MENU

Step 11: Buy Your First Shares

When you buy a share, you’re purchasing a stake in a living, breathing business. Buy shares of your favourite real estate company and you own a part of the company. Literally. Every time someone buys a new condominium, a tiny bit of cash drops to your company’s bottom line. High five, shareholder!

Finding great share ideas is as simple as opening your eyes in your everyday life. Your home, your mobile phone service provider, the bus or taxi on the road, or even your doctor: all hotbeds of investment ideas. Behind virtually every successful product or service may lie a publicly traded company that’s cashing in on that success — and that you can join as a business partner.

Better know a better business

But a great service or product does not a great investment make. Try to think of buying shares in a company as buying a stake in a local small business. Does the business have staying power? How much cash flows in and out of the business? Do you trust the management and employees to do right by you as an outside investor? These are hardly the kind of questions that you would need a Harvard MBA degree to ask.

We Fools take the same common sense approach to investing. We’re interested in the strength of a business. Not past performance, not charts, nor whether the shares trade at 10 cents or $50.

Specifically, here are a few things we look for:

1. A sustainable competitive advantage: Some businesses have unique, lasting competitive advantages that allow them to earn outsized profits. The more durable a company’s competitive advantage, the larger the “moat” that surrounds its financial fortress. Think about… SATS and Singapore Exchange. They are good examples of businesses with sustainable competitive advantages.

2. Cash aplenty: Cash is the lifeblood of any business. It pays the bills and covers the tab for new growth projects. Fools look for low-debt, cash-rich balance sheets and steady cash flows. Specifically, free cash flow — the cash left over after funding operations and growth — fuels share repurchases and those sweet, sweet dividends that show up in your bank account every six months.

3. Strong leadership: Is management invested alongside you? Do they have a history of creating value for shareholders? Do they have years and years of relevant experience? Do they treat outside shareholders (business partners) with respect?

If you stumble across a company that nails all of the above, odds are good that you’re looking at a great candidate for your hard-earned cash.

If you need help in finding such great companies, luckily you’re in the right place. Here at The Motley Fool, in our free regular emails, our special free reports, and our premium research newsletters, we aim to highlight the very best companies trading on the Singapore and even the US stock market. Click here to receive, for free, the best of our content sent directly to your email inbox.

Now you’re ready to buy your first share

You’ve paid off your credit cards. You’ve saved up an emergency fund. You’ve opened a brokerage account. You’ve done your research, compared notes with like-minded Fools, and found the share of your dreams. Let’s get going!

Ease back on the throttle!

Hey, we’re just as excited as you are that you’re ready to be a share owner. But before you go start charging into the stock market with your cash and gusto, let’s keep some perspective.

First, this is just one of many investments you’ll end up owning. That’s to say, you want to invest in sips, not gulps. Your first purchase should be small in size but big in spirit. Second, don’t forget that your first investment is also a learning experience. As any craftsman will tell you, there’s no better way to learn than by doing.

A journey of a thousand miles begins with a single step. And that’s what we recommend to you: Buy a single share of your favourite share. Just one. This one share will teach you more about life as an investor than we could ever hope to teach you here. Follow it. Get to know it. Read the quarterly earnings releases, listen to the conference calls, and see how the share’s daily fluctuations affect you. For future share purchases, you should keep trading costs and commissions to less than 2% of your total purchase amount, but we’ll let that slide on your first buy.

But there’s something else we want you to pick up while you’re making a stop at your friendly broker: A stake in an index fund.

The passive investor’s best friend

How many times have you heard someone ask, “How’d the market do today?” But what is “The Market?” And how do we know how it did? Usually, the answer reflects the performance of an index — such as The Straits Times Index — rather than the market as a whole.

What all indices have in common is that the value of the index changes proportionally to the value of the shares in the index. So when the index goes up, the aggregate value of the shares in the index has grown by a proportional amount, and vice versa.

And you can invest in those indexes — through index funds. These funds don’t look to beat the market — they look to match it as closely as possible. That might not sound enticing at first blush, but consider that index funds offer:

  1. Instant diversification: When you invest in an index fund, in one fell swoop you’ve spread your dollars across industries, markets, currencies, and countries, substantially lowering your risk in the process.
  2. Low costs: Index funds have much lower expenses than actively managed mutual funds.
  3. Superior returns as compared to a typical fund.

Little wonder that we think index funds should be the foundation of your portfolio. But for now, we simply recommend that for every dollar you put into individual shares, you roll the same amount into an index fund.  To learn more about index funds, and the type of funds available here in Singapore, visit our Managing Your Portfolio Guide.

But about that share
Yes, we Fools love index funds, but we also believe everyone should own at least one share (and ultimately, at least 15 to reduce your risk and increase your odds for success). Why? Well, it’s fun (really!). By owning a share, you have your own little piece of history, and you get to witness firsthand the power of capitalism and entrepreneurship at work.

But just as important, if you want to beat the market, you simply can’t do that by investing only in index funds. In fact, your goal for every share you buy should be to outperform the index. So get out there and start having some fun on your way to market-beating returns.