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The Definitive Guide: How to Start SG Stocks Investing [Part-2]

The Definitive Guide To SG Stocks Investing Part-2

The Definitive Guide: How to Start SG Stocks Investing: Part 1 | Part 2 | Part 3 | Part 4

Introduction

I hope you have enjoyed reading part 1 of the definitive guide to SG stocks investing.

I have also included some Q&As at the bottom of the post answering some questions you might have on SCB brokerage account.

Before going further, let’s have a little recap on what has gone through on my previous series.

  1. Getting your brokerage accounts ready. I highly recommend SCB
  2. What stocks are exactly. A portion of ownership of a company.
  3. How do stocks started? It started at the very beginning where an individual decides to set up a company.
  4. What are the benefits of being a shareholder? Lots of it. Mainly entitled for dividend payment, right to vote, right issues and etc…

The large part of this post will be on Strait Time Index, as I believe it is one of the most important things you need to know in stocks investing before you even started buying stocks.

It’s not all about stocks investing but also how it can be used as a reference point for us to determine whether an investment products are considered appropriate in term of risks and returns.

To many outsiders, stock investing is often seen as a risky endeavor. There are many stories around it but sadly most of it are bad ones. Even the good stories are bad.

It’s bad because it’s often hard to deter away from the notion of gambling.

There are very little people who look at the numbers behind the market. And mostly have an inadequate understanding about what investing really is, and what lesson has the history of stock markets have left us with for us to make an informed approach to stocks investing.

More importantly, I’ll also be sharing what sort of perspective and expectation an investor should have on stocks investing so to avoid what I believe is unnecessary pain and frustration.

Since this is a guide that is written with the view of a starter like myself a few years ago, I think it will be at best for me to address some of the commonly asked questions that I found in the forums.

I’ll start off with the question “is it worth paying thousand to stocks investing seminar/course” before getting down to the core topic of this post.

seminar

Is Investing Seminar/Course Worth Paying Thousands?

First let me express that it’s very easy to say that you should not when you are not a beginner.

There are books from a library that you can borrow, free information on the internet. And free educational videos on YouTube.

In fact, there are also plenty of published reports and studies from some renowned financial institutions that we can assess to without forking out a dollar.pay

So why pay for it?

We like to subscribe to the notion of investing in ourselves. So isn’t investing with thousands of dollar on an investment course/seminar considered a form of investment as well?

There are people who dislike reading, lacking the time for in-depth research and study due to heavy family commitment. Does that mean that it is wrong for them to spend thousand of dollars so that they can shorten their learning curve and to jump start their investing journey?

My point is everyone comes from a different background with a different financial situation. If an individual who has a capital of $200-300K in his bank and every day having it getting eroded by inflation.

To him, spending a $2-$3K would mean paying 2-3% learning fee to kick start his stocks investing journey. And to make 2-3% back from investment would probably take a year or two, or less. That doesn’t seem to be nonsensical after all.

However, on the other hand for an individual who only has ten to twenty thousand in his bank account. Paying the same amount of course fee just to learn investing would be outright insane.

For those individuals who are able to pick up through reading books and materials from the web would think that this is even ridiculous – why pay for it where you can learn for free?my take

My takes about paying for investment courses

Paying constantly? – Investing is like any other endeavors, you are required to learn constantly and you can’t possibly constantly paying over thousand dollars for it.

Paying makes you lazy – You can’t be lazy if you want to invest successfully. If you don’t have the time you should consider using the money to invest in STI ETF instead.

Being misguided – The intent and quality of a trainer is often unknown until you have paid and attended the class. Just because someone is able to crack jokes, and have a good record does not mean that his approach is viable or workable for you.

Suitability – You’ll never know what style suits you best until you have seen a variety of styles. And it will be too costly to achieve that through seminars/courses. However, it is easily achievable through online sites and books.

If I want to expose myself to dividend growth strategy I’ll go to TheDiv-netGreenbackd/AlphaArchitect for deep value investing and OakTree Memo by Howard Mark for getting investing perspective and insight.
upselling
You see those are apparatus or sub-section of stocks investing and I’m able to get it with a few effort of mouse clicks.

Too many upsellings – It usually comes with a cost of $20-$30 or free for a three hours seminar. They’ll tell you stories and persuasive reasons why you should invest then a few bit of teaching that can be easily covered by a single page of a book.

The sole purpose is to advertise their actual investment course. There’s nothing wrong with selling a course. What’s wrong is that you feel cheated as you come with a learning mind but turned out you are just a lead for their potential sales.

I don’t mean just the four digits courses, even those three digits courses work the same manner as well. And, I’m not only referring to the get-rich-quick seminar which is even worst. I’m also referring to SGX academy, SIAS, invest fair and more and more. This seem to be an industry practice which has to be changed for the good.

If you are the organization who happens to read this, I repeat it is NOT wrong and I don’t by any mean against upselling. What I’m against on is the waste of people time and money to provide a DEMO show of the actual course.

There’s simply no value-add at all, worst of all is to convince or add conviction to beginners that you need to pay to learn. It may be the case in 2005 but now is 2015!

Conclusion:

It is definitely alright to pay to learn and I often do that for myself too. The key is you need to know what you are paying for, and with no basic knowledge and fundamental on investing and finance it is likely you will not know what you are paying for.

So I do not advice to go for investment course until you possess the basic of investment. I have also written a guide on Singapore REITs investing that you might like to check it out.

Course recommendation:

BigFatPurse(VIMC) – $98, I attended this course myself at the start of the year, very educative and value for money.[This is affiliate link meaning I get commission for your enrollment but no extra cost on you]

FifthPerson(Dividend Machine) – Est: $200 I’ve not attended but I see good feedback from bloggers, and I believe their course provides great value from the way I see their blog.

SGX Academy – $20 onward, a lot of cheap courses most of it are quite rubbish and with upsell.

Discussion(I know you won’t listen to me, so I include this section for you):

http://www.valuebuddies.com/thread-6460.html

[OFFICIAL]Stock market courses discussion

[SERIOUS]How to choose a good paid stock market seminar?

Value Investing: Jump Start in Singapore

How Much Money Do I Need to Start Investing?

I felt the need to address this question as well, as there are plenty of misinformation and advice out on the street. It’s also the first few questions I had when I started out.

If you have ever asked someone who has invested(or thought they have invested) in the stock market. It is not hard to get a response like “If you don’t have $100,000 then don’t waste time.”

Don’t get discouraged by that, capital requirement is one of the many misinformation in stocks investing. It is a common notion that investing is for the rich.

30 sept 2015

30 sept 2015

Let’s start by looking at the numbers first before coming out with a conclusion.

We will start with Strait time index, the top 30 stocks by market capitalization(I’ll explain more on below.) This list easily has the most expensive stock price per share.

Any stock outside of this list can be a lot cheaper. I have listed out the top 30 stocks and use the average cost per share.

As you can see, in the past before the lot reduction on average it cost $5,000 to buy a single lot of shares. But now, you only need $500. Hence, if you are going to buy 10 stocks. At present, the bare minimum you have to pay is $5,000.

Of course, you can pick the bottom 10 stocks that will be a lot cheaper which is only about $1,200.

Note: Only in SGX you are not allowed to buy 1 share. It used to be 1 lot = 1,000 shares. As of early 2015, SGX reduced the trading lot from 1,000 shares to 100 shares. So now whenever you see the price on the price quote, just multiply by 100.

A share that shows $0.30 means you will have to buy at least 100 of it which means $30. Kindly note that 1 lot=100 shares only apply to SGX,as for international stock market it’s always 1 lot = 1 share unless it specifically indicated.

The Alternatives

STI ETF – I’ll explain in detail on below. At the time of writing, STI ETF is trading at $2.81 per share. So for 1 lot which is 100 the alternativeshares. That’ll will be $281! Hence, you only need to have $281 to buy 1 lot of units that consists of 30 top companies by mkt cap. in Singapore.

Lower Cap. – There are plenty of stocks that are trading at $2-6 dollar, and let’s assume that you are going for 10 stocks. That’ll be around $2,000-$6,000.

DCA Approach – Dollar cost averaging means that you invest a fixed amount of money on a regular interval, usually monthly. This is like the saving-plan method, set a fixed amount of money a set every month for saving. In the case of STI ETF will mean to invest $281 monthly – depending on the price at every month.

This solved the problem of not having sufficient capital for a lump sum investment.

Conclusion:

You don’t need $100,000. Not even $10,000. Somewhere $3,000 is good enough, and you don’t even need to start off with $3,000 if you are using DCA method.

For STI ETF with $280-300 in the first month is good enough, but remember to invest it monthly.

Making Money From Capital & Dividend.

There are two main ways that you can make money from investing in stocks:

Share price appreciation – Capital gain / unrealized gain

Wait, what is capital in the first place?

You still remember on my part-1 guide. Capital refers to the amount you invested. For easy explanation, if you bought a stock at $1.00 and it increases to $1.20, you have a capital gain of $0.20.

making money

But wait.

Does it mean that you have $0.20 more in your pocket? Remember our property(HDB) used to be a lot cheaper in the past say $200K for a flat, but now it easily valued at $350K. Again, does it mean that we have $150K in our bank account?

You probably have the answer. That’s no. Because we have not transacted the assets. You need to sell it in order to receive the money.

So a capital gain is also an unrealized gain. A gain of capital that is not yet realized as you have not sold it. The same applies to loss as well, a capital loss is a loss when the price of the assets fall below the price that you paid.

But because you have not sold it hence the loss is an unrealized loss.

Note: Capital gain/loss even though it has not realized. It is a real gain/loss, just because you refuse to sell it on an unrealized loss that does not that you are not losing money!

Through collecting dividend from stocks

In order for you to make money from capital gain, you will have to sell the stock to realize it. Dividend is one of the way that you do not need to sell your stocks and yet you are able to receive the money.

If you are aware of what a company is. Then you probably know that company money is not belong to shareholders entirely, both are separate legal entity.

A company makes profit through its business conduct however that profit does not belong to shareholder rather it’s under the company’s account.

Dividend allows the company to share their earnings with their shareholders.

Note on profit distribution: Dividend is a form of profit distribution to its shareholder. Profit distribution means that if the company has zero or negative retained earnings it will not be able to declare dividends to shareholders. Since there isn’t a profit in the first place.

Strait Time Index

If there is one thing you need to pick up for Singapore stocks investing, this is the one thing that you must know. Yes it is a must. Because STI teaches you how to defense yourself financially in the world of finance that is full of scams.

Strait Time Index is also known as STI. It is an price index that represents the top 30 largest companies in Singapore by market capitalization, with companies like SingTel, OCBC, UOB…. aka Blue Chips

BigFatPurse has the best guide on STI ETF, for more info click here.

How To Be An Investor That Doesn’t Get Scam?

The reason why I say that STI is the most important thing for a starter to know in stocks investing is because it is often used as a reference to determine a country’s economic performance.

Not only that, it also gives us a reference point to determine whether an alternative investment is appropriate given to its risks and returns.

The average STI ETF annualized returns is 7% over the past 10 years. For more info click here.

Annualized returns: Are period returns re-scaled to a period of 1 year. This allows investors to compare returns of different assets that they have owned for different lengths of time. – ycharts.com

For example if you make 50% over 2 years, the annualized returns will be 25% per year. Actually this is not the correct way to calculate but just to help you visualize the idea. The reason is because 50 is in a percentage form which has to base its percentage on a number. The correct method is to use a geometric mean rather than the above arithmetic mean, click here if you need to calculate.

In this example, that will be 22.47%. Annualized returns is also known as CAGR = COMPOUND ANNUAL GROWTH RATE. Sound complicated?

It’s quite easy to understand, let’s use the same figure as well

For a 50% gain over two years. That means if you invest with $1000, two years later it will be $1500.

1st year – $1,000 with a 22.47% = 1,225.
2nd year – $1,225 with a 22.47% = 1,500.

Now you get the idea? If you were to use 25% that will be wrong, because it does not factor in the compounding effect.

CAGR and Annualized returns are both used interchangeable. All mean the same thing. FYI if you have tried to manually calculate STI ETF CAGR, you will notice that your answer would NOT be the same as it shown in SPDR, that’s because you did not factor in the dividend, the actual calculation is more much complicated.

Always compare it with STI

So if someone walks up to you and says they can make you 10% returns in one month. Without a second thought you would tell outright that it is a SCAM.

Let’s assume that it is not a scam, that would still mean one thing – extremely risky!

The right question to ask is this. If the average of the top 30 companies in Singapore only manages to provide 7% annualized returns, what are the chances that the alternative investment product can outperform that without taking a significant amount of risk?

10% in a month would mean 120% in a year. Doubling your investment in a year, seriously? How many companies are you able to name out that is doubling their revenue and profit in a year?question

Google? Apple? Facebook?

Extremely rare isn’t it? Those tech stocks are easily 1 out of a million. Another perspective you can put on is to think, how does that “investment” makes its returns from.

In order to pay you 10% in a month, that means the investment vehicle would require making more than 10% isn’t it? It has to pay its operating expenses and etc.

The scary truth may end up that they are delivering the returns through getting fresh capital that comes from naive investors that are making the 10% possible.

Again, this has been longer than I expected there are simply way too many things I want to cover. I will stop over here for the meantime. Do you know this is 3,000 words post!

I’ll try not to exceed that words count to prevent making you falling asleep.

If you find the above useful then subscribe to my blog by entering your Email address below, so I know you love it and it will keep me going for more and more and more.

And I will see you all next time!

Happy learning!
GV

PS: Hit the SHARE button! So that people around you know that you found an awesome guide.

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