Do you know how to start investing? If you have always wanted to learn how to invest, you’ve come to the right place.
This handy guide will address your common questions on investing and help you understand the common terms used.
We will also provide you with a simple roadmap on how you can go about buying your first stock and build your own stock portfolio.
So, let’s get started!
What is investing?
We start at the beginning: what exactly is investing?
Investing is about getting your money to work harder for you.
When you invest, you are able to grow your initial sum of cash into something more (that’s called capital growth), or to receive a dividend payout from the stock you buy (that’s a sum of money paid to your bank account).
The capital growth or dividends will help better prepare you for retirement.
How to start investing?
The two basic investment options are shares or bonds.
Shares represent part ownership of a business.
Bonds, on the other hand, are akin to a loan that you provide to a business. You get paid an interest rate for your commitment.
Before you can start investing, you need to open a brokerage account.
To help you along, you can read our guide to the different brokerages in Singapore HERE.
Once you’ve chosen a broker and opened your account, you can purchase shares and bonds.
Shares, as well as some bonds, are available to be bought or sold on a stock exchange.
An exchange is a platform used by investors to transact in securities, and almost every country has its own stock exchange.
You can either purchase individual stocks on the exchange, or choose to park your money in an exchange-traded fund, or ETF.
In a nutshell, an ETF holds a basket of stocks and helps you to gain exposure to a wide variety of businesses without you needing to allocate your money to each individual stock.
Alternatively, you could also choose to subscribe to safer, government-guaranteed securities such as Singapore Savings Bonds (SSB).
The SSB offers an average return of between 1% to 2% per year over 10 years, depending on which month you subscribe to them.
How much should you invest?
The good news is you don’t need a huge sum to start investing.
Just a few hundred dollars is sufficient to get you started.
The typical lot size is 100 shares on the Singapore Exchange.
For instance, you can purchase 100 shares of financial technology company iFAST Corporation Limited (SGX: AIY) at S$6.36 apiece which will cost S$636.
Real estate investment trusts, or REITs, are another option if you are looking for a steady stream of dividend income.
A REIT holds a portfolio of properties that generates a steady and predictable stream of rental income.
Take Frasers Centrepoint Trust (SGX: J69U), the owner of popular malls such as White Sands, Hougang Mall, Century Square and Waterway Point.
You will be able to buy 100 units of this REIT for as little as S$229.
As you can see, the starting amounts to invest in stocks are quite affordable.
You can start small before slowly putting more money into the stock market.
A popular approach is dollar-cost averaging, a method whereby you allocate a fixed amount of cash into the stock market on a regular basis (e.g. monthly).
Over in the US, the minimum amounts are even lower as you can purchase as little as one share.
For example, you can buy one share of iPhone maker Apple (NASDAQ: AAPL) at US$172.55 per share, while sports footwear and apparel company Nike (NYSE: NKE) is going at US$146.5 apiece.
Note: Share prices as of 18 February 2022.
What returns should you expect from the stock market?
Since 2002, the Straits Times Index (SGX: ^STI), Singapore’s bellwether blue-chip index, has returned 6.6% per year in total returns.
However, it’s important to remember that while you can definitely make money if you hold for the long term, the stock market will be volatile in the short term.
Source: S&P Global Market Intelligence; Yahoo Finance; author’s calculations
The chart above shows the maximum decline the STI has experienced in the last 30 years.
There were two years (1998 and 2008) when the decline exceeded 50%, and in many other years, the declines usually averaged between 10% to 20%.
The above provides an indication of the fluctuations in stock prices that occur in a typical year, and should prepare you for the volatility as a new investor.
There’s good news, though.
This next chart shows the odds of making losses based on your investment holding period.
Source: S&P Global Market Intelligence
Note that the chances of making a loss fall dramatically once you hit the 10-year mark.
Based on past data, if you can hold on to your stocks for two decades, there’s a zero percent probability of incurring a loss.
This simple chart shows that it is “time in the market” that is important, rather than trying to “time the market” for that perfect entry.
Before you start investing
Now that you are all set to make your first move, there a three important things to remember before you start investing:
Before you start investing, here are a few important points to take note of.
1. You should ensure that you have at least six months worth of cash for emergencies.
This is a general rule of thumb in case anything unexpected crops up.
With this buffer, you won’t be forced to sell your shares at the wrong time.
2. If you need cash for major financial commitments in the next five years such as the purchase of a house or car, or to start a family, then do not invest this amount.
You should only invest any cash in excess of this amount.
This is to avoid a situation where you have to sell your stocks at possibly low prices to raise cash for large purchases.
3. Finally, do not pour all your available cash into the stock market at one go.
Take your time to learn and gain more knowledge about investing and businesses.
Over time, as you grow more experienced, you will have the confidence to commit more cash.
It’s also important to learn from your mistakes, and those mistakes will be kept much smaller when you’re just starting out.
Best stocks for beginners to start investing
To help you get started, you can take a look at stocks that are suitable for beginners.
The REITs mentioned above make good candidates as they have a great track record of paying out distributions and are backed by a strong sponsor.
Other REITs with stellar distribution track records include Parkway Life REIT (SGX: C2PU).
If you’re searching for a mix of stability, growth and dividends, you can consider blue chip companies.
Blue chip companies are large and reputable corporations that have a long operating track record.
An example is Singapore’s largest bank, DBS Group (SGX: D05).
Other blue-chip stocks include real estate giant CapitaLand Investment Limited (SGX: 9CI).
Over in the US, growth stocks such as Apple, Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOGL), which owns the search engine Google, could constitute possible investment candidates due to their size and earnings stability.
Why do share prices move up and down?
There are two key reasons why share prices move up and down.
The first reason is the company’s revenue, earnings and cash flow.
When a business earns higher profits, it becomes valuable.
And when its value increases, investors are willing to pay more for its shares, thus bidding up its share price.
The same also occurs when a company pays out an increasing dividend.
Yield-focused investors who desire the dividend will then push up the price of the stock as demand exceeds supply.
The second reason why share prices move is due to expectations, sentiment, and psychology.
If investors believe that a company is poised to do well, they will willingly bid up its share price to own a piece of it.
Reasons could include the winning of a major contract or positive news about the industry that the company is in.
In all the above scenarios, the converse can also happen.
If a company reports a decline in profits or even losses, it will become less valuable and investors will pay less for the business.
If bad news hits the company, for example, due to a lawsuit or a ban on the sale of their products and services in certain countries, investors could also sell down the stock in anticipation of lower profits and dividends.
Bear in mind that share prices can also rise and fall for entirely random reasons that are not related to any of the above.
The need to diversify your shareholdings
As the saying goes – there is no sure thing in investing.
Random and unexpected events means that not every company is guaranteed to succeed.
As such, as a new investor, it’s best to diversify your shareholdings.
Diversification consists of two main aspects.
The first is to ensure you purchase a portfolio of stocks that cover different industries and sectors.
For instance, buying all three of Singapore’s banks, namely DBS Group, United Overseas Bank Ltd (SGX: U11) and OCBC Ltd (SGX: O39), does not constitute adequate diversification as all three belong to the same industry.
Instead, an investor may consider owning a couple of REITs, a bank, or a telecommunications company such as Singtel (SGX: Z74).
Throw in a consumer goods business such as Fraser and Neave Limited (SGX: F99) and a vehicle inspection business such as VICOM Limited (SGX: WJP), and you have successfully set yourself up to owning a smattering of businesses in different sectors.
The second rule is to diversify across countries and exchanges where possible.
This involves purchasing stocks that have exposure outside of your home country.
An example could be the purchase of a Chinese e-commerce business Taobao, owned by Alibaba Holdings (SEHK: 9988) or a social media company Facebook, a brand owned by Meta Platforms (NASDAQ: FB).
Building a robust portfolio
Your goal should be to build up a robust and resilient portfolio that can withstand different economic conditions.
Remember that the goal of investing is to make your money work harder for you.
While you chase returns, you should also keep an eye out for the risks involved.
By investing in strong, well-run companies that possess tailwinds, you can construct a sturdy portfolio that can stand the test of time.
A sturdy portfolio is akin to a tree with strong roots.
Should the tree encounter a violent storm, its roots will anchor it to the ground and ensure that it will not topple.
Your investment portfolio should be as resilient, too, and be able to withstand economic storms.
Depending on your personal investment goals and circumstances, you may also wish to go for a mix of growth and income stocks to enjoy capital gains and dividends, respectively.
Get Smart: The most important step
You are one step closer to building your own investment portfolio and can now work towards growing your pot of gold to meet your financial needs.
Now that you’ve read through this guide, you should have the basic tools to get started.
By enriching yourself with knowledge, you can now start to craft your investment process to suit your goals.
Start investing now to build your investment portfolio and work towards a comfortable, worry-free retirement.
If you’re nervous, confused, or worried about buying your first stock, then our latest beginner’s guide to investing can help. It’s easy to read yet packed with valuable insights. Download it for free today, and buy your first stock in the next few hours. Click here to get started.
Disclaimer: Royston Yang owns shares of DBS Group, VICOM, Singapore Exchange Limited, Apple, Meta Platforms, Nike and Alphabet.