Things to consider before stock trading
Updated: May 9, 2022
You’re most likely reading this because you’re a beginner who’s thinking of savings and investment strategies, including stock trading. Fortunately, as professionals, we understand that researching is crucial for anyone who wants to venture into anything finance related, especially in the area of stock trading.
Below, we’ve listed some of the things that you need to know to help you understand the stock market better.
Take note, though, trading doesn’t always guarantee a successful outcome, so due diligence is required. However, these are good starting points for those who would like to start stock trading.
Determine which investment type is right for you
When investing, there are numerous options for you, such as Stocks, Bonds, Unit trusts or funds, Exchange Traded Funds (ETFs), and Real Estate Investment Trusts (REITs), or the latest one, cryptocurrencies. Some of these are perfect for beginners, such as stocks. Others require more experience, time, and dedication.
Each investment type offers varying levels of risk and reward. Thus, you should consider and thoroughly research each investment type before deciding which one aligns with your financial goals.
How to start stock trading
In your first step to stock trading, knowing the difference between a robo-advisor and an online brokerage is a must. Robo-advisors are ideal for those who want to invest but do not have the expertise or patience to manage their investment. In short, they’re digital financial advisors that manage and choose investments for you using computer algorithms and advanced software.
Online brokerages, on the other hand, are suitable for those who are comfortable managing their own trades, and for those who are technologically savvy. They’re essentially for hands-on investors that prefer to make trades themselves, instead of paying a broker.
And then there’s the topic of opening an investment account. Both approaches require you to open an investment account.
Before opening a brokerage account, you need to open a Central Depository Account (CDP), which acts as a safe for all your stocks.
To open a CDP account, you’re required to have a bank account with one of the following banks listed below:
Standard Chartered Bank
If you already own an account with one of the aforementioned banks, you can fill out your CDP application form here.
You may also choose to open an account through a stock brokerage firm of your choice. Keep in mind that you can open an account with more than one firm. If you choose this method, opening a CDP account isn’t needed.
This is a technique that reduces risk by allocating investment across various stocks. It’s because putting all your funds in one stock is very risky.
Let’s say an individual only has airline stocks in his investment portfolio. Now that travel has been put on hold due to COVID-19, this means his portfolio has experienced a noticeable drop in value.
However, if he had different portfolios in various industries such as healthcare, or e-commerce, this wouldn’t have largely affected his investment portfolio.
If there’s one thing to know about diversification in investing, it’s this: the more diversified, or uncorrelated, your stocks are, the better.
Do your homework
You should be prepared to dedicate your time to research before investing. This means taking a good look at the company’s financial records, their long term stability, and their strength in weathering financial climates and world events.
After all, you are becoming a shareholder of a company, so proper analysis of a company is required!
Educate yourself on the financial terms
There are a lot of terms to familiarise yourself with in order to understand anything that’s related to the stock market, such as:
Private Equity (PE) - refers to the capital investment made into companies that are not publicly traded
Earnings Per Share (EPS) - refers to the portion of a company's profit that is allocated to every individual share of the stock
Return on Equity (ROE) - refers to the a company’s ability to generate returns on the investment it received from its shareholders
Price to Earnings Ratio
Price to Earning Ratio, or PE ratio, gives you an understanding whether a stock is undervalued (underpriced) or overvalued (overpriced).
To find the ratio, the formula is: price per share/earning per share.
If the price per share > earnings per share, a company is overpriced.
Alternately, if the price per share < earnings per share, a company is underpriced.
You can then use this information when selecting which stock to buy.
It’s smarter to go for one with a low PE ratio, ranging between 1.0x and 10.0x. since they’re more likely to grow. This can even increase to about 10.0x and 20.0x if the market performs better.
Keep in mind that you should compare this number with other companies in the same industry, just to see which one is more viable for you.
A stock dividend is a dividend that’s paid to shareholders in the form of additional shares in the company, instead of cash. If a company consistently pays dividends, this often tells you that a company has high stability.
Be careful with companies that have very high yields, though. While higher yielding dividend stocks provide more income, they often come with greater risk. A high dividend yield can show that the payout is unsustainable, or that stocks are being sold. This could not be a good sign since the company is returning so much of its profits to investors, instead of growing the company.
Don’t let your emotions impact your investment decisions
Emotions like greed, fear, and impatience negatively impact your investment decisions. It’s important to control your fear, and do not panic to sell stocks at rock bottom prices.
Check your emotions before making any major financial decisions. Focus on your strategy that’s based on your own unique goals and needs.
Start your savings and investment plan with a financial advisor today
If you’re not sure how much to save and invest, get in touch with us. We’ll connect you with our financial advisors who have years of experience in providing investment advice and management to help you pave your way to financial freedom.