Investing can seem like a daunting task, but with the possibility of making our money ‘work for us’, it is hardly a topic for the backburner. Business Consultant Pria Masson shows you where to start with her cheat sheet on investing in equities.
It’s the second month of the new year and hopefully you’ve met some of your ‘start of the year’ goals. Was the idea of making your ‘money work for you’ one of them? If not, you may want to add it to your list. With technology allowing investments and money-making avenues to be easy, accessible and available, the ‘how to’ is relatively easy. It is the ‘where to invest’ that is a big question.
This month, I thought I would do a very quick cheat sheet on investing in equities. Why equities? The simple answer is ‘reasonable returns’. Equities have the potential for higher returns than simpler options like bank or term deposits. This does mean higher risk, but, that’s where a cheat sheet of how to minimise that risk, or know when you can bear the risk, will help. Keep in mind, these are my personal views and how I approach the process. These suggestions are not financial advice. Always consult with a professional advisor before making any investment decisions.
The Very Basic Basics
When you buy equity in a company, you own one or more shares of that company. So, understanding the company is critical and should be the only factor, should it not? Afterall, if the company makes money, you make money. If only it were that simple. The shares issued are traded which means, it’s a marketplace where the prices rise and fall each day. How does the price change? It changes based on how much demand and supply there is – similar to how vegetable prices change. If more people seem to want to buy a stock, the price goes up. If more people want to sell the stock, the price goes down and the final price is a calculated value of what people want to buy and sell it at.
The factor to understand then is, what makes people want to buy or sell a stock? Fundamental company performance, overall “market sentiment” or how people are feeling around the future on that day and of course, the competition in the market i.e. demand behaviour and performance of other similar alternative stocks.
How to Begin
To begin with, pick a country, ideally one that you are familiar with. Most of these will have investment sites that are popular. For instance, you could go look at either Reuters or Bloomberg. Pick an industry or sector that you understand a little bit. A quick Google search will tell you which are the main listed companies in that space. Research that.
What Do You Need to Look For?
These are the terms that I like to look at: P/E ratio which is the current price of the stock divided by its last listed profit. Look at this along with the PE ratio of the peers of that company. If the average P/E of the industry is higher than that of the company, you have one tick mark in place. Next, debt coverage ratio. Too much leverage is rarely a good thing. Most companies however have debt. Again, compare with the industry average and you will get an idea of how good or bad its level is.
Next, I like to look at the shareholding pattern. Companies that have too much control with few sets of people, and too few shares available to public are better avoided. Finally, look through news articles and comments on websites around these stocks. It’s a treasure trove and will give a good indicator of the future and reliability of the company.
