Basics 1 – Understanding Investment

Investment is the act of putting money in some thing in order to achieve profits.

There are many ways we can invest, for example:

  • Buying the stock of a company, and making a profit when share prices rise
  • Putting money in the bank, and earning interest rates
  • Using different forms of saving / endowment plans that earns you a return
  • Buying and selling or renting a property
  • Buying various currencies and selling them when rates changes
  • Lending money to government and companies, in terms of bonds in exchange for a fixed return each year
  • Buying rare wines / custom guitars / limited edition coins and stamp and reselling them
Wine
Do you know what is the best kind of wine that appreciates in value, how to store them and where to sell them? In that case, wine investment may be suitable for you.

Key point 1:

The key to making money is to know what you are doing, and do it well.

For simple investors, we recommend beginners and most people to stick with stocks for liquidity and the ease of access to information.

What are stocks?

When a company is founded, it is classified as an individual. It can own buildings and take loans under its name. So how do we know who controls this company? The company does that by issuing shares.

Shares are the specific ownership certificate issued by a company.
A stock is a general term for an ownership certificate of a company.

greyhound_stock_certificate
A stock certificate

Holding a share out of a total of 100 means you have 1% ownership of the company. These are the power you hold as a shareholder:

  • A claim on the assets of the company
  • A claim on the earnings of the company, and any money the company decides to distribute back to its owners (known as dividends)
  • A say in who runs the company and important decisions that affects the interest of the company (by voting)

A claim means that while you own 1% of the shares issued by the company, you do not directly own 1% of its assets. You cannot walk into a company and take 1 out of 100 chairs it owns.

How do I own stocks?

There are various ways to own shares of a company, and the most common being

  1. Buying them from the company when it issues them when it first list on the stock market
  2. Buying them from the stock market, from other shareholders who wants to sell them
  3. Buying them when a listed company issues more stock to raise funds

The exact process of buying and selling stocks will be discussed in our future post.

Investing or speculating

Not everyone who purchases stocks from the stock market is an investor. To invest, you need to be making rational decision that gives you the highest chances of making a profit.

Speculation on the other hand, is like gambling. It’s purchasing a stock with hopes that it will rise further, without understanding or caring why stock prices are going up. Some forms of speculation includes:

  • People who buy a stock, lets say Keppel Corp, because it fell to $5 (from $10) and the price is ‘cheap’ now.
  • People who buys on rumors and even news without actually calculating the effect of the news. (etc. company taking over another)

A simple test to know which you: are you hoping for share price to increase, or do you have some basis to determine why it should increase?

Learning to separate the price of a stock, from the value of the company is an important topic we will talk about in our later articles.

Key point 2:

Investors, with a strong and valid reason to expect the share price of a stock to rise, should expect to profit from the stock market in the long run.

Key point 3:

The price of a stock doesn’t determine how cheap or expensive a company is. The value of the company determines if you are paying too much for a stock.

About the author: Simple Investor SG