What is Stock Investing?
A Thorough Comparison & Analysis
Most investors have an easy goal of investing in the stock market – investing today with the goal of creating investment returns.
While their goals may be similar, each investor’s strategy may differ dramatically. This has resulted in different unique investment strategies.
If you’re overall new to investing, you might have heard about different strategies like Value Investing, Growth Investing, and Index Investing. But what precisely do these strategies of investment involve?
What is Stock Investing?
What must you know before investing in shares? Here’s the rundown
Table of Contents
Fundamental vs Technical Analysis
What are the basic investment terms for stock investing?
Before we start, you will need to understand these things before investing your first stock investment.
If you’re new to invest, we’d like to share six investment terms with you that can aid you to make your investment decisions. This is especially important in Value Investing, Growth Investing and Dividend Income Investing.
P/E ratio refers to how much you are paying to buy a stock for every $1 that it is able to earn.
The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
P/E ratio of 10 would imply that an investor would need to pay $10 for every $1 that the company earns. High P/E ratio means that investors are anticipating higher growth in the future. Companies that are losing money do not have a P/E ratio.
In addition to showing whether a company’s stock price is overvalued or undervalued, the P/E can reveal how a stock’s valuation compares to its industry group.
P/B ratio, aka Price-To-Net Asset Value, is used to evaluate the market value of the company (i.e. its share prices) against its tangible book value (i.e. assets owned by the company with minus liabilities).
- P/B ratio = 1, means the market value of the company is the same as the price of the book.
- P/B ratio greater than 1, means that the company’s market value is higher than its existing book value while
- P/B ratio lesser than 1, means that the company’s market value is actually lower than its existing book value
Most importantly, Debt-To-Equity’s value is to know how much the company assumes debts. The business may earn record earnings, but the output may be supported by leverage
The increase in D/E is a bad thing. Leveraged performance during good times is amazing. But businesses run the risk of bankruptcy during difficult times.
If your investment goal is to enjoy passive income, it will be crucial to know which stocks pay their shareholders’ periodic dividends. Dividends refer to an amount of cash frequently paid out of its earnings or reserves by the business to its shareholders.
Also, investing in a business that delivers the greatest dividend yield without taking into account the capacity of the business to continue to sustain this elevated dividend payout would be absurd.
Market capitalization is the word used to define the company’s complete value. Simply put, it tells you how much the total value of a certain company is based on the current stock price.
Most individuals would prefer to invest in companies with a greater market capitalization (i.e. larger companies). This is because companies with greater market capitalization tend to have greater liquidity.
Beta is a sign of a stock’s volatility against the majority of the market. A beta below 1 means less risky stock than the market. A beta exceeding 1 means the stock is more volatile than the majority of the market.
Every time you buy a stock, it’s worth finding out what the beta of the stock is, especially if you’re new to invest. Compared to the majority of the industry, this provides you with an idea of how volatile a stock is.
After knowing the 6 basic investment terms, we will look into the different types of strategies used by investors. And more importantly, which strategies should you use best?
What are the different types of stock investing strategies?
Let’s begin by explaining how each of these strategies works.
An index investor is not focused on having earnings by investing in the right businesses. Instead, an index investor is more concerned with gaining the return on the market.
Index investors are not selecting individual stocks. Instead, they use tools like an Exchanged-Traded Fund (ETF) to assist them to attain the return on the market. The Straits Times Index (STI) ETF, for instance, will be prepared to produce a return comparable to the STI’s real results.
Index investing allows you to be exposed to a diverse portfolio of high-quality stock exchange companies.
The only principle in Value Investing is; “Buy Low, Sell High“.
Value investing is a strategy in which investors are presently seeking stocks that they think are undervalued. An investor will buy the stock in such cases, anticipating its value to increase in the future to be competitively priced.
Although there’s no sure way to determine whether a stock is underestimated, most value investors would use financial ratios such as Price-To-Earning (P/E) and Price-To-Book (P/B) to determine the stock’s intrinsic value.
#1) Stock Analysis & Valuation – investigate and determine the intrinsic or true value of a stock.
#2) BUY when its price is BELOW its intrinsic value, SELL when its price is ABOVE its intrinsic value.
The concept behind growth investment is that an investor hopes to invest in an attractive company that will be able to develop their business significantly in the years ahead, in terms of income, market share and profitability.
Growth stocks may not necessarily demonstrate powerful fundamentals or adequate financial ratios today compared to value investment. Indeed, some of these companies may not even be profitable. Investors can still invest in the stock, however, because they think the company’s future is bright.
Very often, a firm is regarded as a growth stock because of some crucial value propositions that it can give. For instance, a business may have millions of active users using its products and services, although it has not made a profit. While value investors can avoid such businesses, growth investors who see a company’s potential may want to purchase their shares.
Momentum investing is about buying into trends and is based on the concept that winning stocks continue to win and losers tend to continue to lose, a concept based on the idea that you can earn long-term profits by riding stocks while they are on a good run, and selling them once they’ve had a long bad stretch.
Technical analysis is the primary point of reference for momentum investors.
Investing in momentum is purely a strategy for technical trading. Momentum investors are not worried about the operational performance of a company, unlike value investors. In order to recognize trends and gage the power of the trend–in other words, to determine the amount of price activity on the market, momentum investors apply technical indices to the analysis of a security.
Some of the technical indicators that are most commonly used in momentum trading:
Below are 4 of the most commonly used indicators for Momentum Investing / Trend Investing (Trend Lines, Moving Average, MACD and RSI)
1) Trend lines
Trend lines are a basic technical analysis tool for monitoring price movements. A trend line is drawn between two successive points on a price chart.
If the resulting line is sloping upward, then it indicates that there is a positive, bullish trend, and an investor may buy shares.
If the resulting line is downsloping, then the trend is a negative, or bearish trend, and selling short is indicated as the most likely profitable position to adopt
2) Moving Average (MA)
A moving average line allows traders to identify the current trend while eliminating much of the market fluctuations, resulting from insignificant changes in price.
Upward trend is generally expressed if the price of security remains consistently at or above moving average.
Downward trend is generally expressed if the price of security remains consistently at or below the moving average.
Sideways trend is generally expressed if the price of security remains consistently traded within a horizontal range without forming any distinct trends.
3) Moving Average Convergence Divergence (MACD)
MACD measures the relationship between the two EMAs. On a trading chart, the moving average convergence-divergence indicator (MACD) was designed use exponential moving averages of 26 and 12 days, although the MACD is a model into which you can insert any moving average that suits your fancy and backtests well on your security.
MACD also acts as a momentum oscillator, showing when a trend is gaining strength or losing momentum as it cycles above and below a center zero line. MACD is an excellent indicator.
The arrows in this figure show where you would buy and sell:
Buy: In the MACD indicator window, the crossover of the trigger and the MACD indicator occurs earlier than the crossover of the two moving averages in the top window. Looking from the left, the MACD tells you to buy two days earlier than the moving average crossover.
Sell: The real benefit comes at the next signal — the exit. Here, the MACD tells you to sell over two weeks ahead of the moving average crossover.
Reenter: At the right-hand side of the chart, the MACD tells you to reenter, while the moving averages are still lollygagging along and haven’t yet crossed.
4) Relative Strength Index (RSI)
Relative Strength Index (RSI) is an indicator that compares upward and downward movements in closing price over a period of time of your choice (commonly 14 bars). As with any indicator, traders use the RSI in many ways.
The RSI aims to indicate whether a market is considered to be overbought or oversold in relation to recent price levels.
In an uptrend, a long signal is when RSI moves below a value of 40 and then rises above it. Buy signal when RSI is below 40.
In a downtrend, a short signal is when RSI moves above 60 and then moves back below it. Sell signal when RSI is above 60.
Many of us dream of a life in which we are not bound by work commitments, where we can dictate our schedules, take as many vacations as we want, and have the freedom to enjoy the things we love and maybe spend more time with our loved ones at home. And above all, having the income to do all these stuff.
We can possibly strive to earn enough dividends each year by investing in the stock market and other financial instruments that pay us dividends so that we can offset our lifestyle costs and provide for ourselves and our loved ones without having to work.
Examples of Singapore stocks that can give us the dividend yield we are looking for:
3% Dividend yield: ThaiBev, CapitaLand, ST Engineering, Jardine C&C
5% Dividend yield: Singtel, UMS, Keppel REIT, QAF, Hong Leong Finance
7% Dividend yield: Frasers Commercial Trust, ESR REIT, Mapletree Logistics, Taisin Electric
Do note that not only investing in individual stocks provides a dividend. Investments such as Unit Trusts (UTs), Exchange-Traded Funds (ETFs) and Bonds are also able to provide us with a steady stream of passive income or steady dividend income stream.
Dollar-cost averaging is one of the time-honoured investment techniques. It’s also popular because you don’t need to begin with a lump sum. It’s simple to apply and takes from when to invest the guesswork.
In dollar-cost averaging, you are investing a fixed amount of funds into a particular stock, unit trust consistently every month over a period of time, regardless of price fluctuation. This means you will buy more units of the shares or unit trust when the price comes down and fewer units when the price is higher.
All in all, dollar cost averaging is a sound approach to making investments as it gets away from investing impulsiveness and guesswork. Markets also usually go up over time and you’ll profit from staying invested in the long-term upside. It may also be more rewarding to save monthly from your salary than to keep the money in cash.
Dollar-cost averaging removes the risk of timing the market wrongly.
Many individuals believe that investment is for the wealthy only. If you wonder how to begin investing without any experience, the dollar cost averaging is a comparatively low-cost approach.
You can actually purchase Singapore shares like DBS Bank, SPH, ComfortDelgro, Singtel and CapitaMall Trust in the blue-chip with as little as $100 to spare each month.
This option has been available for a long time especially for Unit-Trust investments, aka ‘Regular Savings Plan (RSP)’, after making the initial lump sum investment (which is $1k in most cases), you may invest a fixed amount monthly into the same shares or unit trust to achieve the Dollar Cost Averaging effect.
Alternatively, you can approach us to start your Regular Savings Plan as low as just $100/month!
How to screen and filter companies for stock investing?
If you’re new to invest, SGX has a stock-screening platform ready to get you moving on shortlisting stocks that are worth looking at based on your needs. Within your shortlist, you can readily use this platform to compare distinct kinds of stocks you are looking at, especially finding details such as P/E, Dividend Yield and Company’s Information.
Best of all, to use the platform, you don’t even need to sign up. Just go over to SGX Stock Screener.
Which is the best strategy for me?
While our intention to invest is to generate stock market profits, we also need to be intelligent in selecting the correct strategies that make sense to you. Here are some variables to consider before deciding on the investment strategy that works best for you.
1) Know how to identify and analyze – In order to be profitable in investment in both value and growth, you need to know how to identify and analyze stocks. Otherwise, the correct stocks to invest in will not be chosen.
2) Diversification – to manage risk, you should invest in a diversified portfolio of different investments. You should allocate your capital to different asset classes according to your desired risk-return profile.
3) Know your Risk Tolerance – before you start investing. Different types of strategies have different risk. Investing in growth shares tends to be much riskier and usually most impacted when a recession hit. In contrast, value investing tends to be less risky (although not always) as value investors typically invest in high-quality stocks at low prices.
4) Personal Interest – may also impact your stock investment strategies. For instance, if you’re someone who likes to read news linked to technology and enjoy checking out the recent products that can alter our world, then you may be naturally inclined to invest in technology businesses like Apple, Alphabet and Amazon.