5 Tips to invest in equities — Part 1
Get the most out of your investment.
Investing in equities can be pretty challenging for beginners. Without proper planning and understanding of how to invest in equities, many end up losing money instead of making it. This bitter experience more often than not results in beginner investors giving up investing.
This is where we step in and try to share with you how you can make sure your investment is worthwhile.
Yes, it sounds cliché, but that’s the reality — you must set a goal first in order for you to know when and how to invest. When you have identified your investment goals, risk tolerance, and the time horizon for your investment, then you can start planning out the rest.
For example, if your goal is that you want to have enough money to buy a PlayStation 5, you can’t simply just go and invest in any equity products you want. Some of these investments take years to grow, where most probably you’ll see a brand new PlayStation 6 when you’re still struggling for that PlayStation 5. For that, you’ll need to look for investments that are profitable in the short term.
You’ll also have to know your risk tolerance. Investment is a win-and-lose game. It is important for you to know how much you’re willing to lose if your investments go south. Some were too eager that they went and borrow money just to invest, and when things go bad, the only thing they’re getting is debt and bankruptcy proceedings.
The general rule of thumb is that your risk tolerance should be an amount of money that won’t send you down the drain if you lose overnight. Simply put, an amount you can live on while watching it disappear.
Another important thing is to set out how long you’re thinking of holding your investment — or to know your time horizon. This is important since some types of investments are riskier than others. Of course — more risk more gain, but be sure you have enough cash under the pillow to take the risk.
2. Know the different types of equities
Some new investors may confuse themselves thinking that investing in equities is only by buying stocks. That’s true, but that’s not all of it. There are many types of equities and each come with its own pros and cons. Here are some of the most commonly traded equities:
i) Common shares
Common shares are the most common type of investment you’ve heard of. It’s simple when you buy shares from a company — thus giving you a dib in part of the company’s profit as well as internal information (including voting rights).
The most important benefit of common stock is that you get to have voting rights, i.e., you get to decide the company’s future — although most beginner investors won’t have enough shares to really make an impact in the voting process, it’s good to be in the knows nonetheless. You’ll also have more prospects of long-term stock price increase… like, we have all imagined if we invested in Apple (NASDAQ:AAPL) two decades ago, haven’t we?
Despite that, dividends for common shares are relatively low compared to preferred shares, and these kinds of investors are at the back of the line in terms of receiving their cash. Say, if the company goes bankrupt, with whatever cash they have left they’ll have to pay everyone else first before they see if they have anything left for you.
ii) Preferred shares
Preferred shares are like common shares, minus the voting rights but with (usually) higher dividend payouts. Preferred shareholders, as the name suggests, are preferred over other investors or creditors in terms of dividends payout. What it means is that you’d most probably be the first in line for the cash, and if the company goes down, your payment will be prioritized over the others.
Apart from the absence of voting rights, another downside to common shares is that it’s harder to liquidate your shares. This is due to the fact that there are more common shares out in the market and there are more buyers as well. Preferred shares, it’s less available in the market with fewer buyers too. Thus, you might find it a bit harder to sell it.
iii) Private equity
Private equity is a type of equity where, unlike common shares that are usually traded in the public market, private equity is traded privately, i.e., it involves companies that are not publicly listed.
Usually, investments in private equity are for a company that has a high potential for growth. Most are seeking to be publicly listed and some seek to be acquired by bigger corporations. Don’t be confused with venture capital — private equity funds or firms usually invest in companies that have already matured.
The most common way for you to invest in private equity is by engaging with private equity firms of funds. These firms or funds will then invest in private equities. However, investing in private equities would usually require you to be rich first, which is not the case for many new beginner investors. How rich? Usually, the case is you have to be at a few hundred grand or even millions to invest.
Alternatively, many of these private equity firms are now publicly listed so you can buy their stocks instead of engaging with them to buy private equity. Among these companies are Blackstone Inc (NYSE:BX), KKR & Co Inc (NYSE:KKR), and Apollo Global Management Ord Shs (NYSE:APO). Do note, however, these are just examples of the companies and it is in no way a suggestion for you to buy or sell these stocks.
iv) Equity exchange-traded funds (ETFs)
Another equity investment product that you may be interested in is equity ETFs. An ETF, simply, is like a basket full of equities from different companies. Consider it like a set meal. When you purchase your own stock, you get to decide it like an à la carte meal — which stock you’d want, how much you’d like to purchase, etc.
With ETF, it’s like you’re looking at set meals — some may have chicken and veggies, some beef and potatoes — but it’s pre-picked and bunched up for you to choose from. So, with an equity ETF, you will buy one ETF stock, whereby the value of the ETF will depend on the performance of the set of companies bunched up in that ETF.
This is a good method of investment if you’d want to replicate a market index. For example, you want your portfolio to move like the S&P 500 market, but as many other beginners are, can we actually afford to buy every single stock in the S&P 500? Most likely no.
So, instead of that, you can choose from various ETFs that try to replicate the S&P 500 movements by bunching up a few companies that reflect the movement of the S&P 500.
v) Equity mutual funds
Equity mutual funds, equity funds, or stock funds (yes, apparently there are a lot of names for this one). Just like other mutual funds, an equity mutual fund is where a bunch of people pool their money into a fund which is then managed by a fund manager. These fund managers are usually professionals who are well-versed in the equity market.
These fund managers will then use the money that you and other investors put in the fund to purchase stocks in the market that they think will generate the most returns.
There are many ways for you to invest in mutual funds, but the two most common methods are either by directly engaging with fund providers (in which some cases may require you to be rich first), or you could also open a brokerage account and trading mutual funds in the market.
Do note, however, that mutual funds, unlike usual stocks, are only traded after the market close, and once a day. So, if you see that the price of a mutual fund is low before the market closes and you press buy, the price that will be applicable is the price that will be calculated after the market close.
3. Portfolio diversification
When speaking of portfolio diversification, many new investors mistakenly think that not putting your eggs in one basket means not investing in only one company that you like. It’s true! Don’t throw away all your cash into just one stock.
However, the most important key is to invest in stocks with different risk levels to make sure that if you lose, you don’t lose too big. Don’t diversify your portfolio by investing in multiple stocks but all of them are high-risk stocks.
In managing risk, you must ensure that your portfolio consists of multiple kinds of assets, or perhaps you can invest in different sectors, industries, or even locations — like investing in multiple countries’ stock markets. If one country is in an economic downturn, your asset in another country may correspond differently.
4. Portfolio rebalancing
Portfolio rebalancing is where you adjust your portfolio allocations to manage exposure to risks or to ensure that your portfolio allocation is based on your investment planning.
Putting forward a simple example, it is done by selling or purchasing a certain part of your asset to ensure that your asset allocation matches your initial plans. For example, your investment planning is that 50% of your asset value is in stocks and another 50% is in ETFs.
If your stocks suddenly rise, this will make your portfolio value change, say, stock value is now taking up almost 70% of your total portfolio value. How rebalancing looks like is where you sell a few of your stocks and buy some ETFs to get both values to 50% again.
Do note, however, that your portfolio need not be at the 50–50 ratio. Some allocate 30% to bonds 70% to stocks and so on. The most important key is that your asset allocation suits your investment goals.
However, do take into account that while rebalancing is important, it may take a jab at your income as constant buying and selling of your assets may lead to higher commission costs. Some also argue against it, stating that portfolio rebalancing can be bad since you could be selling strong assets while taking in weaker ones.
5. Dollar-cost averaging
Another investment method that you might want to consider is the dollar-cost averaging method. This is a method where instead of investing in a huge sum of cash at one point in the market, like buying the dip, you go and invest in a relatively smaller amount constantly into your preferred asset — kind of like when part of your salary is being allocated monthly to your pension fund.
The upside of this method is that you will be less vulnerable to market movements as your investments are done constantly, regardless of the market price. There might be times when you invest as the price goes down, but there will be times when you invest when the price goes up as well.
This will also ensure that you’re not investing huge bulk of money based on emotions such as fear of missing out (FOMO), which may bring in more losses than gain if your emotion deceives you.
Simply put, it is a method where you constantly invest a certain amount into an asset with a promising long-term run regardless of the price.
Do note, however, that for this method, your gains may come in a little bit slower and you may want to count in the cost you will have to incur for fees, commissions, and others.
Well, that’s it for now and we’ll look forward to bringing you more tips in the future!
None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.