If you are interested to start trading or investing in stock market, this is a blog post that you don't want to miss.
In this post we will share with you why you should start investing in stock market, process of account opening, and the learning process that you will encounter and the things to avoid when selecting stocks.
Why invest in stock market
When we think of stock market we always think of Returns, additional income and to fight against inflation.
However, in order to achieve the above, investors or traders must be equipped with high level of investing and trading skill. Otherwise it will not have the same outcome as you expected above.
Let's not talk about Return On Investment first. Start by developing a saving habit.
When I started my first job, I always have difficulty to save. Even though I have set up an online FD in my salary account, it is just too easy to withdraw. Insurance savings plan is never my options due to the commitment and duration to maturity which is too long, and early withdrawal will have part of my saving burned.
So every month I deposit 20% of my savings into my trading account (learning from Rich Dad & Poor Dad by Robert Kiyosaki). The reason I put my savings with the broker is because of the withdrawal process. Some brokers require 2 working days to have your funds deposited into your bank account. To those who can’t control your desire for shopping, this is a good way to control yourself. Because by the time your funds are in your bank account, your desire would have faded off. That makes withdrawing from the trading account your last option.
Another plus point of having your savings in the trading account, you get to earn interest too! Not much comparing to the banks, but at least there are gains.
After you have developed the habit of saving, next thing is to learn what stocks to buy with your savings.
Please take note, investing in stock market is not like what it shows in the movie or drama series which you can easily make profit out from the stock market. Often movies and dramas portray the good side of the story but never show much on the losing side. A successful investors or trader spent thousands of hours and multiple failure in order to achieve success. Which is why I always tell my followers that it is better to learn from mistakes or failures. If you meet any successful traders or investors, don't ask them what strategy they use, always ask how do you deal with failures and mistakes. You will learn more from that as what make us human successful are the mistakes and failures we overcome, it is never the system that make them successful.
For those who are new to the stock market, you can first try with buying bit by bit on those good company. The common company that many investors and traders always look at are Nestle and Public Bank because of their stable growth in price.
Don’t Invest Like Buying Vegetables in Wet Market.
Now you might say the stock price for these company are too expensive! Here's the question back to those who think the price are too expensive and not worth investing. Do you want to buy a cheap property that is out of nowhere with no value appreciation nor rental demand? Or you don't mind spending more to buy at prime areas which have demand for rental and better resale value?
Always remember, you are investing, not buying vegetable in the market. A vegetable with lower price at the end of the day will still fill your stomach. Which has served its purpose. But investment is not! Look at how steady the prices of these stocks grew at the chart below. A good investment is never too expensive (please don't use this thinking in your shopping philosophy), it will always be expensive.
Beginner traders can start with this to roll your returns. But you have to remember one thing. Expensive stocks don’t mean good return. Often beginner have the same mistakes of entering into stocks that are expensive, thinking it will have good return. But end up trapped in liquidity problem. Some stocks have not much floating shares in the market for buyer to buy or for seller to sell at the nearest to current price. Look at the examples below, the price offer in the market is very wide. Willing buyer at 0.335, willing seller is 0.350. The price in between is missing due to no willing buyer and seller at 0.340 and 0.345.
The reason why there is such a gap is due to the majority of the shares being held by the investors or shareholders. Now you might think, if they are holding means it is a good company, right?! Well, if you are holding big number of shares then yes. Or else you must remember the rules in the stock market, demand will push the price up. The demand of the big players like funds or high net worth investors will drive the shares price up.
If that company is good, but the floating shares in the market is very little, big player will not be interested in buying from the market. Because they can’t acquire many shares there. As a result, the share price will not be active. What they can do is buying from shareholders or investors off market which do not have much effect to the price in the market. Because it is a private sales and purchase arrangement so it will not have much effect on market price movement. Although there are exceptional cases.
Looking into stable growth companies will be a good stepping stones for beginners to familiarize the trading platform and how stock market works.
If you want to further improve your analysis skills, you may start to learn about fundamental for investment and market psychology for trading.
Next step: Learn the skill to trade or invest
I must warn everyone not just the beginner, also to those who are still learning, prepare to lose SOME money during the learning process. But there is a way to limit the losses while learning.
Always start with risk management, our style of risk management is different compared to others.
● Position sizing: We will have a standardize position sizing based on our initial capital for each trade regardless of the stock price. E.g. RM 1 stocks enter 100 lots, RM 0.20 stocks enter the same lot size of 100 lots. The reason is because of the profit and loss of each trade is based on how many lots you entered. If a stock goes down 1 price level then you will lose RM 100, if it goes up by 1 price level you will gain RM 100.
● 2 cut loss points: we constructed a cut loss point that follows the market, which will help us to cut loss near to our entry point with minimal losses sometimes with a profit. 2nd cut loss point is for the worst case scenario when the stock price plunges the next day, so we can cut loss effectively by knowing the stocks have no intention to push higher.
● Select stocks with lowest risk: when we talk about lower risk, it doesn't mean by the company fundamental, because we don't go for long term investment, we prefer short to mid-term swing. We define lower risk stocks by the entry price of our stocks to our 2nd cut loss point. If the stocks you enter and the cut loss point is set far away from your entry price, your trades will not be consistent. Because you need to have a higher reward to cover it.
● Understand the market: the best way to protect yourself is to understand the things you deal with. If you don't understand how the market works, you will always be on the losing side.
Risk management is very important, if you have a great strategy but don't have a good risk management for it to work together, your trading or investment return will be inconsistent.
Your learning doesn't stop at risk management and trading strategy. The next key to master trading is to Master your Trading Emotion, which is one of the most difficult part to control and master. With investment and trading, you will understand a lot more about yourself. The greed and the fear in you will always control your decision and you will find it hard to make rational decision all the time. Especially if your analysis is based on signal itself but not understanding the market. Because you don't have facts to convince yourself, so you rely on emotions to convince your trading decisions.
It is a learning process, do it step by step.
- Understand the intention behind all price movement. If an analysis that you learn from internet or someone else, doesn't convince you to sell or buy with facts, look for one that tells you why the price will go down and up based on the price movement of the market. We believe everything happens for a reason, every price movement is due to a previous setup. But often traders or investors look for the reason after the price moves.
- Learn from mistakes: after you have learnt the facts of each price movement, it is time for you to do some mistake by not following the facts. I will say, 90% of the traders will ignore the facts for the first few times and continue to hold. And when the price move according to the facts, you will start to regret not following the facts you see in the price movement and you will start following in your next trade.
- Never put your expectation in the market: you are not the market, many investors and traders always set a target return from each trade or set a profit target on each trade. When the price didn't achieve their expectation, they will feel sad and emotions will take over the decision making. Worst when it hits your expected target then your ego will take control (often happens in male traders).
- Prepare for losses and profits: investment and trading is a boring job, if you are feeling excited or sad when you make profit or lose money, it is no different from gambling. Why gamblers feel excited when they win? Because they are betting on hope! If they got it right it is unexpected! That's why you will feel happy when you win a bet! If you know that you are going to win, will you be excited about it? (I am not saying that every time we know we will make profits, just an example to better understand trading psychology.) Always prepare that you will lose in every trade, profit will just be a bonus, then you won't feel so bad when you are losing, so your emotions will not take control.
Trading Account Opening
So now you know about the trading journey. Are you ready to open a trading account?
There are so many SECURITIES firms out there, which one should I choose? I capitalize SECURITIES firms because many people will always refer securities firms as bank. I encountered many clients asking me which bank are you with? Your BROKERING house is not a bank? Is it safe?
Basically, all securities firm in Malaysia are governed by Securities Commission Malaysia, Bursa Malaysia and Bank Negara. They have to meet the requirements in order to setup and maintain their securities firm license. With the same standard as other "banks" that everyone refers to.
But why some banks offer share trading facilities. Basically securities firm and the bank business are separate entities, you might see CIMB BANK, but the brokering company is CIMB SECURITIES (which is now known as CGS-CIMB SECURITIES, due to 50% acquisition by China Galaxy Securities). Basically securities firm with bank names on it, is their subsidiary company which is also the same as other securities firm.
The plus side of having a trading account with bank linked securities firm is funding your trading account will be much easier if you have their banking account in my opinion, do let me know if there are more advantages of having an account with the bank linked firms. But depositing funds are not really an issue these days with online transfer.
Services is what you need to consider, such as the brokerage rate and dealer/ remisier service.
Normally there are 2 types of trading accounts offered to you, cash account or collateral account.
● No extra leverage
● Trade according to your funds available in your account.
● Normally the brokerage rate is lower (because risk is lower to the securities firm), different broker will have different rates.
● No margin call, because you can only trade on the available funds.
● Extra limit, normally 1.5x or 2x of your cash or shares held in hand (depends on the share)
● If utilizing extra limit and you want to hold the shares, you will need to deposit extra funds into your trading account, normally we call it pick up. Or else, it will force sell on T + 4 ( T means the day you bought the share, + 4 days means 4 days after you bought the shares.) Your dealer will contact you on T+3 or 4 to confirm if you want to pick up.
● Higher brokerage rate, can be 4x higher than cash account rate. (Different broker will have different brokerage rates)
So now you have understood the basic account type available in the market, you may choose the account type that suits you.
Process of account opening
You may search from the internet to look for securities firm and click on contact us for account opening, but they will randomly choose a dealer for you. Some dealers are good and will provide a good service, so it depends on your luck. But if you know anyone around you who are remisier or dealer then you may open a trading account with them, at least you know who they are.
Or if you need recommendation, you may contact us.
First you need to filled up an account opening forms below:
1. Client details
2. Product details
3. CDS account opening forms (Bursa)
*make sure to fill in your name and address according to your IC, in terms of symbol, spacing and paragraph.
Then provide a front and back photocopy of your IC and latest bank statement or bank book front page.
Some broker will charge an account opening fees of RM 10.
Once the account is ready, you will receive a confirmation email from the securities firm and you may start funding your account after activation. Then you may start from step 1, save 20% of your income into the trading account.
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This blog is for educational purpose only. It is not and advice or recommendation to buy or sell financial instrument. Viewers and readers are responsible on your own trading decision. The author of this blog are not liable for any losses incur by any investment or trading.