So, where do you start?
I guess you may have read other blogs and articles about investing, and if you had done so, then some of the things I am going to say here would be a repeat.
1. Objective: Why do you want to do this?
To make money or profit. To exit more than you had before. You don't buy shares so that you can participate in setting the right price for shares. That would be stupid. You want to buy and trade in shares so that you make more money than you had before.
Simple objective but not so simple way to do it.
2. Why is it so difficult to make money on the stock market then?
Everyone has the same objective. And since it is a zero sum game (save for the dividend), you have to lose for them to win, and vice versa.
You are most probably quite insignificant (especially when you are starting). This is in terms of capital. The entire market is way to big for you to influence and worse some of the other players play dirty. They are significant enough to manipulate the share price, commonly known as goreng sampai hangus..You wanna get on the 'goreng' part and leave before you 'hangus'.
The share price of a company is almost unpredictable, especially if you do not have the technical or fundamental tools. It would be like walking blind without a stick even to guide your way. The share price is subject to the expectations of everyone else and since you cannot read their minds, you would not know. Therefore, without any knowledge on how to 'feel the surrounding' you are basically gambling. You could win with almost equal luck as a flip of a coin (I vaguely remember reading a study done on this).
3. The first thing is to know yourself
Like I said earlier, buying shares is not unlike going into a battle (of wits). And as with any battle, you gotta to have to things, a great deal of knowledge about yourself and a plan.
You already know what is you objective is: to make money. However, here you would need to be a bit more specific. Do you need to make profit everyday, every month or once a year maybe. This is determined by your cash need and how long can you go without the cash you are using to invest. There is no right or wrong answer, as there is no guarantee that you can make any profit any day, month or year. But this would determine the kind of time you need to be monitoring the market and the kind of shares you can buy.
In my case, I cannot be stuck on the screen every minute, so I guess I need to make my profit on a monthly basis. Not that I need the profit for my monthly expenses, rather for the purpose of discipline. I can go for at least one year without the capital back in my pocket.
Risk level? The moment you decided to buy shares that means you are on the above average risk takers already, daring and brave. The only thing right now is to not make ourselves foolish instead, or even stupid.
4. The second thing to do is to 'un-blind' yourself systematically
A fool falls down a lot, mostly for the stupidest reasons. That is akin to being blind and refusing to learn how to feel with your other senses. Well, the 'brave' also falls down sometimes, it hurts just as much, but as he are able to feel the surrounding, he would fall less (usually a lot less) than a fool.
There are many ways to learn about the or feel the stock market. Two of them are 'top down' and 'bottom up' approaches. I like the top down approach in general as a systematic way to feel the market.
First we start with the entire market, hundreds and hundreds of companies with hundreds and hundreds of shares. It is not uncommon for first timers to then quickly look at the most active counters as a guide for the choice of shares to invest in. I don't go for that because usually by the time the counter gets on that list, the meat is already gone. Meaning the price is already stabilizing, coming down or about to come down.
If you have lots and lots of money and you do not know at all what to buy, you could buy the entire market, meaning you would buy ever types of shares there are in the market or more realistically, the shares in the indices. That way you will be taking the market risk and return. You will make profit when the whole market makes profit.
Does it mean you need to have millions to to this? The answer is: not anymore.
You can 'buy' the exposure to the entire market by buying ETF from as low as a couple of hundred ringgit. For more details on ETF and how it works, you may visit my earlier posting here.
But if we want to take a higher risk and hope for a higher return (or have enough money for just one or two stocks), then we have to narrow down our selection further.
The entire market is then dividend by industries. Oil and Gas, construction, banking and such. Within these industries are companies (and shares) that does business; some more profitable than others and some loses money.
The natural thing to do is to pick an industry that is gathering most positive attention from other investors. Remember, share price moves based on expectation and expectations can sometimes be totally different than the reality of the fundamentals.
How do we find this out? Which industry is getting the attention? Well, we need to read the newspapers, trading forums and the likes and judge which industry is getting the most airtime. It could be oil and gas, it could be banking it could be property or plantation. You make your call.
- to be continued-
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