Monday, 13 October 2014

How to Invest in Shares [Part 3]

In the previous two posts, I've talked about the first steps. I've also mentioned about the dividends and various returns and risk of various forms of investments!

Today I would be focusing more on the last few things to take note!

Let's say you want to purchase your first share in a company? But which company?

What characteristics of each company should you focus on when deciding to make your purchase?

I won't go into too MUCH details here, but commenting more on what I feel are the essentials. It's mostly what I've studied in micro/macroeconomics.


1. This company has a strong brand name, preferably a market leader in the industry.

2. If the company can't be a market leader, then it should have a high barrier to entry. 
Eg: (Telecommunications Sector, Singtel Starhub, M1) New competitors have to be approved by MDA.


3. Selling Products that are difficult to replicate!
Eg: Abercrombie and Fitch. Look around you in Singapore, 90% of teenagers are wearing replica T-Shirts from Abercrombie. Reason? The replicas are way cheaper and quality is acceptable. And what else? People are not willing to pay $50-100+ and above for a shirt with a moose logo! As of now, shares are trading at USD 33.32 after falling 0.53 points. (1.57%) But will it last forever? Time will tell.


4. Strong and stable stream of profits!
Self-explanatory! You wouldn't want a company who's up to their necks in debts and making losses.


5. Pricing Power!

An economic term referring to the effect that a change in a firm's product price has on the quantity demanded of that product. Pricing power ties in with the "Price Elasticity of Demand."

Generally speaking, if a company doesn't have much pricing power then an increase in their prices would lessen the demand for their products. (Investopedia)

Companies that can raise their prices, and demands wouldn't lessen are usually telecoms. SMRT. We're so highly dependent on Internet usage and public transport, that telecoms and transport operators can raise their prices and demand will still be strong. (Sad for us.)

6. Sell items that are essential for everyday life/useful products
Supermarkets, think Sheng Siong/NTUC Fairprice/Giant.

7. Invests Cash & Dividends back into the business/Strong Leadership/Healthy Balance Sheet

You could decide to Value Invest! You refuse to follow the crowd, to pay high prices for popular shares. You get shares at good prices and then wait for that share to be valued in the future.


What's Next?


Some questions to ask before any investment:


1. WHY are you buying it? What's attractive? What makes you think the share price will rise?
2. Does the company has strong competitors? What makes you think it has the edge?
3. How is the company performing? Good? What about the future?
4. Does it have a stable cash stream?
5. What's the track records of dividends? Have earnings increased over the years?
6. What is the company's debt status?
7. Pricing power?
8. Affected by macroeconomic issues?

COMMON MISTAKES MADE:


1. Selling too early versus Selling too late.
2. Trying to time the market.
3. No diversification.
4. No proper asset allocation.
5. Not re-investing dividends (This is personal preference, not really a mistake)
6. Being too emotional.

That's it! That's all I have for today. I am considering a short post next on a guide to building your own portfolio!

See you soon :)

Signing off,
Teenage Investor

Posts you might be interested in:
1. How to Invest in Shares [Part 1]
2. How To Invest in Shares [Part 2]
3. Living without money: Nearly half of Singaporean households living from paycheck to paycheck
4. Rebalancing & Managing your Portfolio
5. Having too much expectations on your Dividends

2 comments:

  1. personally, i do dividend analysis as the first step.

    put money in, must know whether it can come out cold hard cash without selling it.

    visit my blog for some ideas...thanks!!!

    http://paullowinvestmentjourney.blogspot.sg/2014/09/investing-made-simple-as-abc-part-1.html

    ReplyDelete
  2. Hi Teenage Investor,

    Just a suggestion, but an addition to this section on how should investors go around choosing good value companies (some ideas here and here)would be a helpful addition to this section which teaches people to pick out the good companies.

    ReplyDelete