For a new investor, a stock market can be scary place.
The amount of information out there can leave you feeling like you’re swimming in a vast ocean, uncertain of which direction to go. But do not fret; I would like to offer are three simple tips to help you get started in investing sensibly in the stock market.
View stocks as businesses
In the Singapore stock market alone, there are more than 700 stocks to invest in. Behind every stock is a business. As such, we should not treat stocks like pieces of paper to be bought and sold willy-nilly.
Warren Buffett, one of the world’s most renowned investors, once said:
“Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.”
What he means by that is that we should get to know a company inside out before committing any money into it. It’s not too different from when we shop for a new electrical appliance. Before we buy, we would do thorough research on it by checking reviews on the internet, comparing different products and the price, before parting with our cash.
The same applies to businesses.
Before we buy any stock, we should research the underlying business thoroughly, such as its financial statements, its competitive advantages, and its management. We do also want to ensure that the valuation of the company is not exorbitant.
Don’t be tricked by dividend yield alone
The dividend yield of a company gives you an idea of how much dividends you are getting for the stock price that you are paying.
For example, if Company X’s dividend per share is S$1 and its stock price is S$10, the dividend yield of Company X is 10% ((S$1/S$10)*100%). However, this dividend yield in itself does not tell us if the dividend is sustainable. Another firm, Company Z, with a dividend yield of 5%, may offer more stable dividends than Company X.
So, never buy any stock based on high dividend yields alone.
Go back to the drawing board and check the company’s financials before buying such dividend payers. To learn how to determine a firm’s dividend sustainability using StarHub Ltd (SGX: CC3) and Singapore Telecommunications Limited (SGX: Z74) as examples, you can head here.
Keep emotions in check
When it comes to investing, we should have a long-term view, and invest more in stable businesses whenever the stock market throws a tantrum.
From 1993 to 2017, there were a total of 6,411 trading days where the Straits Times Index (SGX: ^STI) more than doubled (excluding dividends). In that period, however, there were 870 days when the index lost 1% or more, 242 days with a drop of more than 2%, and 90 days when the daily decline went past 3%.
This shows that over the 24-year period, despite small blips here and there, the stock market managed to generate wealth for investors. What is needed from the investor is patience and discipline, without fear getting in the way.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.