The Basics of Investing and How to Do It Properly

The basics of investing can seem daunting, but if you stick with them, you'll end up with a long-term investment that pays off over time.

Investing involves making a series of decisions. But rather than being overwhelming, this is the easiest thing you'll ever learn about.

So if you're ready to start investing in the right way, keep reading!

Investing is simple

Investing is simple but certainly not easy. If you want to make money in the long run, then you need to keep putting your money in the right place.

When you invest in the stock market, you're not just making money out of thin air. You are investing in actual, real companies that produce goods and services that people want and need.

Sales from these products will then be used to grow the company where it'll become even better and bigger, while you as a shareholder, will benefit along from this growth, be it by earning the capital appreciation or dividends (if you don't know the meaning of these words, keep reading and watch the episode below).

Media vs truth

It's an important question: Should we invest our money in stocks because of what the media tells us? Or is it better to ignore and do your own thing when investing in stocks?

Well, admittedly, the news still plays an important part in our investments. We need to stay updated with the current affairs, changes that are happening to some businesses, and how they can affect our investment.

However, the basics of investing tell us that we should NEVER EVER buy or sell based on the signals from the media or jump into action at every rise or fall of the share price. If we fail to follow these, our lives would be an absolute misery!

Instead, we should exercise independent thinking and review our investments based on the news we've heard.

Is the news important? Will the company's business be permanently affected by this recent news?
Based on common sense, does their analysis make sense?

Stock market news is designed to stir our emotions and influence our decisions. And that's fine because it's the media’s job. But, if we aren't careful, the media can also convince us to act against our best interests.

Emotions aside, let's now talk about the basics of investing from a technical standpoint.

Important terminologies

Still confused what's what? We broke down 6 of the most important terminologies in the basics of stock investing:

1. Share

Buying a company's share means you are buying a portion of the business and putting your money in the company for it to grow. By buying shares, you will become a shareholder.

The share prices reflected on platforms like Google or other investing platforms are for one share.

However, people don't usually just buy one share because that will be impractical as your brokerage fee will cost much more. It'll be like buying 1 packet of chicken rice for $3 and paying a delivery fee of $10.

Most investors usually buy shares by the Lot. In different stock exchanges, one lot can either mean 100 shares or 1000 shares.

2. Stock exchange

A stock exchange is where all stocks live.

When a company decides to publicly list their company for retail investors like us to invest in, they usually choose a stock exchange to be listed on.

Most countries have one stock exchange for all their listed companies, but some countries have more.

For example, the US have both the New York Stock Exchange (NYSE) and Nasdaq stock exchanges, while Singapore only has the Singapore Stock Exchange (SGX).

3. Brokerage

Most brokerage firms we can find here in Singapore are usually attached to banks, e.g., CIMB Securities, UOB Kay Hian, et cetera.

A brokerage firm is where your broker is. A broker helps you buy and sell your shares from the stock market. Traditionally, all you need to do is call your broker whenever you want to buy or sell your shares.

However, technological advancements have now allowed us to do all our trades online using the platforms hosted by these brokerage firms.

4. Dividend

When you hear "dividends" as a shareholder, it is usually a sign for you to smile, because that means you're getting some money.

Dividends are usually issued by listed companies to their shareholders as a form of profit-sharing, especially if they have had a good financial performance for the year.

It is usually issued on a per-share basis, e.g., if you have 1000 shares with them and the dividends issued are at $0.10 per share, it means you will be getting $100 in dividends.

It is not compulsory for most companies to do this and most fast-growing companies prefer to use their profits to grow their business instead of issuing dividends.

5. Capital appreciation

Capital appreciation happens when the shares you've bought increase in price and value due to business growth over the years.

The capital you've put in as an investment in the business appreciates/increases, hence, the term capital appreciation.

6. Intrinsic value

Price is what you pay, value is what you get.

A stock's price and intrinsic value are two different things, and we should always trade based on the latter, not the former.

Take for example a normal plate of chicken rice at the hawker centre. Would you buy it if it's sold at $20 per plate? Highly likely not, and that's because you know the VALUE of it, which is much lesser than the $20 price tag.

Sadly, most "investors" in the stock market don't understand this and trade based solely on the ups and downs of the share prices.

Funny thing, most "investors" out there do not even have the basics of investing down.

Instead, they're mostly trading by blindly following others, or making rash investment decisions based on every up and down in share price. This will not only cause major losses but also constant anxiety.

To invest properly, always make sure you know exactly what you're doing and you've done proper research into the stock you're about to invest in. Only by knowing its real intrinsic value will you be able to make sound buy and sell decisions.

Join us for a free bootcamp on how to select the best stocks to invest in.