Monday, September 25, 2006

Stock Market

Lesson 11: Stock Market

Today I am going to talk what I know all about stock market. Actually, stocks can be considered as a good investment vehicle because of a few reasons below,

'Place where you can make or lose money!'

1) Stock is simply a piece of paper stating that you have some ownership in certain company. It has no physical meaning, therefore, you do not need maintenance to keep your stocks as compared to your real estate. For houses, lands, etc, you need to pay some money to the government because of certain taxes. You even have to spend more money every year to repair your house. However, you do not need single cent to keep your shares!

2) The liquidity of stock is high, basically, you just need to call your agent and usually, you can cash out your money within days as compared to property, in ewhich you may need months or even years to get your cash.

3) What you gain in stock is considered as capital appreciation. In Malaysia and a lot of other country, you do not need to pay tax for that. As compared to property, you need to pay tax if you make a profit after selling your house within a certain years after you buy it.

It sounds like that stock is a good option for one to invest his money. This is supported by a lot of studies which show that average stock market return is always higher that your fixed deposit interest. However, you must know that the volatility of stock market is much higher than other investments.

Volatility just means how much a stock’s price can fluctuate, your 1 dollar stock may drop to 20 cents or even up to 3-4 dollars within a year, you must always ask yourself whether you can tolerate that kind of fluctuation before deciding to buy any stock.

I always think you must be an investor if you really want to invest in stock market. Never become a speculator who listens to rumors and hold their stocks only for short term. You want to invest in a stock if the stock can provide you the following,

a) Good long term prospect- you are confident the core business of a company has a bright future. Although the current prospect may not be good, you anticipate the company will grow in 5-10 years time.

b) The stock provides you good dividends and the board of directors are very generous to give the shareholders money after the company makes profit.

c) The company is leader in their field. If you think of soft drink industry, you think of Coca-Cola, you think of McDonald's when fast food crosses your mind. Buy these stocks if you think it is a good time and you have extra cash!

However, you must remember one golden rule if you want to invest in stock market, be disciplined in the market and never use your feeling to buy/sell your shares. Be ready to lose your money as well, of course!

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