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23 Aug 2021

Investing for Dummies: The 'How' of Investing

Investing for Dummies: The 'How' of Investing | VI
(c) Sadie Xiao

There must be people who get offended by the word “dummies.” This article is for those who do not take offence, as this is primarily written to make investing less intimidating, especially for those who are just starting to invest in stocks.

Whatever stage of investing you are at, you would always benefit from treating yourself as a beginner – thirsty for knowledge and hungry for returns.

Some investors have been on the market for years but do not make a single cent. Some of them even suffer losses. All this is because they started on the wrong foot – no knowledge on how to do investing properly, no relevant resources and tools to make smarter investment decisions, and no concrete strategy.

See also: Learn how to invest smarter, faster, and easier with VI APP

You reading this article is a telltale sign that you already realise the critical role that investing plays in our lives, particularly at a challenging time like today.

Instead of letting our savings get eaten up by the inevitable inflation, we must choose to invest prudently and build our retirement fund.

For you to get started, here are the key concepts you need to understand.

Stocks, anyone?

The stock market is all about businesses. A stock is simply a company that is publicly traded, whereby members of the public, like yourself, can go in and buy shares.

Buying shares of Alibaba, Coca-Cola, Disney, or Google means becoming a part-owner of these companies, minus the perks of being a part of the company’s management. This means you can have voting rights. You can also share in the company’s profits and benefit if they give out dividends.

With such an understanding, you will know better than just choosing to invest in the “hot stocks” or following what everybody else in the market is doing. Understanding that stocks are businesses will prompt you to investigate the business model, the management, and the company’s valuation vis-à-vis its share price before deciding to invest.

See also: Look at these 3 key things before investing

Identifying good businesses

Good businesses can be found in all nooks and crannies. They are all around us! You can identify them by looking at business track records, business models, present management, and competitive advantage.

If you think this is difficult, remember to look around you. What are the thriving businesses you know of? If it’s still too hard, then look at your monthly expenses. What are the products or businesses that always make it on your expenditure list? More often than not, you’ll find you’re a customer of a good business, which is why you continue to buy from them.

Plus, there is a systematic way of identifying good businesses to invest in. Warren Buffett is the most popular investor who does this same strategy, proving that when you invest in great businesses, there’s no way you can’t make profits. Just look at Buffett’s current net worth!

When to buy good businesses

To maximise your profits, you should always buy a good stock when it is trading at a bargain. Take note that these two should be mutually exclusive: good stock and good price. You can’t just buy a stock just because it’s sold at a low price. Similarly, you can’t buy a stock just because it has strong fundamentals.

See also: 5 Reasons Why Value Investing Works for Everyone

Oftentimes, an economic downturn, a pandemic like COVID-19, or a crisis presents investing opportunities if only you know where to look.

How to buy a stock

You’ll need to have a brokerage account to purchase your first stock. You can choose to open a brokerage account where you can only buy in your local exchange, for example, Singapore Stock Exchange. Or if you want to buy stocks listed in international exchanges, such as the New York Stock Exchange or NASDAQ, then you must open a brokerage account that allows just that.

Remember that each exchange has its rules about the minimum number of shares you can buy as well as taxes. Brokerages likewise implement transaction or brokerage fees.

See also: Your Ultimate Guide to Stock Investing in Singapore

How long should I hold a stock

The strategy you employ influences your time horizon. As value investors, we are always big picture investors that are not bothered by short-term price movements. Not only does this dramatically improve our results, but it also gives a much better balance to the psyche, simply by understanding that short-term price fluctuations are inconsequential to the trained investor.

We hope the above gave you more confidence to start investing. To know more about how to do value investing systematically, join our free masterclass.


Disclaimer

No income guarantee or promises of any type are being made in this article. Know that your results will vary due to circumstances that are outside of our control. The author and the company do not warrant, guarantee, or make any representations about the use or results of the use of the products, programmes, services, and resources mentioned in this article. The reader, thus, agrees that the author and the company are not responsible for the success or failure of readers’ investment and business decisions relating to any information provided herewith.