Think & Create

As a stock trader, you will begin to pay more interest to the business section of your local newspaper. Most feature a section that deals with Stock Market prices at close of the previous day. In this section, you will come across the following descriptions:

Reading the stock market performance section of the newspaper is an easy thing to do. You just need to do it a few times until you begin to feel comfortable with it.

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To buy or sell shares on Bursa Malaysia, you need to use a registered broker who is a member of Bursa Malaysia. You cannot deal directly with Bursa Malaysia as only brokers have direct access to the market.
A broker acts as your agent – much like a real estate agent that sells your house.
He/she earns a commission on the value of shares you trade – just like a real estate agent earns commission on buying and selling houses for people.
A broker can also be involved in the listing of a new company by underwriting the float and marketing the float to their group of clients.

There are many brokers to choose from – click here for a list of all brokers.

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The stock market is where the shares in companies are bought and sold, providing companies options to access capital, and investors opportunities to own a share of the company and enjoy potential gains from the company’s future performance.

The stock market offers people the ability to generate a separate income stream apart from their daily jobs, or income streams which are superior to those from traditional savings deposits. But before you even think about buying and selling shares, you must know the fundamentals of the stock market and of trading.

First time investors can become confused because of the terminology that is used to describe various market functions. These don’t take long to learn. Click here for your basic share trading terms. Incidentally, one common confusion is over the terms ‘ stocks’ and ‘shares’. Actually, they both mean the same thing and can be used interchangeably.

The Role of Bursa Malaysia

You can only invest in stocks through a stock exchange, an organized marketplace where stocks are bought and sold under strict rules, regulations and guidelines. The Malaysian stock exchange is called Bursa Malaysia. Bursa Malaysia has over 1,000 listed companies offering a wide range of investment choices to local and global investors. Companies are either listed on Bursa Malaysia Securities Main Board for larger capitalised companies, the Second Board for medium sized companies or the MESDAQ Market for high growth and technology companies.

Raising Capital on the Stock Market

The Stock Market was created by companies wishing to raise capital for their business. When someone says they have a listed company they mean listed on Bursa Malaysia. All companies need cash to take advantage of growth opportunities. Many start-up companies however find themselves short of capital to fund expansion. One way to acquire this cash is to publicly float the company. This involves selling part of the company to private individual and institutional investors who are then able to freely exchange these stocks on an open market. Purchasing stocks in a company that is listed on the stock market is done through an Initial Public Offering or IPO.

Once an IPO has been issued, you can contact the company (phone, fax or email) for a copy of the Prospectus and complete the application to apply for an allocation of shares. Or you can wait until the company is floated and buy shares on the open market. Besides Bursa Malaysia, stock brokers will also have information regarding Initial Public Offerings.

Companies that are already listed can also raise additional money on the stock market by offering existing stockholders the opportunity to buy more stocks in the company. For example, a listed company wanting to raise additional capital might issue one new share at 5sen each for every three shares an existing investor owns.

When you buy shares, you are buying a share in that company and so you own a percentage of that company. When the company makes a profit, you share in that profit in the form of a dividend. Typically, the number of shares that have been issued multiplied by the share price gives us how much a company is worth.

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Investing is making your money work for you by getting your money to generate more money.  Investing in stocks has consistently proven to be one of the most profitable forms of investment available.

The benefits include:

• Immediate Buy/Sell so you can sell part of your investment any time.
• Very low transaction cost.
• The freedom to work at your own place, at your pace in your own time.
• Easy monitoring — log in to the market from anywhere in the world.
• Being able to maximise returns whilst spreading your risk.
• A predictable form of investment if you know what you’re doing.
• Putting you in control and freeing you of fund management fees.
• Considerable tax advantages.

Things to watch out for:

• The market can be a volatile place.
• You must acquire knowledge of what you are doing.
• You must monitor your investments.
• You must learn the discipline to enter and exit the market on entry and exit signals.

Can Ordinary People Profit from the Stock Market?

Many people say things like “I’d love to get into the stock market” or “If I had more money, I’d invest in stocks”. Many people also believe that to make a profit from the stock market you either need to be rich already, be a full-time investment trader or be a financial whiz.

Not necessarily so.

Let’s take a look at three different scenarios of ordinary people in the stock market to see how they fared. This will let us view how the process works, the different approaches, and how returns are generated.

Scenario 1:
John works in a manufacturing plant earning RM33,000 a year. After rent, living and personal expenses, John has managed to save RM1,500 over the past 6 months that he wants to invest in the stock market. John buys 1,600 shares in ABC Mining at RM0.90 per share (RM1,440). He also pays RM32.95 brokerage fees for buying the shares. In total, John has invested RM1,472.95.

Six months later John decides to sell his shares. He has kept an eye on the performance of ABC Mining and they have risen to RM1.19 a share.  John sells his shares for RM1,904. He also pays RM32.95 brokerage fees for selling his shares, leaving him with RM1,871.05. That is a profit of RM398.10.

RM398.10 may not sound a lot, but remember John only invested RM1,472.95 for 6 months, so he won’t make a huge return. Nevertheless, John made a 27% profit which is far better than he would have made by putting the money into his savings account.

Scenario 2:
May and Chong both work full-time in professional jobs. Together, they earn RM120,000 per year. After mortgage repayments, living and personal expenses May and Chong have managed to put away RM5,000 that they want to now invest in the stock market.  They buy 1,500 shares in AAA Steel at RM1.48 a share (RM2,220) and 1,500 shares in XY Manufacturing at RM1.33 a share (RM1,995). They also pay RM65.90 brokerage fees for the two transactions. Their total outlay is RM4,280.90.

Over the next 12 months AAA Steel shares have risen to RM2.60 a share and XY Manufacturing shares have moved to only RM1.38 a share. May and Chong sell their shares for a total of RM5970. They pay their broker RM65.90 and are left with RM5904.10. Their initial investment was RM4,280.90. So, they make a profit of RM1,623.20.

Scenario 3:
Aminah is retired, owns her own home and earns a comfortable income from several long term investments. Aminah would like to invest RM15,000 that she has set aside for buying shares.

Aminah selects a portfolio of 5 companies and aims to invest around RM3,000 in each. Aminah buys 3,333 shares in ABC Mining at RM0.90 a share (an investment of RM2,999.70). She also buys 2,027 shares in AAA Steel at RM1.48 a share (RM2,999.96) and 2,255 shares in XY Manufacturing at RM1.33 a share (RM2,999.15). To complete her portfolio, Aminah buys a further 2,912 shares in MM Multimedia at RM1.03 a share (RM2,999.36) and 3,000 shares in BB Furniture at RM1.00 a share (RM3,000). Aminah also pays RM164.75 brokerage fees for buying the shares. In total, Aminah has invested RM1,5162.92.

12 months later Aminah sells her shares. Four of the shares have increased in value but BB Furniture has dropped to RM0.95 a share.   ABC Mining rose to RM1.19 a share returning RM3,966.27.   AAA Steel rose to RM2.60 a share returning RM5,270.20.  XY Manufacturing rose to RM1.38 a share returning RM3,111.90.   MM Multimedia rose to RM1.09 a share returning RM3,174.08.   BB Furniture dropped to RM0.95 a share returning RM2,850. In total, Aminah’s shares returned RM18,372.45 less RM164.75 for brokerage.  This gives a total of RM18207.70, earning a profit of RM3,044.78.

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Recently, I led a round-table discussion with people whose net worth ranged from “comfortable” to approaching a billion dollars. All of them have achieved significant financial wealth, and all of them have done it on their own. There was no inherited money in this group! I asked them what they did to accumulate money, and for advice to pass along in TIPS. Here are the results:

1. Save 10% of everything you make, no matter what. The percentage varied slightly, but they were unanimous on the key point: Live within your means and save money every month.

2. Invest for the long haul. They pointed to Warren Buffet and noted that he buys and holds a stock for 20 years or longer. Invest in good stocks or properties that you understand, and hold on!

3. Avoid debt. They talked about raising capital for their businesses (sometimes borrowing from investors), but insisted that personal debt be eliminated. One woman said, “consumer debt is devastating. If you want to achieve financial wealth, kill your credit cards.” Another added, “no car or boat or anything else is worth the cost (financial and emotional) of borrowing money.”

4. Crunch the numbers. They talked about doing their financial statements “every month, no matter what.” Another added, “Only the numbers tell you how you’re really doing; you’ve got to watch them like a hawk and use the information every day.”

5. Have a plan. They expect their investments to grow steadily over the years (not over-night), and they plan accordingly. They emphasized setting 20, 30, even 50-year financial goals.

6. Know that money is one way of keeping score, but it’s not the game itself. Money comes from investing or creating or doing something other people value and will pay for. They emphasized that “it’s fun to have nice things” but noted that the money was secondary to doing “interesting things.”

All of them had stories of starting out with school loans, small children, a “stuffy little apartment,” working for minimum wage or eating “lots of macaroni and cheese,” and yet knowing that they could “achieve some measure of success.” Now, they’ve done it, and so can you. We can learn from the experts!

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Each individual has a risk tolerance that should not be ignored. Any good stock broker or financial planner knows this, and they should make the effort to help you determine what your risk tolerance is. Then, they should work with you to find investments that do not exceed your risk tolerance.

Determining one’s risk tolerance involves several different things. First, you need to know how much money you have to invest, and what your investment and financial goals are.

For instance, if you plan to retire in ten years, and you’ve not saved a single penny towards that end, you need to have a high risk tolerance – because you will need to do some aggressive – risky – investing in order to reach your financial goal.

On the other side of the coin, if you are in your early twenties and you want to start investing for your retirement, your risk tolerance will be low. You can afford to watch your money grow slowly over time.

Realize of course, that your need for a high risk tolerance or your need for a low risk tolerance really has no bearing on how you feel about risk. Again, there is a lot in determining your tolerance.

For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do?

Would you sell out or would you let your money ride? If you have a low tolerance for risk, you would want to sell out… if you have a high tolerance, you would let your money ride and see what happens. This is not based on what your financial goals are. This tolerance is based on how you feel about your money!

Again, a good financial planner or stock broker should help you determine the level of risk that you are comfortable with, and help you choose your investments accordingly.

Your risk tolerance should be based on what your financial goals are and how you feel about the possibility of losing your money. It’s all tied in together.

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Depending on the type of investing that you plan to do, you may need to hire a broker to handle your investments for you. Brokers work for brokerage houses and have the ability to buy and sell stock on the stock exchange. You may wonder if you really need a broker. The answer is yes. If you intend to buy or sell stocks on the stock exchange, you must have a broker.

Stockbrokers are required to pass two different tests in order to obtain their license. These tests are very difficult, and most brokers have a background in business or finance, with a Bachelors or Masters Degree.

It is very important to understand the difference between a broker and a stock market analyst. An analyst literally analyzes the stock market, and predicts what it will or will not do, or how specific stocks will perform. A stock broker is only there to follow your instructions to either buy or sell stock… not to analyze stocks.

Brokers earn their money from commissions on sales in most cases. When you instruct your broker to buy or sell a stock, they earn a set percentage of the transaction. Many brokers charge a flat ‘per transaction’ fee.

There are two types of brokers: Full service brokers and discount brokers. Full service brokers can usually offer more types of investments, may provide you with investment advice, and is usually paid in commissions.

Discount brokers typically do not offer any advice and do no research – they just do as you ask them to do, without all of the bells and whistles.

So, the biggest decision you must make when it come to brokers is whether you want a full service broker or a discount broker.

If you are new to investing, you may need to go with a full service broker to ensure that you are making wise investments. They can offer you the skill that you lack at this point. However, if you are already knowledgeable about the stock market, all you really need is a discount broker to make your trades for you.

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The invention of the Internet has brought about many changes in the way that we conduct our lives and our personal business. We can pay our bills online, shop online, bank online, and even date online!

We can even buy and sell stocks online. Traders love having the ability to look at their accounts whenever they want to, and brokers like having the ability to take orders over the Internet, as opposed to the telephone.

Most brokers and brokerage houses now offer online trading to their clients. Another great thing about trading online is that fees and commissions are often lower. While online trading is great, there are some drawbacks.

If you are new to investing, having the ability to actually speak with a broker can be quite beneficial. If you aren’t stock market savvy, online trading may be a dangerous thing for you. If this is the case, make sure that you learn as much as you can about trading stocks before you start trading online.

You should also be aware that you don’t have a computer with Internet access attached to you. You won’t always have the ability to get online to make a trade. You need to be sure that you can call and speak with a broker if this is the case, using the online broker. This is true whether you are an advanced trader or a beginner.

It is also a good idea to go with an online brokerage company that has been around for a while. You won’t find one that has been in business for fifty years of course, but you can find a company that has been in business that long and now offers online trading.

Again, online trading is a beautiful thing – but it isn’t for everyone. Think carefully before you decide to do your trading online, and make sure that you really know what you are doing!

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