5 Things To Know Before You Start Investing

So you have saved up some money and are unsatisfied with the little return you are getting from keeping your money in the bank? You heard about how you might be able to earn a little extra from investing in the market. You saw your friends doing it, you have seen movies about it and now you think you are ready to start your investing journey as well?

Well, hold your horses. If you are unprepared and rush into the stock market, you could very well end up poorer, not richer.

Therefore, before you even start buying your first stock in the stock market, here are 5 key things to know to prevent you from getting hurt in the market.

  1. Know the difference between investment and speculation

Many of us started out wanting to be investors. Unfortunately, more often than not, we tend to be speculators at the beginning. There are sharp differences between the two and the key lies with the mental framework within us.

A speculator is someone who bet on the direction of a share price without understanding about the business of the company. A speculator hopes to make a profit in the short term, typically in a few days or months. He (or she) does that by trading in and out of a stock constantly, spotting trends from the charts.

An investor on the other hand, is someone who invest into a company based on fundamental reasons. He (or she) see a stock as a part ownership of a company. When he invests, it is typically for a longer term, counting in years. He researches about the company before he invests, by understanding what the company does, how it makes it money and how it can grow in the future.

Thus, the first thing before you start investing, is to think like an investor, not a speculator.

  1. Know your accounting

To understand a business, we have to read its annual report, understand its financials. That means we should at least have some knowledge of simple accounting. We need to know what is a balance sheet, an income statement and a cash flow statement and how each of them relates to one another. You would need to arm yourself with basic financial tools. Click here to find out some of the most commonly used financial ratios!

  1. Know your sources

Next, we need to know where to look for these information. Firstly, Google is the best source for anyone. Google the company you are interested in, find its website, news about it and forums on what others think about the company.

For more specific information, here are some sources for the market markets in Asia Pacific.

  1. Know what is leverage and why not to use it

When you are investing, you will come across the term leverage or margins. Brokerages will offer you such services as a way to increase your profits. Margin is basically a loan given to you to purchase a stock. However, be warned. Leverage is a double-edged sword. It can increase your profits, but it can easily increase your losses as well. If you are not ready to lose everything you own, it might be easier to stay clear of leverage.

  1. Follow a few companies

Now that you have a clear mindset of what an investor is, you know some basic accounting, know where to find the sources to do your research, it is time for you to hunt for some companies. Many companies you come across on a daily basis are listed companies. Companies like MTR Corporation Limited in Hong Kong, Singapore Telecommunications in Singapore and Tenaga Nasional Berhad in Malaysia are all listed companies that serve the local communities on a daily basis.

Find a few companies you are interested in and start following their news and financial first without investing in them. In this way, you will get a clearer picture of how each companies operates and what are the growth prospects for them.

I hope these 5 things would help you on your journey in becoming a better investor. If you have any comments or questions, just drop us a message and we would be glad to help you on this journey.

Stanley Lim, CFA

Stanley Lim has spent the last decade in the investment industry. Over the course of his career, he has kick-started a few businesses, worked in the family office industry and most recently in the investment advisory industry. He has been a writer and analyst for The Motley Fool Singapore from 2013 to 2017. He has written close to 2000 articles online, on investment education and market analysis. He is the co-writer for the upcoming investment book: “Value Investing In Asia”, scheduled to be published late 2017. Stanley is currently the chief editor of Value Invest Asia.

4 thoughts on “5 Things To Know Before You Start Investing

  • May 1, 2017 at 1:47 pm
    Permalink

    On point #2, how much do Malaysian accounting standards differ from US ones?

    Reply
    • May 1, 2017 at 3:12 pm
      Permalink

      Hi Marc,
      most countries, including Malaysia follow the International Financial Reporting Standard, commonly known as IFRS.
      The key difference between IFRS and US GAAP is their philosophy. IFRS focuses more on principle-based while US Gaap is rule-based.
      Examples of their difference includes the recognition of intangible assets. US GAAP allows acquired intangible asset to be recorded at “Fair value” while IFRS only allow you to recognise any value to the acquired intangible asset if the company can prove that the asset has future economic value.

      Other things like the recording of inventory and stock-base compensation can be different as well. for a full list, you can read the report from PwC.
      https://www.pwc.com/us/en/issues/ifrs-reporting/publications/assets/ifrs-and-us-gaap-similarities-and-differences-2014.pdf
      However, for an investor, we do not need to worry too much about the difference unless we are comparing two similar companies using different accounting standards.
      Apart from that, just knowing basic accounting like reading an income statement, balance sheet and cash flow statement is suffice for us to start investing in the market.

      hope that helps
      Thank you for the question.

      Reply

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