Stocks. Shares. Many in the investment arena are familiar with these two words. After all, these words flash by every single day if you watch business news, along with “up by 4%”, “down by 5.2%” and the like. However, do you really know what a stock is?
By definition, a “stock” or “share” is a part ownership in a company. It is not an invisible gambling ticket which will earn you millions instantly if you hold the right one. From the definition, we know that when we hold stocks or shares, we are partly invested in a company. We become owners of a company, in a theoretical sense. This is the simplest concept, yet the most foundational and essential, if you want to be on your way to financial freedom through stock investing.
Many people ask me, “There are so many stocks for me to choose on the market, how do I go about picking one?” Well, there are certain investors who use the dart-and-arrow (essentially, scattergun) method (which I do not recommend). There are others who invest based on tips from friends and family (which I also do not recommend). Then, there are others who select stocks solely based on quantitative factors, such as Return on Equity (ROE%), Earnings-per-share (EPS), and Price/Earnings (PE) Ratio. And then there are people, like Warren Buffett, who choose stocks that are familiar names which possess both quantitative and qualitative factors showing signs of good growth. Well, I’m not going to say which method is more “correct”, but using the initial definition of a stock, I would go with Mr. Buffett’s way of stock selection.
The reason is simple. Imagine you could be the CEO of any company in Singapore. Which company would you choose? You’ll obviously have too many choices, right? And, you’d obviously pick the one that looks financially stable, has good-looking prospects, and is not taking on too much debt, right? Yes, you would! Now, apply this thinking to your stock selection, and you’ll avoid most of the bad apples in the market.
Look at DBS Group (D05.SI). The largest local bank in Singapore since its merger with POSB in 1998, DBS Group Holdings is one of the strongest banks, with a steady cash flow, low borrowings, and a worldwide presence. Unsurprisingly, the stock has also been giving shareholders a pretty decent return (with dividends) if one invested in it two or three years ago, right after the Financial Crisis of 2008.
Regardless of whether you’re a growth investor, value investor, technical trader, market timer, or any other kind of investor, the definition applies. A great stock with a great business will never go wrong in the long run.
Produced by Tembusu’s financial literacy interest group, Strategos, Money Talk aims to raise the level of financial literacy among Tembusians, covering personal finance, investments and money matters not commonly talked about, among other (sometimes controversial!) topics, striving to make them fun and easy to understand.
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