Sunday, February 13, 2011

How to Invest in Stocks in a Nutshell

Let's talk investing in stocks. There are basically 3 ways to play the stock market/invest in equities:

1) Invest with a Fund Manager
2) Buy an ETF
3) Build your own portfolio

Let's discuss each in detail.

1) Invest with a Fund Manager
This is the easiest way to invest money with a fund as it requires the least research/work on your part. All you need to do is research into which fund you think is most suitable with you and whether you trust the management team managing your funds.

However, the downside is that mutual funds usually have large transactions costs both when you purchase and sell the funds. These can cut into your profit margins and dare I say it, further your losses!

Another thing to consider is that dollar cost averaging (ie: depositing a fixed amount monthly) is shown to be not the best of ideas and remember, the agent who sold you the funds is getting is cut monthly! So, your agent may not be giving you advice in your best interests! As such, some general advice is to try and time the market and to invest a lump sum.

Basically, mutual funds give you hassle free investments in equities for a fee!

2) Buy an ETF
ETF stands for Exchange Traded Fund. Imagine a stock and a mutual fund having a baby... they would give birth to an ETF! It trades like a stock making it very liquid so you can buy and sell very easily and the management fee is usually below 1%.

One of the 5 ETFs listed on the BURSA is CIMB X25 Xinhua which is supposed to track the performance of the Chinese stocks. But if you look closer , these are Chinese stocks listed on the Hang Seng and are mainly focused on Banking and Telco Stocks. The bad thing about this is that the key way to play China is to tap into the consumer market and the banks don't really do so. That's why it may not be the best way to play China.

For more, read Tim Hanson's article here :

However, the downside is that the ETF may not track as closely as you want it to. So, take a closer look and read the prospectus to see the NAV (net asset value) and whether the stocks making up the ETF fit your investment idea.

3) Build your own portfolio
This is the most time consuming exercise as not only do you need to pick stocks but keep a close eye on them! This will take up your time and it is not as simple as picking a few stocks as you will need to diversify your portfolio to ensure it is not too risky.

I will deal with this in more detail as this topic requires a post in itself!

Last thing, remember, for options 2) and 3) you will need to choose a broker and to save transaction fees, you may want to consider getting an online broker with lower fees. The more trading you do, the most transaction fees you will pay even if its a loss!

So that's investing in stocks in a nutshell!

Image Credit: COINS 6
© Alexey Lisovoy |

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