Stocks are the most common financial asset when one thinks about investing. Stocks are also known as shares or equity as when you buy a stock, you are buying a share or equity into a company or particular commodity. As a shareholder, you are part-owner of that company. You make money on the stock market in two ways:
- If you sell the stocks of the company at a higher price than what you bought it for, you would earn a profit or what is called a capital gain.
- If the company you own stock in has high profits and in turn pays out dividends to its shareholders, you receive money once, twice or four times a year (depending on the company’s policy).
In Singapore (on the SGX), shares are mostly traded in board lots of 100. If a share is priced at $1, you would pay $100 to invest in one lot of shares (excluding transaction costs). You can buy stocks through your stock broker and you can buy stocks of Singapore companies and foreign companies traded on the SGX or other stock exchanges available from your stock broker.
Choosing the right stock to buy which will earn you money in one of the two ways listed above requires skill and experience to analyze a stock. To know whether a stock is a potential good pick, investors analyze a stock or company using methods known as Fundamental and/ or Technical Analysis.
Fundamental Analysis is the process of analyzing a business’s financial statements (assets, liabilities, earnings, cashflow etc) to determine the intrinsic value of the business in relation to its stock price.
Technical Analysis does not look at the health of an individual business but focuses on trends, patterns and forecasting the direction of stock prices through the study of charts including past market data, primarily price and volume.
You will often see the term “blue chip stocks” or “blue chips” when it comes to stocks. Blue chip stocks refer to well-established companies that are financially very stable. Blue chip stocks are considered safer bets (but not guaranteed) and many of these companies also pay out dividends on a regular basis.
At the moment, just 30 of the 800 companies listed on SGX are blue chip stocks. These include companies like SIA Engineering, Singapore Press Holdings, Singapore Telecommunications and Starhub.
Another term you will see is “small-cap stocks”. These refer to smaller new companies that are in the early stages of growth and are very volatile. However, the upside is that if the company turns out to be a winner (like Google or Facebook), the value of the stock can skyrocket and you can make a lot of money. Small-cap stocks are considered very risky but with the potential of growth.
You can read more about stocks here.
Bottom Line: Stocks are the backbone of any portfolio that brings in significant returns and growth to your portfolio. However, as stock picking requires skill in analyzing the stock and company, it requires an investor with knowledge and experience.
So, while stocks will form a significant part of your portfolio when you become a more experienced investor, stocks should not be the very first investment for a new and/ or passive investor.