Introduction to Purchasing Stocks for Beginners

We all know that dabbling in the stock market can be lucrative. But that’s not the right mindset to have when purchasing stocks!

Without the right mindset and knowledge, entering the stock market could lead to potentially large losses. There are many ways to manage these risks and avoid them, but don’t expect your stock trading journey to be a smooth one.

You will encounter setbacks and need to be able to handle losses, then pick yourself up. As retail investors who are not professionals, we will definitely lose some amount of money, but with the right risk management frameworks in place, you would be able to curb your losses.

Jump ahead here:

• Disclaimer
• How much should you invest?
• Where can you start purchasing stocks from?
• What to consider before purchasing stocks?
  1. Individual Risk Profile
  2. Company Profile
  3. Company’s Financials
  4. Financial Ratio Analysis
  5. Affordability
  6. Dividends or Capital Appreciation?
  7. Diversification
  8. Dollar Cost Averaging

Before I dive into this guide, let me put forth a DISCLAIMER.

DISCLAIMER: I am by no means a certified financial advisor or professional. These information that I have written is based on my own research, experience and what I am currently doing.

If you wish to follow the information stated in this guide, I will not be responsible for any of the losses you have made on your own accord. This is only information to help you be aware of what you need to consider before entering the stock market and finalize your decision of purchasing stocks.

With this disclaimer in place, let’s begin!

How much should I invest in purchasing stocks?

There are many fears that come with entering the stock market. The greatest one being the fear of losing a large sum of money. However, there is a way to work around this.

A rule of thumb I follow is to only invest what I am willing and able to lose. This would amount to about 10-20% of my income for example. Depending on my needs for the month, this amount that I am investing each month will vary.

As a student, my income is definitely not a hefty amount. You must be wondering how I am able to invest in stocks then?

There are many ways to invest in stocks. Of which, one particular concept is micro investing and there are various ways to do this. I’ve compiled a few ways you can invest and grow your wealth with just small start up capital like $100. If you’re interested, you can find it here.

Where can I start purchasing stocks from?

There are various brokerage platforms where you can start purchasing stocks from. Each brokerage platform has its pros and cons to attract users and certain platforms will require you to have a certain level of prior investing experience or your application will be rejected. I’ll introduce some of those that I’ve tried here.

1. FSM One (Referral Code: P0388574)

FSM One is a local Singaporean based brokerage platform. It has a great interface that is easy to navigate and they also have pages where you can visit within their site to learn more about trading for beginners.

I mostly use their mobile app to monitor my portfolio as it is very user-friendly!

The downside of FSM One is that it charges commissions (minimum SGD$10) that are slightly higher than some other platforms per transaction for stocks.

2. Saxo Markets

Saxo Markets is another local Singaporean brokerage platform. However, it has a pretty complex interface from a new user’s perspective.

Despite its more complex interface, it takes lower commissions (USD$4) per transaction and has a wider variety of stocks in its marketplace.

For our International viewers who are looking for brokers, here are some introductions.

3. Oanda

Oanda is a globally recognised broker originating from Canada. Although its interface may look slight confusing to new users, you can try starting off with a demo account first to navigate through the platform. Once familiar, proceed with the live account with your preferred settings.

Its great for trading on the go as it supports multiple platforms and has many platform tools you can explore that helps in your analysis.

4. TD Ameritrade

TD Ameritrade is one of the larger brokers in the U.S. It is also not very friendly to beginners as it has complicated interface. However, they take 0% commissions from your transactions on the platform.

After accumulating investing experience, you can consider switching to this broker in the long run if you are looking to cut commission costs.

5. WeBull

WeBull also takes 0% commission from users per transaction. However, only U.S citizens are able to set up an account with them.

Users from other countries can still use their platform for all the research data they provide!

They have a large database and will provide information on each stock such as the latest news of the company, company profile and financials, basic analysis of the company’s performance, etc. which is very useful for your stock analysis.

What to consider before purchasing stocks?

1. Your own risk profile

This self assessment is very important before even entering the stock market. There are various ways to determine your risk profile, to find out whether you are risk loving, risk averse or risk neutral.

Your risk profile will greatly affect the decisions you make in the stock market when determining a proper investment asset allocation for a portfolio together with your risk management systems.

Here’s a general guideline for risk profiling. However, there are various questionnaires that you can search up that gives you a more accurate depiction of your risk appetite.

Are you able to swallow huge losses in the pursuit of high returns? Are you seeking safe companies with stable performances in the long-term?

After determining your risk appetite, it helps you understand how much risk you are willing to take on and gives you a rough guide of your investment portfolio should look like.

This is some of the most common investment portfolios for investors with reference to the image above:

1. Level 1 – Conservative: 
   • Equity: 0-10%
   • Debt and other fixed/low-risk investments: 90-100%
2. Level 2 – Moderately Conservative:
   • Equity: 10-30%
   • Debt and other fixed/low-risk investments: 70-90%
3. Level 3 – Moderate
   • Equity: 40-60%
   • Debt and other fixed/low-risk investments: 40-60%
4. Level 4 – Moderately Aggressive
   • Equity: 70-90%
   • Debt and other fixed/low-risk investments: 10-30%
5. Level 5 – Aggressive
   • Equity: 90-100%
   • Debt and other fixed/low-risk investments: 0-10%

This is just a general concept and your risk profile may change over time depending on your income, goals, age, etc.

2. Company Profile

Research plays a very detrimental role in your stock selection process. Before you head off and start purchasing stocks, you need to understand what the company does.

This includes understanding the

• Products and services they are selling to customers
• Who their main consumer base is
• Outlook of the industry
• Competition
• Competency of their management
• Company’s future outlook and projections
• Etc.

These are just some points to look out for. When you are purchasing stocks, you are not just putting your money into it for the returns. You are also investing your money into the business.

If the business doesn’t resonate with you or if the management does not align with your personal values or ethics, you may not want to invest in that company.

You want to know what the company is capable of doing and how it is going to sustain itself long term before putting your money in.

3. Company’s Financials

Apart from researching on the company’s profile, you should also familiarize yourself with the company’s financial performance.

This includes:

• Growth trends
• Past financial performance
• Understanding the company’s cash flows

Are there any trends in the earnings of company X? Did they generally increase or decrease over time?

Regardless of how small, regular improvements over a long period of time can still be a positive indicator of performance. Other than earnings growth, you need to look at how sustainable its cash flows are too.

You don’t want to invest in a company today for it to cease operations in the next few years.

Look at the cost structure of the company and try to determine its competitive advantages and market opportunities. If you are able to determine a few of them, then check to see if the company is putting in effort and working towards them. If yes, then you could shortlist the company for further review.

4. Financial Ratio Analysis

Financial ratios allows you to evaluate and compare a company’s performance relative to the industry. It provides insight into a company’s liquidity, operational efficiency and profitability by studying its financial statements.

There are many ratios, but you don’t have to know all of them to be an investor. Some more important ones to know include:

• Price to Earnings: Measures how well a stock’s price is doing relative to the company’s earnings.
• Debt to equity: Measures the amount of debt a company has relative to the equity in a business.
• Earnings per share: Indicates how much money a company makes for each share of its stock.
• Return on Equity: Measures how efficiently the company’s management is handling money that shareholders have contributed.
• Earnings Before Interest and Tax

By comparing the company’s ratios with the industry average, it gives you a gauge as to where the company fits in and how it fares against its competitors.

It is important to ensure a fair comparison of ratios amongst companies. When you are doing the comparison, check that you are comparing company X with company Y which is of similar size or market capitalization for the same time period.

Leave a comment if you’d like to learn more about financial ratios in another blog post! 

5. Affordability

In certain stock markets, they will state a minimum lot of stocks you will need to purchase.

For example, in the Singapore Exchange (SGX), you need to buy a minimum of 100 units of a company’s stock. If you want to find out more about the minimum bid sizes on SGX, I’ll link it here.

Different country’s stock exchanges have different minimum lot requirements.  For example, the New York Stock Exchange (NYSE) has no minimum lot requirements.

On the contrary, some have specific requirements that you may need to be aware of such as the Hong Kong Stock Exchange (HKEX) where the board lot size of a listed security is determined by the issuer.

If you are purchasing stocks from non-local stock exchanges, you need to consider the currency exchange costs and commissions that your broker will absorb.

With these additional costs to consider, it may be well over your initial budget in some cases.

6. Dividends or capital appreciation?

What do you want to achieve out of investing in stocks?

Are you looking to earn dividend income or grow your wealth with capital appreciation?

Either way, your income earned from dividends and capital appreciation is not taxed in Singapore.

Here’s the main difference between dividends and capital appreciation:

Dividend Income: Reward to shareholders who invested in a company’s equity, usually originating from the company’s net profits.

Capital Appreciation: Increase in value of a capital asset. Profit is earned when an investment is sold for a higher price compared to the original purchase price.

As for which to choose, it will depend on your risk profile and age that would often affect your investing decisions.

Younger investors tend to have higher risk appetite and tend to go for long term capital appreciation. Investors who are closer to retirement would usually aim for a consistent income from dividends due to their lower risk appetites.

However, whichever you may prefer, it is best to maintain a diversified portfolio with both dividend and growth stocks.

7. Diversification

The stock market is a very volatile and unpredictable environment and hence, we shouldn’t put all our eggs in one basket!

A good practice of risk management would be to diversify your stock portfolio. This means that your portfolio should not consist of only stocks from the same industry.

There are various benefits to diversification of your portfolio. By introducing stocks of different industries and risk profiles into your portfolio, you are protecting yourself against adverse market cycles.

Moreover, diversification helps to:

• Minimize volatility
• Reduce risk of loss to your overall portfolio
• Generate more opportunities for returns

8. Dollar Cost Averaging (DCA)

DCA is a common investment strategy used by many!

Concept: Practice of investing a consistent dollar amount towards the same investment over a period of time. This helps to reduce the impact of volatility on the overall purchase.

No one can constantly beat the market by timing their purchases. You may get away with it a few times due to sheer luck, but it is not sustainable.

Thus, I have introduced this strategy which is more sustainable over the long run.

There are however pros and cons to this investment strategy in which I’ll discuss.

Pros:

• Reduces emotional attachment by investing mechanically.
• Avoid timing the market.
• Smooths out your returns and losses.

Cons:

• Lower overall returns.
• Passive towards the changing environment and does not support dynamic portfolio management.
• If you’ve picked a poor performing stock, you will be steadily investing into a losing investment.

If you are new to the stock market, DCA is a preset approach such that you are exposed to wild market swings. For more experienced investors, active strategizing would offer better returns.

This concludes my beginner’s guide to purchasing stocks with 8 things you should look out for before purchasing stocks. As a new investor, keep your risks well managed through diversification and only invest what you are able to lose.

Looking to save up money to invest? Here’s some tips on how you can do so! As for those with the fear of losing money, if you need a push to take the leap, check this out!

Let me know in the comments below if there are any other finance related content you would like to see! I’ll collate the ideas and start working on them!