In the previous issue, we spoke about if savings in FD was the best way of investing. Along with it, we summarized other key investment instruments available in the market for you.

So how do you decide on the best vehicle to invest in? Ask yourself these four questions:

HOW  TO  KNOW  IF  THE  STOCK  MARKET  IS  FOR  ME?  

How much starting capital do you have? If you are just starting out and do not have much savings, look for options with lower starting capital. 1  How frequent do you need to withdraw money from your investment? If you need to withdraw money frequently to cover your living expenses, then choose a vehicle with high liquidity – so you can withdraw money anytime you need it.

2  What is your expectation in terms of rate of return? A quick way to compare is – how soon can the vehicle help you to double your money (on average).

3  

What is the level of risk you are willing to bear? The higher the rate of return is – the higher the risk of the vehicle. There are two ways to determine your risk tolerance; one is to go by age (the older you are, the lower your risk tolerance). The other is to take a risk profiling test, which can be done here.

One important point to remember is that risks can always be managed by way of education.

4  

 

HOW  TO  KNOW  IF  THE  STOCK  MARKET  IS  FOR  ME?  

On this same note, the table below compares these questions against the investment instruments. Note that the comparison is only a reference, the actual figures differ depending on investment provider, market condition and other factors.

Vehicle Starting capital requirement Relative Liquidity Annual Compounded

Return How fast can your money double? Relative risk level

Cash None, you start with whatever you have.

High, you can spend it anytime.

<0% (your cash loses value due to inflation) Never Low

Fixed Deposit Depends on bank.

High, you can withdraw anytime (might lose some interest).

3% 24 years Low

Bonds High Medium 6.4% 11 years Low

Gold Low to medium Medium 7.6% 9 years Medium - High

Real Estate Very high Low 10.8% 6 years Medium - High

Malaysia Stocks (KLCI) – 15 years history Low to medium High 10.5% 6 years Medium - High

US Stocks (Dow Jones) – 15 years history Low to medium High 12.6% 6 years Medium - High

 Table of comparison between investment vehicles.

     

HOW  TO  KNOW  IF  THE  STOCK  MARKET  IS  FOR  ME?  

From the comparison above, you will see that stock market investing and trading is a balanced choice because you can get started with reasonably low capital and with proper risk management, it has potential to outperform all other instruments.

With the stock market, you can choose a style that fits you. What does that mean?

Your trading style is correlated to your risk profiling and character. We assume:

• Investor (low risk tolerance) • Swing trader (medium risk tolerance) • Day trader (high risk tolerance)

Q: What is the difference between an investor and a trader?

A: Both make profit by taking part in the stock market. An investor looks for returns over an extended period of time (usually more than one year), through buying and holding. A trader takes advantage of the markets in a shorter period. There are two types of traders; a swing trader (holds trade position for days to weeks, and a day trader (holds position during the day only, no overnight positions).

Once you have identified your trading style, use this checklist below that has worked for many of our students (who have come from a variety of backgrounds and since their education with us, they have now moved to becoming wiser investors and traders).

Are you ready for stock market investing? Questions to ask yourself:

þ Starting capital: Do I have RM5000 to start? þ Rate of return: Can I make more than 20% per annum? þ Risk: Am I willing to spend time learning to minimize my risk? þ Increasing returns: Am I willing to spend 30 minutes a day to

improve my returns?

If you have said Yes to most of the above, congratulations!

You are well suited to explore the stock market as your investment tool.

What’s next? In the following article, we will show you what it really takes to succeed in the stock market.

About Beyond Insights

Beyond Insights is founded on a mission to bring out the best in people and their financial future. Besides being passionate and dedicated, all our trainers and coaches are full time investors or traders, who have collectively coached more than 1700 students. Beyond Insights is also the pioneer in Investing & Trading Psychology Boot-camps in Asia offering a comprehensive education for anyone who wants to create financial success through investing and trading. We can be contacted at www.beyondinsights.net.