January 29, 2017 0

Why do we invest in stock market?

Why do we invest in stock market?

Stock market is generally a marketplace where stocks and bonds are ‘traded’ – essentially the trade means buy and sell. Why do a lot people invest in stock market? The obvious reason is to get rich.

How do people get richer by investing in stock market? Mainly there are two methods to make money from stock market.

a) Know that stock prices fluctuate constantly when the stock market is open, we will never really know how much we are going to make until we sell the stocks. First is by knowing when to sell the stocks. Most of the times, without proper knowledge and skills, we have to be ready to lose the stocks that we hold. This is what we call capital gain/loss.

b) Go for higher value stocks, not all stocks guarantee dividend payouts. Depending on the nature of business for the stocks that we hold, we may get high or zero dividend payouts. Dividends are paid through the company earnings.  If the company is at loss, thus we will not get dividend payouts.

The key point is do your homework. Without doing any homework and just follow the crowd or based solely on speculations, we may end up at the losing end of the stock market investment.

Things to look for before investing in stock market/trade. Go for companies that have:

a) Consistent growth (the business operation). How to find out whether the company is growing – read and study the company’s Income Statement (sales growth, revenue, cost, profit, expenses, non-operating income, tax, finance), Balance Sheet (net-worth, capital structures, liquidity) and Cash Flow Statement (Operating, Investing, Financing) for the past year, and the years before.

b) The company has little debt. The debt structure allows the company to endure tough market conditions. Higher debt means the company have the obligations to pay interests from their earnings. How to find out whether the company has little debt – read and study the company’s Income Statement (sales growth, revenue, cost, profit, expenses, non-operating income, tax, finance), Balance Sheet (net-worth, capital structures, liquidity) and Cash Flow Statement (Operating, Investing, Financing) for the past year, and the years before.

c) Strong cash flow (liquidity). Why look for this trait? With strong cash flow, the dividend payouts are almost guaranteed. How to find out whether the company has strong cash flow – read and study the company’s Income Statement (sales growth, revenue, cost, profit, expenses, non-operating income, tax, finance), Balance Sheet (net-worth, capital structures, liquidity) and Cash Flow Statement (Operating, Investing, Financing) for the past year, and the years before.

d) Stable dividend. The company has a dividend payout policy and the dividend payouts are stable and consistent throughout their business operation. How to find out whether the company has been giving out stable dividend payouts – read and study the company’s Income Statement (sales growth, revenue, cost, profit, expenses, non-operating income, tax, finance), Balance Sheet (net-worth, capital structures, liquidity) and Cash Flow Statement (Operating, Investing, Financing) for the past year, and the years before.

Why go for dividends?

a) It is real money. The capital that we put into the stock are traded using our cash investment, and if the company makes money, the stock will payout dividends into our trading account, which we can withdraw later into our bank account.

b) We have the opportunity to reinvest. By reinvesting our dividend payouts, we are creating an investment platform that allows us to earn compounding returns.

c) We are a shareholder for the company stocks and in a way we are also treated as owners for the business. It is vital that as a shareholder, we want the company to grow and we also can reap the benefits as an investors/shareholder for the company.

d) Depending on the companies that we invest in, we may bump into companies that have generous management team. Generous means the dividend payouts to the shareholders can be higher than the retained earnings kept in the company.

e) Most mutual funds and unit trust fund management companies, go for stable companies and be part of their individual fund portfolio. Each unit trust funds have their own mandates to fulfill and give opportunities for unit trust investors to earn their returns. The collective of dividend payouts are then given by the unit trust management companies as income distribution to their investors.

 

P/S The content is extracted from the short seminar that I attended in Q42016 on Knowing and Understanding the Dividend Payouts topic.

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