One of the best ways to invest towards a passive income or a retirement plan is stocks. In many ways, stocks outperform investing in bonds, especially when it comes to returns in the long run. And though investing in stocks can be a bit scary for beginners, there’s nothing to worry about. Yes, there are some risks when you invest in stocks, but these risks are amplified when you don’t know what you’re doing, and the same can be easily minimized.
If you are planning to start investing in stocks, then you first need to understand the entire process before taking any major steps. This is vital in minimizing risks. Remember, patience goes a long way in stock market investments. Here are the steps you need to take for the same.
Choose the Approach: CDP vs. Custodian
There are two types of accounts that you can create for stock trading and investments, Central Depository (CDP) or Custodian. CDP is used to store the shares that you purchase; they give you full custody of the same, and with them, you are considered a shareholder in the respective firm. CDP account ensures timely delivery of the firm’s annual reports, notices, and circulars. On the other hand, Custodian accounts allow you to trade the shares but don’t give you the ownership, i.e., they are owned by the stockbroker. Custodian accounts come with lower fees making them more accessible to beginners.
Find the Right Broker
The next step is to find the right broker to manage your stocks. Stock brokers are essential, as they can help you access more technical tools, and help you maximize your earnings. By opening an account with such investment platforms and brokers, you get the best help you can get from professionals. They also take your decisions for you, whether to buy or sell the stocks, and they also offer other services like research, margin finance (to boost your investment power), and trade settlements. And their charges range from 0.12% to 0.275% of the stock price depending on the market and company.
Additionally, if you are going with the CDP route with your stock investment, you also need to create a CDP account to store your shares as these will not be stored by your broker. In the custodian, the broker has provisions to store your shares.
Plan Your Strategy
You now have to strategize your investment. You should avoid going all-out with your investment initially as this is considered a rookie-mistake, and it increases your risks. Instead, you have to formulate a strategy that will be beneficial in the long run. And to begin with that, you should set your initial investments to be small and realistic.
To make these small investments, you should go with index investing, either into ETF or STI. And the best way to do it is by investing a small amount each month, instead of putting all your money in one go. This will help you get more exposure to the market, and you will spend your money more evenly, i.e., you’ll buy more stocks when the market is low, but you’ll also buy better shares when the market is booming. This strategy is called Dollar Cost Averaging.
Along the way, you can add individual companies or asset classes to your portfolio. Your strategy should be treated as a marathon and not a sprint. By implementing such principles, you will minimize risks and maximize returns.
Research the Market
Now that you have your strategy in place, it is time to buy the stocks. But before doing that, you need to do thorough research and analysis of the stock market. You need to first create a list of the companies that interest you. Then, you have to evaluate their financial books of balance sheets, along with their management tactics. You should also take a look at the level of debts and profits the company is producing annually. The next step would be to shortlist companies that are likely to perform well.
Then, you have to consider the timing too. Buying stocks when the market is low is the right choice. This is called riding the bull, where you buy low and sell high. A popular tactic when it comes to the stock market. This is especially important if you are choosing the retail trading route with your investment.
Here, your best option is to invest in blue chip stocks, i.e., shares of major firms that are already well-established. They offer ideal dividend earnings, but the stocks are priced on the higher side. The best time to invest in blue chip stocks is during market slumps. Another great option is REITs.
Consider the Potential Losses
Investing in the stock market is a win some-lose some game, and sometimes, the losses are inevitable. The right strategy can minimize the loss, but sometimes, these can happen anyway. Once you invest in stocks, you must keep a look-out on the potential losses. It would be best if you stay updated on the latest news and developments in the company, the trade market, and you should also focus on trade wars that can affect the Singaporean market.
And as a beginner, you should avoid being exposed to too much risk. You can do this by taking small steps and avoiding significant gains. Being greedy in the stock market can lead to substantial losses. As mentioned above, you should treat your investment in stocks as a marathon and not a sprint.
All said, you should definitely invest in the stock market. The returns and dividends outweigh the potential risks. And as long as you know what you are doing, have the right broker, and the right strategy, your losses will be on the lowest end of the scale. Once you have made the right investments, you have to then wait till your stocks grow enough to return the best dividends and returns.