Stock Market: Can You Waver the Waves?
Investing in the stock market is like riding the waves. There are times when the waves are rough, there are times when things seem to be calm, and sometimes the wind picks up slowly, leaving us in constant anxiety.
In the marketplace where volatility is high, any factor can cause havoc; sometimes it's good news, sometimes it's bad news, but one thing is sure: this news will affect investors similarly.
For those unfamiliar with stock market investment, investing in stocks means buying shares traded on the stock market. In Malaysia, all these transactions will happen in Bursa Malaysia, the central hub for stock market players.
When you buy a share, it means you're purchasing a unit of the company ownership. This ownership is in the form of shares or equity. As a shareholder, you're entitled to attend the company's Annual General Meeting.
You can only buy shares of companies listed on Bursa Malaysia, and some major players are Tenaga Nasional Berhad, Malayan Banking Berhad, Telekom, CIMB Bank, Nestle Malaysia Berhad, and others.
How To Invest In The Stock Market?
Before investing, you must open a Central Depository System (CDS) account, which records shared ownership and transaction history.
In the past, investors relied on stockbrokers, but today, investments can be made directly through online platforms like Maybank2u and various other accounts. This reduces costs as you no longer have to pay commissions to third parties.
However, the most crucial aspect of investing in the stock market is that you need to spare time to manage and monitor your investment consistently, staying on your toes about news local and international news as any changes will affect the stock price.
As the stake is high, your commitment must be significant as it is crucial in determining your success. This is particularly important if you want to focus on short and medium-term profit, in which your objective is on immediate capital gain, where you want to sell your holding when the stock price goes up.
However, you can also take a position to hold your stock for the long term. As such, any changes in the price per share have a minimal impact on your financial standing. If this is the case, your focus should be more on annual dividends as profit rather than capital gain.
The Oracle of Omaha, Warren Buffett, advises stock investors to refrain from investing in businesses they don't understand. He suggests investing based on the long-term value of a company. Additionally, Buffett emphasizes the importance of investing based on knowledge rather than emotions.
Risks Of Stock Investments
Since investing in the stock market is compared to riding waves, it undoubtedly involves high risks.
However, investors can expect high returns, especially if you actively monitor your stock movements, companies, industries, and the global environment, allowing you to act quickly to sell or buy the relevant stock.
Most importantly, to capitalize on your profits or minimize losses, you must be willing to sell your holdings when necessary. Greed for excessive profits can sometimes blind investors as the stock rises. As this happens, most the investor will sell their holding, which subsequently leads to a fall in price.
Why does it fall? The price will naturally fall when most investors sell their stocks with few buyers. So, to play in the stock market, you must take proactive steps and be willing to make fast decisions, whether to seek profits or minimize losses.
Returns From The Stock Market
Investing in the stock market gives you two opportunities to gain profit: capital gains and dividends.
Capital gains occur when the current stock price increases compared to the purchase price. In contrast, capital losses happen when the current stock price is lower than your purchase price.
Dividends are usually declared by companies when they make a profit. If the company incurs a loss, it's unlikely that dividends will be announced.
Consider the following scenario:
Ali buys 1,000 shares of XYZ company at a unit price of RM1 (RM1 x 1,000), making the total value of his holdings RM1,000.
Several months later, the stock price of XYZ company dropped to 50 sen per unit (RM0.50 x 1,000). At this point, the current value of Ali's shares is RM500, compared to the previous RM1,000.
If Ali sells his shares, he will incur a loss of RM500, which is a capital loss. However, suppose Ali doesn't sell the shares. In that case, the loss is only on paper, and he can still enjoy dividends from the company, if any.
Market Instability
Stock market investments are exposed to the risk of losses. This is because stock prices are susceptible to events affecting the company, such as internal and external political situations, relevant industries, and economic performance.
For example, during the peak of the COVID-19 pandemic, there was a high demand for rubber gloves. The demand far exceeded production because gloves became necessary, causing the price to skyrocket.
This enabled glove manufacturing companies to enjoy substantial profits.
At that time, the stock prices of glove manufacturing companies soared, allowing many to profit from the increase in stock prices.
However, now that COVID-19 is no longer considered a pandemic, the demand for gloves is decreasing, and today, the unit price of shares in glove manufacturing companies has also fallen.
Investors still holding shares in these companies may now face the possibility of losses because the stock prices may not return to the levels seen during the height of the COVID-19 crisis.
Other than that, many have suffered significant losses during the market crash. For instance, during the 1997 Asian Financial Crisis, the Kuala Lumpur Stock Exchange Index fell by 856 points.
Therefore, it's essential to understand that the stock market has high volatility and is highly sensitive to events in this country and globally.
Stock prices can rise one day and plummet the next. In such situations, buying and selling decisions should be made quickly to achieve positive returns or to avoid more severe losses.
Invest Wisely
Suppose you want to invest in the stock market. In that case, you need to be mentally prepared and diligent in acquiring knowledge to handle the challenges and volatility you will face as a stock investor.
However, suppose you seek a peaceful investment journey and still do not have any emergency funds; it is better to opt for low-risk investments such as ASB (Amanah Saham Bumiputera) and fixed deposits.
The low-risk investment will act as a shield to protect you from any financial downfall.
Financial advisors will always advise us to only start investing in high-risk investments if we have excess money, which will not affect our financial standing if faced with a loss.
Exploring various types of investments is not wrong, but be cautious not to let investments blind you. Key Takeaways:
1) Investing in the stock market is high risk, but investors can expect a high return.
2) There are 2 types of returns that can be pursued, which are capital gains following an increase in the price per unit of a share compared to the purchase price and dividends distributed by the company.
3) Investors need to allocate a lot of time to monitor investments in the stock market to reap profits and avoid losses. Investors are advised to only participate in stock market investments using surplus money, which will not affect their financial position if they face losses.
