Updated: Dec 29, 2019
Disclaimer: Please note that this post is designed to help those with little knowledge about the stock markets to understand it better. If you are an experienced trader or investor, you may want to skip this. The following content is going to be a layman’s presentation about stocks and is purely for educational purpose. Please exercise your own discretion and let’s begin.
How does a stock come about?
When a company targets the public (you and I) for funds to grow its business, it files for an Initial Public Offering (IPO) to get listed on stock exchanges such as Singapore Stock Exchange (SGX), New York Stock Exchange (NYSE), Hong Kong Stock Exchange (HKEX) etc. For your info, some well-known local companies such as Koufu and Propnex filed for IPO on SGX in 2018. Levis filed for IPO just a few days back on NYSE.
The company now has its stock listed with a unique Ticker Symbol usually a 3-4 letter combination of numbers and letters. Alibaba is known as BABA in the NYSE, Singtel is known as Z74 on the SGX, and Tencent is known as 700 on the HKEX etc.
In exchange for the public funds, the company gives the public “a part of their business”, albeit a very small one in the form of stock shares. A person can own “a part of their business” by buying shares of the stock. This give the person the right to vote for key decisions in the company AND more importantly, a portion of the company’s profit. To give you a sense, Alibaba has outstanding shares of 1,367,060,000. It is currently selling for US$180.97. Therefore, the market cap is simply 1,367,060,000 X US$180.97 = US$247 Billion. Now that’s the power of going public, where the big money lies.
Fun Fact: This is how Jack Ma become China’s richest man with a net worth of US$ 39 Billion. He didn’t earn a salary to have that kind of net worth. He owns shares of his company Alibaba that grew in value. If any, it’s the public that made him rich.
How do I buy shares?
To buy shares, all you need to do is to open a brokerage account that have access to the stock exchange where the stock you want to get is listed on. Example, you can’t buy Alibaba stock on SGX as they are listed at NYSE or Nasdaq. Therefore, you need to find brokerage that offers exposure to NYSE or Nasdaq to purchase Alibaba.
If you don’t have a brokerage account yet, you can consider starting with Saxo Capital Markets which has exposure to global markets. It has one of the lowest commissions % and minimum fees amongst the brokerages in Singapore. You may also refer to the following link to do a comparison of the brokerage: https://blog.moneysmart.sg/invest/investment-brokerage-singapore-guide/
A cash reward of $150 + $100 is now given to those who open a brokerage account with the Saxo and perform 3 margin trades. You may refer to https://www.jayronong.com/earn-free-cash for more information. The things is, you can also start referring your friends for referral fees as well. https://www.home.saxo/en-sg/accounts/referral
I am not sponsored by Saxo Capital Markets whatsoever. I just found this Lobang that is available to all its clients. Don’t say Bo Jio.
How much cash do I need to buy a stock?
Note that in US, you can simply buy just 1 share. Whereas in Singapore, you must buy at least 1 lot of 100 shares. Currently, Alibaba price is about US$180 and thus you can buy 1 share of Alibaba for just US$180 before commissions. On the other hand, Singtel sells for S$3 per share. To buy Singtel, you need to buy a minimum of 100 shares and thus that costs S$300 (more capital needed). Don’t ask me why like that, ask SGX.
How do you make money in the stock market?
1) Cash Dividends
Long story short, the company pays a portion of its net profits to you, depending on how many shares you hold. The pay-out could be quarterly, semi-annually or annually. To understand how much you would get, you must know what dividend yield is.
Dividend receivable = Dividend yield X Number of Shares X Stock price
For example, if a company announces 5% dividend yield. And you own 100 shares at a share price of $1. That means you get 5% X 100 X $1 = $5 annually.
Listed below are some local brands and their dividends yields. You may find the information of Singapore's stock at www.investingnote.com.(Just key in stock name and look under the Fundamentals tab)
Usually, companies give big dividends as their businesses generate huge cash flow and they don’t aggressively use the cash generated to expand and grow. However, it is important to note that if a company dividend yield is high, it doesn’t mean it’s good. Offering high dividends to attract investors may be a warning sign of the company’s struggling need for more funds. For example, Hyflux was issuing preference share of 6% dividend yield to retail investors before we know it all came crashing down.
There are other companies that don’t even give any dividends at all! Nani!? I will explain why in the following section.
2) Capital Appreciation
Capital appreciation is simple. If you own 100 shares of a stock at $1 (100 x $1 = $100) and the share price rose to $2, the stock is now worth $200 (100 x $2 = $200). You can sell to realise a $100 gain.
The reason why some companies don’t give dividends is because they use the dividends to grow their company or even buyback their own shares to raise the stock price. Examples are: Alibaba (BABA), Google (GOOG), Netflix (NFLX), Tesla (TSLA). You may find the above US stocks information at www.zacks.com. These stocks are commonly known as growth stocks and the returns to investors is highly dependent on the stock prices. If the stock prices go up, investors make money through capital appreciation.
Unlike dividend stocks, where price is largely stagnant (tell that to Singtel where the share price is about S$3 in 1994, and is still S$3 today.), growth stocks can show crazy share price growth that can make you salivate.
When Google went public in August 2004, its share price was at about US$85. Taking into an account of a stock split in 2015 (corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares.) the real return is actually 22X according to Fortune. This article is released in August 2017 when price is still around US$960. Today it is US$1,180. So, the real multiple is estimated to be 27X. If you have invested $40,000 in google in 2004, in just 15 years, you have $1M in net worth today. That's about $64,000 per year, which may be more than the annual salary of some people.
You may refer to Google's stock chart below to witness the exponential growth. If you don't know how to read one, it will be taught in future posts. There are several free charting available online for free. For me, I use Investing Note for SG stocks. For US stocks and options, I use Thinkorswim. For Forex, commodities and all others, I use Trading View.
Although growth stocks can make you lots of money, a strong leap of faith is needed from investors as they don’t receive any cash while “owning” the business. Investors can only “hope’ that the share price rises. Some failed to rise to expectations, just like Yahoo!
In conclusion, there are so many stocks out there in the market (about 7000 in US, and 800 in SG). We clearly need to understand the nature of the stock and research the fundamentals of the company. It shall suit our needs (e.g. dividends or growth, time horizon, risks aversion) before we decide to buy the stock. The overall economic cycle and technical analysis also play important roles in timing our entry.
As the saying goes, price is what you pay, value is what you get. A smart investor knows to buy and accumulate fundamentally strong companies when the market is pessimistic and price is at a discount.
In addition, you need to manage your risks adequately. Before you fire the buy trigger, have you asked yourself:
When will you exit the trade? (stop loss),
How much shares shall I buy? (position size),
Do I need to have insurance (hedging with options)?
How dangerous a gun is, is not the fault of the gun, but the fault of the gun holder. Once you know how much the recoil will be, you know how to handle the gun safely - same for any investments.
In my future posts, I will discuss how to choose stocks as a value investor as well as trading methodologies. Feel free to also share this with your friends too. Thanks for reading!
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