Recent news reported that our local bank Bank Islam Brunei Darussalam (BIBD) is planning an Initial Public Offering. Along with the fact that they gave high dividends last year, I think it’s a good time to talk about stocks.
One of the ways we can generate wealth is through buying stocks. This can be through capital gains when the stocks are worth more, or through dividends over time. Choosing which is the best strategy for you falls onto how you perceive risk, age and timeline. Before diving into the market and potentially losing all your money to the big players and sharks inside this lucrative pond, it is very important for us to learn what it is.
As part of your due diligence, you owe it to yourself to absorb as much information about how any asset class works before jumping in. That is to say, “If you don’t want 100% risk for unknown gains, study up!”
What are Stocks?
Stocks are considered by many as an investment vehicle. The terms owning a stock and owning an equity or share in a company are synonymous. What they mean is that if you have a stock/equity/share in a company, you own a part of that company. Therefore, if the company made profits, you are entitled to a percentage of it.
Where can you find stocks?
While you can buy stocks directly from a company (if they’re selling), usually they are traded publicly in places called Stock Exchanges. These are marketplaces where stocks may be bought and sold to one another. These include the Singapore Stock Exchange (SGX), New York Stock Exchange (NYSE), Bursa Malaysia and Hong Kong Stock Exchange (HKEX) to name a few.
How do stocks become available?
Initially, all companies are private; meaning their stocks and shares are held by a select few shareholders. These include the founders and investors. Usually companies will first “go public” and offer their shares to the general public through a process called an Initial Public Offering or IPO. In return for selling their shares, the companies (often) get large amounts of capital to use. This could be for increasing their productions or growing their company.
Once a company goes public, they have to adhere to a set of rules set by regulators. One of these is to disclose their financial and accounting information. More on how you can use these information below.
Why invest in stocks?
As with many investment options, the ultimate goal is to grow and preserve your wealth and not let it get destroyed by inflation. The reason people invest in stocks are, in short, to make money through:
1. Capital Gains
Capital gains are what you get when you sell any assets at a higher price than you bought it for. If you bought 1,000 stocks for $1 each and sold it when the price is at $1.50, you would have made a capital gain of $500 (1,000 times $0.50 profit each stock).
Whilst this is great, there is also a chance the stock may lose value; that would make your invested money less than you initially started!
2. Dividends
A dividend is how a company pays out its’ profits to the shareholders. The more shares you hold, the more dividends it entitles you to. Investing in stocks for dividends is one strategy for retirement planning whereby the dividends can be used to replace your salary.
That being said, dividends are not guaranteed and you should not rely solely on them for your financial planning.
! Dividend =/= Interest !
Some people confuse dividends with interest so here’s a simple explanation.
Think of interest being paid to you by a financial institution, e.g. a bank, as a “Thank you” for parking your money with them. So while your savings account gives you a little return on your deposit once in a while, it is not considered a dividend.
A dividend is paid to you because you own a part of the company. Think of it as you owning 1% of a pie making machine. Every time the machine makes a pie, you are entitled to 1% slice of it.
Why invest if there are risks!?
It should be laid out that stocks are considered Moderate to High risk asset classes because the market has volatility. Volatility is caused by the prices going up and down from investors buying and selling. If you do not know what you’re doing, there is a chance that you can lose ALL your money.
- After knowing that, why in the world would you do it? Well for one, if you don’t do something, your money will be worth less in the future than it does now. Remember stories about 50 cent kolomees that cost $3 now? That’s all thanks to inflation and rising costs of living.
- Secondly, if done properly, investing risks can be minimised. Yes, “minimised”. Why can’t it be zero risks? Because no real investments have zero risks as we cannot predict the future. Any investment opportunities that claim to be risk-free should be looked at closer in case it is a scam. Also, you can diversify your asset classes into bonds, real estate, forex, starting a business and so on to reduce the risk in case one class blows up.
- And thirdly, sadly, you cannot grow wealth through budgeting and saving up alone! The interest rates for savings accounts are too low (0.01%?) so taking a calculated risk will be worth its while in the future. It is not uncommon for people to pursue a return of around 7% per year. This, combined with compound interest, is seen as a good strategy to build a portfolio.
Compound interest
Compound interest means interest on your interest. It accumulates over time and can be used in your favour. Example: You invest $10,000 and gain 7% return for the year; earning $700.
Now you have $10,700 and if you get another 7% return the next year, it becomes $11,449 ($10,700 + $749).
As you can see, the returns are paid on the cumulative value and if market conditions are favourable, this value will keep increasing.
Where to buy stocks in Brunei?
Gone are the days where prospective investors crowd on the trading floor of an exchange and shout buy and sell to one another. Nowadays, anyone may access these markets through the internet using Stock Brokers and online platforms. Similar to the brokers on the trade floors, they initiate trade orders from investors to buy or sell on their behalf. In return, the brokers earn a commission for every trade (something which was prone to abuse by human brokers).
Brunei does not (seem to) have an active investing community, unfortunately. What we have are active spenders; many of which go into heavy debt. Plus the fact that many people think buying stocks is similar to gambling, they shy away from it.
If you’re thinking of breaking from the social (and financial) norms, and start dabbling in the stock market, there are 2 ways to purchase stocks:
1. Baiduri Capital
Baiduri Capital is the only provider of a trading platform I know of in Brunei. They act as the brokers and help you purchase and sell stocks. They also hold on to these assets for you as you trade. To sign up with them, you will need:
- Baiduri Bank account
- BND1,000 deposit
- Register online and sign off paperwork and declarations (both can be done at their branch).
2. Brokerage accounts outside Brunei
It is possible to open accounts outside of Brunei as the platforms are online. However, some might not entertain non-residents of that particular country. Taking into consideration that you need to transfer money back and forth between different countries, the charges may cost more than to just do it locally.
Be careful of online brokerages too! There may be hidden charges such as inactivity fees and high commission rates padded on. These things eat into your profits or even push you into the red if you do not pay attention.
Yes, yes, but HOW do I choose stocks?
When I first started looking at stocks, I had no bloody idea where to begin. It wasn’t until I accidentally stumbled onto it that I realised the obvious; surprise, surprise: stock picking isn’t like gambling! There are ways, methods, in which any person can learn to pick the stock of their dreams. And there are 2 main ways to analyse a stock:
1. Fundamental Analysis
If you like digging deep into what the company does, who the executives are and how much they earned the last 5 years, Fundamental analysis is for you. Reading through a public traded company’s financial statements and recent news will give you an insight into their stability and growth.
This technique is employed by people who are looking to buy and hold for the long term. Usually more established companies will also pay dividends; some every month, every quarter or every year.
2. Technical Analysis
Don’t like boring numbers and executive summaries? If you can handle looking at as many charts as there are companies, Technical analysis may be the way forward. This technique involves looking at historical charts in order to determine if a stock price is likely to go up or down.
Usually technical analysis is employed by traders who are looking to buy low and sell high. Reading charts is quite subjective and just because the chart tells you the price might go up, doesn’t mean it will.
Building a Mindset for Stocks
There are many mantras that do not just apply to stocks but to investment vehicles as a whole. A core understanding of your personal risk appetite and psyche is important.
1. Know that you will lose sometimes.
Even the best traders will lose some trades; the key is making sure your winnings outweigh your losses.
2. Don’t “revenge trade”.
When you exit a bad position, keep calm and don’t buy the first shiny gem without looking at it properly.
3. Don’t invest money you’re not willing to lose.
If you need the cash to pay for food and petrol, it is best not to invest it. Best solution is to save up a sum of money you don’t absolutely need to survive.
4. Don’t get attached to your stocks.
Know when to cut losses and take profits. You may love your little stock but it likely doesn’t love you back.
5. Know what you’re buying into.
Always be informed when you make decisions. Did the company make profit last year? How about 3 years back? Is their business model sustainable? If you bought stocks of the biggest “Fidget Spinner” factory out there, how would the price react when the fad is over?
6. Don’t trade by word of mouth.
Ever hear someone say “I bought X stocks because they look good”? If you do, do your research before committing. Following the herd may result in a bad trade!
Conclusion
I find it quite unfortunate that there are no proper avenues in Brunei to learn about investment vehicles especially stocks. Usually learning is through trial and error; I am also in the infancy of learning about it and it’s a huge subject in itself. But as long as there’s Google and our internet is working, there’s no reason not to read up about it; Especially if you are considering investing in the stock market. While we likely won’t become the next Warren Buffett, securing a nest egg doesn’t sound bad at all. Speaking of Warren Buffett, he has the best advice when it comes to investing:
Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1.– Warren Buffett
