MAKING money from the stock market is never easy. So much so that even the most seasoned investor will tell you to think twice.
What about those who are thinking of putting their hard-earned savings into the stock market? Should you take the plunge? The following are some simple steps that, with a bit of luck and perseverance, will help set you on the path to investment success in the oh-so-tricky stock market.
Research first
Like any other potential investment, potential investors need to know what they're getting themselves into for jumping head first into something without the proper research can prove costly.
“Like any investment, you must understand what you're going into. Know what kind of returns you can expect to get from the stock market and be realistic about what you hope to get out of it,” says Malaysian Financial Planners and Advisors Association deputy president Robert Foo.
Licensed financial planner Jeremy Tan of Standard Financial Planner Sdn Bhd says it's best to know as much as possible about the company that you want to invest in.
“You need to do some research on its profit track record, balance sheet and earning yield for the last 10 years and get a good understanding of how its been performing. Only then will you be able to make an intelligent decision,” he says.
Setting goals
Once you've understood the fundamentals of the stock market and how it works, know what you want to achieve with your investments before pouring in your hard-earned money.
“Know how far you're able to plough into the stock market. If it's just RM1,000 or RM2,000, then it's not worth the risk,” says CTLA Financial Planners Sdn Bhd managing director Mike Lee.
Foo shares a similar sentiment: “If you're new (and don't have much money to invest), you're better off investing in a unit trust. This is because small investors cannot afford to lose money.”
The common mistake most potential investors make is that they go head first into the stock market with the intention of making big gains quickly only to get “burnt.”
Foo likens investing in the stock market to gambling on the outcome of a football match.
“If a team has been winning by say, one or two goals continuously, don't expect a sudden victory by a huge margin, like 20 goals! It's unlikely.
“The stock market is like that. If the counter has been fairly consistent, don't expect huge margins. Understand the terrain, go on fundamentals and have a long-term strategy.”
Lee reiterates the need to do thorough research before investing.
“If you're a big investor and have the money, then there should be nothing to worry about. For smallish investors, we advise going into small cap stocks that generate high dividend yield.”
Investment pick
Lee adds that it was not just bluechip companies that provided high dividend yield.
Once you've decided that you want to invest in the stock market, which company or stock should you pick?
One analyst from a local bank-backed brokerage says new investors who want to invest in the stock market should start off with defensive stocks before “going on to riskier counters.”
“Defensive stocks tend to have more stable earnings regardless of economic conditions and not so volatile. They tend to perform better than aggressive stocks during an economic downturn, but in an upturn the performance will not be as peaky as other stocks,” she says.
Another analyst suggests keeping abreast of the latest developments involving a particular company, be it via the media or analyst reports.
“It's also important to learn the business that the company is in is it cyclical or seasonal and will the earnings be affected? Furthermore, depending on its business, a stock could move independently of the entire stock market's performance,” he says.
Diversified portfolio
Investors who have the money to spare are advised to invest in a variety of stocks to diversify their portfolio.
“This would help mitigate the risks and losses. Because market forces tend to cause similar stocks to move up and down in tandem, its best to invest in companies that have differing businesses,” says an analyst.
“By diversifying, you avoid the risk of losing all your money and increase your chances of making a profit.”
One fund manager advises that long-term investors, if they had the financial muscle, should consider putting their money in counters that have a stable and proven dividend track record.
“Never put all your investments in one basket. Diversify between defensive and aggressive stocks, small caps and blue chips if you have the money to spare.
“Of course, you don't have to put all your money in the stock market. Try other things like gold, bonds and property.”
Offloading stocks
Knowing when to sell your shares in the stock market is often critical selling at right time and you make a kil, too late and its you that get slaughtered.
“Even experts find this a hard call to make. It's in fact easier to buy a stock then to sell one,” divulges a fund manager.
A good gauge was to be abreast of the latest news involving a particular company, says an analyst.
“Speculation can drive a stock to great highs but it can also cause a stock to plummet. Knowing when to sell is never easy, but a decent gauge to go by is the company's fundamentals.
“If it's been making losses or its earnings have been dwindling, if someone in its top management quits or it has just stopped being innovative or competitive, then it's time to part with your investment. However, a lot of it will also depend on gut feeling.”
Foo says an investor should sell his shares if it “makes sense to his investment portfolio and investment goal.”
“You can't just rely on the share price of a stock because its business model, or even the company itself, may have changed over time.”
He adds that most investors were driven by greed and fear rather then data.
“When you are driven by emotion, in the end, you just end up losing money,” he says.
By EUGENE MAHALINGAM, eugenicz@thestar.com.my
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