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.
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.
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!
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.
- Hong Kong
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.
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.