Intro to Investing: Stocks (or Equity)

To begin this series, let's start with one of the more popular financial instruments in the markets - Stock Investing!

A stock is a security that represents the ownership of a fraction of a company. The stock owner is entitled to a proportion of its assets and profits equal to the stock they own. Each unit of stock is called a "share."

Explanation: That definition does sound technical and scary. So, let's focus on the mechanics behind how an investor makes money from trading stocks. And let's use a simple analogy to understand this better: Picture an iPhone in front of you.

When you first buy an iPhone, it would have cost you let's say, a thousand dollars. (I know the actual figure is higher, but it's easier to use $1,000)

If you were to resell this new iPhone on Carousell, the likely highest price you can ask for is $1,000. After all, no one would pay more for this phone because they can get it at $1,000 from the original manufacturer. Unless…

You happened to be one of the first few buyers. The waiting list is several months, or Apple announces that they're stopping all production for an unknown reason. Suddenly, the supply for that model of iPhone in the market drops, and its value increases exponentially.

You could now make an immediate "capital gain" by selling your iPhone in such a scenario.

Likewise, a stock's value rises (and falls) based on the market's perception of its value. And depending on the size and brand of the company, certain news and events could easily influence this perceived value.

For instance, during a live interview, internationally famous footballer Cristiano Ronaldo shifted two bottles of Coca-Cola. He picked up a water bottle because he believed in drinking clean. That simple action led to the company's market value crashing by a whopping $4 billion as share prices tumbled 1.6%.

The stock market is likewise susceptible to market forces (news and events). Depending on an investor's investing school of thought, the investing strategy should differ. For instance, value investors might feel that this is an opportune event as the company's book value was still substantial, thus making that episode an excellent time to invest.

Things to Note: No one strategy suits everyone as there are many techniques people use to determine whether they should buy or sell a stock.

For example, technical analysis analyses statistical trends gathered from trading activity (Charts movement), and fundamental analysis focuses on the company's management team, financial health, etc.

Regardless of which strategy you apply, the key still lies with your investment goal and what you want to achieve in your specified time horizon.

Risks Consideration: Depending on the type of stocks, the risk level can vary from low risk to high risk. Generally, a stable company that pays out regular dividends would be considered a lower risk as its financials are consistent.

However, a younger company that is still expanding is usually of higher risk. They tend to leverage more aggressively to grow their market share/ company size.