Alphidius
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Seeing how there are lots of newcomers to the stock market (aka equities), this article shall try to address some the basic investment terms and concepts for investing in equities. Do not expect technical or detailed stuff to be in this article but feel free to discuss them anyway.
First off, newcomers must know that there are two schools of thoughts when it comes to investing in equities.
Active Investor
Also known as short-term investor or trader, active investors monitor their stocks on a daily basis. Their strategy relies on stock appreciation and going with the flow of the current trends and market movement. In this school of thought, going against the tide is suicidal and certainly no man can withstand the fall of a ten-ton cast iron, right onto him.
The plan is to spot the trends, wait for a signal (usually using stop limit) and making the move to buy or sell their targeted counters. They believe that the market is a zero-sum game and that their profits are actually someone’s losses. They use the market movement to further their strategy and goals, usually making a lot of money very quickly once they have a sizable capital. Active investors are usually full-time traders or short-term investors with a knack for looking at trends (usually from charts).
Passive Investor
Also known as long-term investor or value investor, passive investors have long-term strategies and goals to grow their portfolio. Unlike the active investor, passive investors rely not only on stock appreciation but more importantly dividend yield, to enhance and grow their portfolio.
The plan is to find out from facts and figures of companies, their true intrinsic values and buying that stock counter below that cost value. Passive investors do not need to monitor their portfolio daily as their stock picks are fundamentally strong companies and they do not let temporary market movements worry them. Their strategy is to see their portfolio grow in strength within a year or two and furthermore they have the holding power to do so. Passive investors usually obtain great portfolio results by diversification, value investing and a strong logical mind that does not let emotions affect its judgement.
Diversification
Essentially a risk management technique that invests in different categories of stock counters in a portfolio. This concept is similar to “Never put all your eggs in one basket” but bear in mind that different and unrelated stock counters could undermine your overall portfolio’s performance as well.
For instance, if one particular sector is not doing too well and taking a big dip while others are up, stocks vested in that sector may drive your portfolio book value down. However, diversification reduces the risk, if one does not diversify and placed all their money into that particular sector that is dipping, their portfolio might be negative instead.
Dividend Yield
An investment concept that is usually kept in high regards by the passive investors, which calculates the percentage of dividend returns per year with relation to their share price. For instance, SuntecREIT gives a total of $0.11703 (per share) worth of dividends last year, and the year end price is $1.35. This would mean that is has a dividend yield of 8.66% (0.11703/1.35 x 100%).
An investor could of course, use the average price he/she had invested into the stock instead of the year end price (year end price $1.35 for SuntecREIT but I bought it at $1.30 so my dividend yield should be higher, etc…) to obtain a more accurate dividend yield, unique to themselves. Higher returns mean better performance of the stock counter in terms of dividend yield.
Holding Power
The concept of the passive investor where he/she is in no hurry to sell the stock counter that has been bought for a long period of time and will only do so when the stock fulfils what the passive investor wants.
Market Movement
The basic concept where the stock market will move towards a certain trend and it is fuelled by public sentiments. On an uptrend, it is usually known as a bull market and a downtrend is known as a bear market, both categorize by the way each animal attacks, a bull will thrust its horns upwards while a bear will swipe its paws downwards. Market movement affects both active and passive investors.
Bull market will usually see active investors buying and selling stocks to realise their paper profits while the passive investors may or may not do anything. In a bear market, most of the times, active investors will dump stocks and switch to CFD to short stocks (shorting) instead while passive investors may or may not accumulate value stocks.
Paper Profit/Loss
Also known as unrealized capital gain or loss, any unrealized profits or losses will only be realized when the stock is sold. Active investors treat paper gains or losses with utmost importance while the passive investor might not be that affected as long as their key investment strategy still stays in place. Regardless, both types of investor must have a proper tracking of their invested stocks and their portfolio paper values if they want to succeed in their investments.
Portfolio
A grouping of assets, in this case, the different types of stocks that are bought and held by an investor.
Shorting
Also known as (short position or short), this concept is where an investor sells borrowed stocks into the market and tries to buy the stock back from the market at a lower price, hence making money from the transactions.
In Singapore, naked shorting is not allowed. Naked shorting is where an investor sells the stock without having borrowed or securing stocks before selling. Those who naked short and failed to buy back the stocks by the end of the day will be fined at least $1000 in addition to the processing fees.
The right way to short is through CFD (Contract for Differences) usually offered by brokerages. CFD is essentially a contract between 2 parties where the seller will pay the buyer the difference between the current value of the stock and its value at contract time. The reverse is also true, where the buyer will pay the seller if the difference is negative. This is where those who short make money from. CFD and shorting is an advanced concept and trading facility that usually only active investors use.
Stock Appreciation
The basic concept of a stock value, when it increases over time. This increase will generate paper profit and will increase the portfolio book value. Both types of investors would like their stocks to appreciate and have capital gains.
Stop Limit
A trading mechanism that when a specified price (stop price) has been reached, an order will be executed (stop-limit order). This is an advanced facility that is used mostly by active investors though passive investors may use it too.
Value Investing
The passive investor’s strategy of selecting stocks that are selling less than their intrinsic values. Passive investors look for stocks of companies they think are undervalued and acquire those stocks using this strategy. The issue here is that no two passive investors might have the same intrinsic value of the same company. Intrinsic value is the concept of the true value of the company, taking into consideration all aspects of the business, including tangible and intangible factors.
Zero-Sum
An economic theory where the gain or loss of a participant, is balanced by the gains or losses by the other participants. An example is if someone is willing to pay $1 for something I have bought at $0.50, then the profit of $0.50 would have come from him. Simply speaking, my gain would be his loss. Zero-Sum only works in a fixed wealth environment and sees the net change in total wealth among the participants as zero. The wealth just shifts from one person to another.
Additional Investor Concepts
Investor Basics - Technical Analysis Concepts
Investor Basics - Fundamental Analysis Concepts & REIT
First off, newcomers must know that there are two schools of thoughts when it comes to investing in equities.
Active Investor
Also known as short-term investor or trader, active investors monitor their stocks on a daily basis. Their strategy relies on stock appreciation and going with the flow of the current trends and market movement. In this school of thought, going against the tide is suicidal and certainly no man can withstand the fall of a ten-ton cast iron, right onto him.
The plan is to spot the trends, wait for a signal (usually using stop limit) and making the move to buy or sell their targeted counters. They believe that the market is a zero-sum game and that their profits are actually someone’s losses. They use the market movement to further their strategy and goals, usually making a lot of money very quickly once they have a sizable capital. Active investors are usually full-time traders or short-term investors with a knack for looking at trends (usually from charts).
Passive Investor
Also known as long-term investor or value investor, passive investors have long-term strategies and goals to grow their portfolio. Unlike the active investor, passive investors rely not only on stock appreciation but more importantly dividend yield, to enhance and grow their portfolio.
The plan is to find out from facts and figures of companies, their true intrinsic values and buying that stock counter below that cost value. Passive investors do not need to monitor their portfolio daily as their stock picks are fundamentally strong companies and they do not let temporary market movements worry them. Their strategy is to see their portfolio grow in strength within a year or two and furthermore they have the holding power to do so. Passive investors usually obtain great portfolio results by diversification, value investing and a strong logical mind that does not let emotions affect its judgement.
Diversification
Essentially a risk management technique that invests in different categories of stock counters in a portfolio. This concept is similar to “Never put all your eggs in one basket” but bear in mind that different and unrelated stock counters could undermine your overall portfolio’s performance as well.
For instance, if one particular sector is not doing too well and taking a big dip while others are up, stocks vested in that sector may drive your portfolio book value down. However, diversification reduces the risk, if one does not diversify and placed all their money into that particular sector that is dipping, their portfolio might be negative instead.
Dividend Yield
An investment concept that is usually kept in high regards by the passive investors, which calculates the percentage of dividend returns per year with relation to their share price. For instance, SuntecREIT gives a total of $0.11703 (per share) worth of dividends last year, and the year end price is $1.35. This would mean that is has a dividend yield of 8.66% (0.11703/1.35 x 100%).
An investor could of course, use the average price he/she had invested into the stock instead of the year end price (year end price $1.35 for SuntecREIT but I bought it at $1.30 so my dividend yield should be higher, etc…) to obtain a more accurate dividend yield, unique to themselves. Higher returns mean better performance of the stock counter in terms of dividend yield.
Holding Power
The concept of the passive investor where he/she is in no hurry to sell the stock counter that has been bought for a long period of time and will only do so when the stock fulfils what the passive investor wants.
Market Movement
The basic concept where the stock market will move towards a certain trend and it is fuelled by public sentiments. On an uptrend, it is usually known as a bull market and a downtrend is known as a bear market, both categorize by the way each animal attacks, a bull will thrust its horns upwards while a bear will swipe its paws downwards. Market movement affects both active and passive investors.
Bull market will usually see active investors buying and selling stocks to realise their paper profits while the passive investors may or may not do anything. In a bear market, most of the times, active investors will dump stocks and switch to CFD to short stocks (shorting) instead while passive investors may or may not accumulate value stocks.
Paper Profit/Loss
Also known as unrealized capital gain or loss, any unrealized profits or losses will only be realized when the stock is sold. Active investors treat paper gains or losses with utmost importance while the passive investor might not be that affected as long as their key investment strategy still stays in place. Regardless, both types of investor must have a proper tracking of their invested stocks and their portfolio paper values if they want to succeed in their investments.
Portfolio
A grouping of assets, in this case, the different types of stocks that are bought and held by an investor.
Shorting
Also known as (short position or short), this concept is where an investor sells borrowed stocks into the market and tries to buy the stock back from the market at a lower price, hence making money from the transactions.
In Singapore, naked shorting is not allowed. Naked shorting is where an investor sells the stock without having borrowed or securing stocks before selling. Those who naked short and failed to buy back the stocks by the end of the day will be fined at least $1000 in addition to the processing fees.
The right way to short is through CFD (Contract for Differences) usually offered by brokerages. CFD is essentially a contract between 2 parties where the seller will pay the buyer the difference between the current value of the stock and its value at contract time. The reverse is also true, where the buyer will pay the seller if the difference is negative. This is where those who short make money from. CFD and shorting is an advanced concept and trading facility that usually only active investors use.
Stock Appreciation
The basic concept of a stock value, when it increases over time. This increase will generate paper profit and will increase the portfolio book value. Both types of investors would like their stocks to appreciate and have capital gains.
Stop Limit
A trading mechanism that when a specified price (stop price) has been reached, an order will be executed (stop-limit order). This is an advanced facility that is used mostly by active investors though passive investors may use it too.
Value Investing
The passive investor’s strategy of selecting stocks that are selling less than their intrinsic values. Passive investors look for stocks of companies they think are undervalued and acquire those stocks using this strategy. The issue here is that no two passive investors might have the same intrinsic value of the same company. Intrinsic value is the concept of the true value of the company, taking into consideration all aspects of the business, including tangible and intangible factors.
Zero-Sum
An economic theory where the gain or loss of a participant, is balanced by the gains or losses by the other participants. An example is if someone is willing to pay $1 for something I have bought at $0.50, then the profit of $0.50 would have come from him. Simply speaking, my gain would be his loss. Zero-Sum only works in a fixed wealth environment and sees the net change in total wealth among the participants as zero. The wealth just shifts from one person to another.
Additional Investor Concepts
Investor Basics - Technical Analysis Concepts
Investor Basics - Fundamental Analysis Concepts & REIT
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