money.
By the time both hit 65 years of age, A would have accumulated S$2.1 million while B will end up with less than half of what A has, at S$1 million.
Just by starting a decade later, B ends up with significantly less money than A, demonstrating the importance of starting as young as you can.
Alternatively, if you are a parent, you can help your kids to invest their money as they have many decades ahead of them to see their money grow.
2. Investing is within anyone’s reach
There is a myth that you need to have a lot of money to start to invest.
The reality is that investing is within anyone’s reach and need not involve a large sum.
For instance, the standard lot size (i.e. the minimum number of shares you can buy) for the Singapore stock market is 100 shares.
Remember that behind each stock is a business.
For instance, a stock such as a real estate investment trust or REIT represents a group of rental income-generating properties that are professionally managed.
These managers work to keep the properties occupied, thereby generating rental income which will then be paid out to shareholders (also called unitholders).
For instance, reputable REITs such as CapitaLand Integrated Commercial Trust (SGX: C38U), or CICT, owns a portfolio of retail and commercial assets such as Raffles City, Clarke Quay, and Funan.
CICT’s unit price stands at S$1.89.
As such, scooping up 100 shares of each REIT will cost you just S$189.
Even well known stocks such as OCBC Ltd (SGX: O39) and Singapore Exchange (SGX: S68) are not prohibitively expensive.
You can purchase 100 shares of the bank for S$1,243 and a similar amount of the stock exchange operator for S$963.
The key is to start small and then slowly build up your stakes as you save more money to invest.
3. Dividends as an added layer of income
Another useful tip is to look out for stocks that pay out a dividend.
A dividend is a company’s way of sharing its profits with its shareholders.
This payout is typically done quarterly, semi-annually or yearly, depending on the company’s schedule.
Dividend stocks help you to create an additional income stream beyond your salary.
Businesses that can pay out consistent dividends also indicate that they generate copious amounts of cash that can be paid out to shareholders.
Over time, as you build up your dividend flow, it could eventually exceed what you earn for your salary!
You can then enjoy salary independence, meaning you can now choose to either carry on working, take a break from work, or pursue a job that you are more passionate about.
4. Share prices can be volatile
Investing should never be about being fixated by the daily price movements of the shares in your portfolio. Instead, it should be about monitoring closely the income stream that those companies are able to generate for you.
Income shares, for example, pay dividends, regardless of what is going on in the stock market. A volatile stock market doesn’t stop a company from writing out dividend cheques.
Consequently, investors who are true to the discipline of income investing should learn to embrace market volatility, rather than be unduly concerned when it happens.
Volatility in the market could even provide some great opportunities for us to buy more of the shares that we like at favourable prices. So rather than freaking out, we should be sitting down calmly assessing the bargains on offer.
5. A long-term mindset
Amazing as it may sound, I have not sold a single stock that I purchased.
Your goal should be to build up a dependable dividend stream and compound your wealth in well-run businesses, so why should you even think of selling any of your stocks?
Hence, it is crucial to harbour a long-term mindset when you invest your money.
By buying and selling frequently, you incur a lot of frictional costs such as brokerage and commissions. You also needlessly interrupt the compounding process with this unnecessary activity.
Remember that great businesses harness the power of time to grow and become larger and stronger. As a business becomes more valuable, its share price should also increase in tandem.
What’s more, a more profitable business that churns out more cash can also pay out more in dividends.
You get to enjoy the best of both worlds by simply hanging on to these solid investments over the long run.
Our team has spent decades scouring SGX for stocks. And we think dividends could be the answer to rising inflation and market uncertainty in 2023. With our newest FREE report, you’ll have everything you need to find, keep and make more money from dividend stocks. Click here to download it for free.
Disclosure: Royston Yang owns shares of Singapore Exchange Limited.