Investing is making your money work for you by getting your money to generate more money. Investing in stocks has consistently proven to be one of the most profitable forms of investment available.
The benefits include:
Immediate Buy/Sell so you can sell part of your investment any time.
Very low transaction cost.
The freedom to work at your own place, at your pace in your own time.
Easy monitoring — log in to the market from anywhere in the world.
Being able to maximise returns whilst spreading your risk.
A predictable form of investment if you know what you’re doing.
Putting you in control and freeing you of fund management fees.
Considerable tax advantages.
Things to watch out for:
The market can be a volatile place.
You must acquire knowledge of what you are doing.
You must monitor your investments.
You must learn the discipline to enter and exit the market on entry and exit signals.
Can Ordinary People Profit from the Stock Market?
Many people say things like “I’d love to get into the stock market” or “If I had more money, I’d invest in stocks”. Many people also believe that to make a profit from the stock market you either need to be rich already, be a full-time investment trader or be a financial whiz.
Not necessarily so.
Let’s take a look at three different scenarios of ordinary people in the stock market to see how they fared. This will let us view how the process works, the different approaches, and how returns are generated.
The stock market is where the shares in companies are bought and sold, providing companies options to access capital, and investors opportunities to own a share of the company and enjoy potential gains from the company’s future performance.
The stock market offers people the ability to generate a separate income stream apart from their daily jobs, or income streams which are superior to those from traditional savings deposits. But before you even think about buying and selling shares, you must know the fundamentals of the stock market and of trading.
First time investors can become confused because of the terminology that is used to describe various market functions. These don’t take long to learn. Click here for your basic share trading terms. Incidentally, one common confusion is over the terms ‘ stocks’ and ‘shares’. Actually, they both mean the same thing and can be used interchangeably.
The Role of Bursa Malaysia
You can only invest in stocks through a stock exchange, an organized marketplace where stocks are bought and sold under strict rules, regulations and guidelines. The Malaysian stock exchange is called Bursa Malaysia. Bursa Malaysia has over 1,000 listed companies offering a wide range of investment choices to local and global investors. Companies are either listed on Bursa Malaysia Securities Main Market or ACE Market.
Raising Capital on the Stock Market
The Stock Market was created by companies wishing to raise capital for their business. When someone says they have a listed company they mean listed on Bursa Malaysia. All companies need cash to take advantage of growth opportunities. Many start-up companies however find themselves short of capital to fund expansion. One way to acquire this cash is to publicly float the company. This involves selling part of the company to private individual and institutional investors who are then able to freely exchange these stocks on an open market. Purchasing stocks in a company that is listed on the stock market is done through an Initial Public Offering or IPO.
Once an IPO has been issued, you can contact the company (phone, fax or email) for a copy of the Prospectus and complete the application to apply for an allocation of shares. Or you can wait until the company is floated and buy shares on the open market. Besides Bursa Malaysia, stock brokers will also have information regarding Initial Public Offerings.
Companies that are already listed can also raise additional money on the stock market by offering existing stockholders the opportunity to buy more stocks in the company. For example, a listed company wanting to raise additional capital might issue one new share at 5sen each for every three shares an existing investor owns.
When you buy shares, you are buying a share in that company and so you own a percentage of that company. When the company makes a profit, you share in that profit in the form of a dividend. Typically, the number of shares that have been issued multiplied by the share price gives us how much a company is worth.
Reading Market Reports
As a stock trader, you will begin to pay more interest to the business section of your local newspaper. Most feature a section that deals with Stock Market prices at close of the previous day. In this section, you will come across the following descriptions:
Year’s High – the highest price for a particular stock for the year.
Year’s Low – the lowest price for a particular stock for the year.
Stock Code – a unique numbering system to identify a particular stock.
Stock Counter – the stocks listed on Bursa Malaysia.
Cls’ng (Closing) – the closing price for a particular stock for that particular trading day.
+/- – the symbol for the increase or decrease in the stock price for that particular day.
+/-% – the symbol for the percentage increase or decrease in the stock price.
– stocks are normally traded in board lots of 100 units; lots traded will tell you the number of lots traded on a particular day.
Day’s High – the highest price for a stock in that trading day.
Day’s Low – the lowest price for a stock in that particular day.
– a dividend yield is a method of valuing stocks; it is calculated as
Cash Dividend per Stock = Dividend Yield
Market Stock Price
P/E Ratio(Price/Earnings Ratio)
– the information obtained from this will enable you to make a performance comparison of a company with that of the industry, and from one period to another. The formula is:
Current Market Price = P/E Ratio
Earnings Per Stock
Earning per stock – amount of a company’s earnings attributable to each ordinary stock of that company.
M Cap(Market Capitalisation)
– this shows the total value of a listed company’s stocks based on the current market price; calculated as:
Stock’s Market Price x Number of Stocks Issued
NTA per Stock
– this indicates the value of assets backing the stock of a company; calculated by:
Net assets of a company
Number of ordinary stocks in it
Reading the stock market performance section of the newspaper is an easy thing to do. You just need to do it a few times until you begin to feel comfortable with it.
A stock market index is a single number calculated from the prices of many different stocks. Index is also called indices when you talk about more than one of them. Indices are used as benchmarks of stock performance for portfolios like mutual funds.
Some investment funds (index funds) manage their portfolio so that their performance mirrors (tracking) the performance of a stock market index or a sector of the stock market.
For example, when you hear that the Consumer Price Index (CPI) for say, January to December 2005 increased by 3.0% to 109.1 compared with that of 105.9 in the same period last year. This tells you that the change in retail prices paid by households for goods and services increased in that period. CPI is designed to provide a broad measure of changes in retail prices.
An index is a tool which enables investors to measure the performance of a group of stocks from a defined market. It can form a benchmark for active or passively managed portfolios covering the particular market. Being part of an index is also a status symbol for the constituent companies and trading of constituent shares obviously supports the share price. Indices also allow the creation of investment products that give investors exposure to markets or groups of stocks which can help in markets where there are barriers to investment.
Stock market indices may be classed in many ways. A broad-base index represents the performance of a whole stock market— and reflects how investors feel about the economy. The most regularly quoted market indices are broad-base indices comprised of the stocks of large companies listed on a nation’s largest stock exchanges, such as the American Dow Jones Industrial Average and S&P 500 Index, the British FTSE 100, the French CAC 40, the German DAX and the Japanese Nikkei 225.
The Use of Indices
Stock indices have developed in the last twenty years to become much more than economic indicators (market barometer) and with growing developments in financial markets, more technical functions of indices have been brought to the forefront.
Stock indices are used by investors and fund managers as one of the many tools to evaluate the performance of a stock market The application of indices is now much wider including the use of indices as benchmarks for investor portfolio comparisons and as underlying components of financial products, for example Exchange Traded Funds (ETFs) and derivatives.
Bursa Malaysia Indices
The existing Bursa Malaysia indices are calculated using the market capitalisation weighted method.
Market capitalisation means the total value of a listed companies shares based on the current market price. Therefore the bigger companies are given higher weightage compared to the smaller companies