All about stocks and the stock market: the bulls, bears and the bottom line

At that time, those in the financial industry had a wider advantage over retail investors as they had easier access to market-moving information, reports or analysis.

These days, thanks to the Internet, investing in the stock market is much more accessible to retail investors.

Today, we no longer have to rely on Teletext to find out about share price movements, head to the library to borrow books on finance or contact a company directly for their latest financial reports. All that information can now be found online.

Brokerages no longer function by having remisiers take orders from clients over phones. Investors can trade on their own on online platforms built by the brokers, which offer more flexibility, convenience and more importantly, cheaper fees.

See also: Are commodities worth investing in?

Amid these changes, something has remained constant: markets go up and markets go down.

In early 2020, the market was more than a decade into its current bull cycle — the longest in history. However, when the pandemic started spreading, markets crashed in March 2020 as investors fled for the exit.

Yet, when retail investors — including firsttime players — started buying what they perceive as bargains of previously lofty stocks, markets, as a whole, roared back to life and gained steadily in the months that followed. By November 2020, US markets were back at pre-Covid levels, thanks to the creation of vaccines, even as the virus continues to lurk in the midst.

See also: NielsenIQ report on Gen Z spending habits finds that more than half surveyed are concerned with rising food prices

Nearly a year later in 2021, stock markets had not only managed a sharp rebound — they had gone on to hit even higher levels.

The Dow Jones Industrial Average (DJIA), on March 20, 2020, closed at 19,173.98 points, down 4,011.64 points from the week before. The Dow, on March 19, 2021, closed at 32,627.97 points, up 70.17% y-o-y.

As at March 31, 2022, the Dow closed even higher at 34,678.35.

One reason was that first-time stock market participants made their presence felt given they had easy access to online platforms where information is readily available and where they can easily trade.

Indeed, the army of retail traders became a force to be reckoned with. In the US, they even took on traditional powerhouses such as hedge funds. In late January 2021, an American bricks-and-mortar retailer GameStop, saw its shares surge multifold to US$325 ($441.03) on Jan 29, 2021. Shares in the retailer were trading at just US$65.01 a week before on Jan 22, 2021, and at US$18.84 on Dec 30, 2021.

Before the surge, hedge fund managers were shorting shares in GameStop as the company was widely seen as a declining business with an outdated model. Its share price was also on a downward trajectory from trading at just below US$50 at the beginning of 2014 to just US$3 in 2020.

The surge in GameStop’s shares created overnight millionaires out of Internet investors and cost hedge fund managers billions of dollars, thanks to a low-cost trading app called Robinhood and a subreddit thread called r/WallStreetBets.

For more stories about where money flows, click here for Capital Section

What are stocks?

What exactly are the building blocks called stocks behind these dramatic tales? To put it another way, stocks enable capital that goes towards funding the economic output of a company, to be organised in a market.

A stock refers to the stake which you own in a company. A share refers to the smallest unit of a company’s stock. These days, the terms are used interchangeably.

Equity, on the other hand, is the amount of capital invested or owned by the owner of the company.

Beyond the jargon, stocks are simply a part of companies or businesses that provide goods and services — which you should try to understand before you invest.

For instance, to invest in a stock like Singapore Post (SingPost), you can visit their post offices to get a better idea of how they are doing.

Similarly, to invest in SBS Transit or ComfortDelGro, take their buses, trains or taxis. Instead of appearing foreign and incomprehensible, these insights will provide you with a personal reason and the conviction for investing in them.

When you can feel and touch these asset classes and see them as more than numbers, you will tend to feel more comfortable investing in them too.

The bottom line is when you have decided to put your money into an investment, make sure you know where your money is going. Never invest in something you do not understand, otherwise, it is just another form of gambling.

Why invest in stocks?

Investing in the stock market is one way to build your wealth and beat inflation at the same time. It is a chance for an investor to gain from the appreciation in the value of a company as recognised by the market.

On average, the S&P500, which covers the top 500 publicly-traded companies in the US, has returned around 8% to 12% a year.

However, the stock market does not necessarily offer positive returns every year. There will be a year out of around every 10 years when markets undergo a correction, in which prices may plunge. However, the stock prices for most companies will usually recover after the dip when sentiments turn more positive.

How are stocks categorised?

There are several ways to categorise stocks.

- By sector
There are stocks according to sectors including technology, electric vehicles (EVs), commodities, energy, banking and finance.

- By region
Whether you are looking to invest in a mutual fund or an index or pick your own stocks, there are several regions for you to choose from.

There are developed markets (DMs) like the US, UK, Australia, Canada, Hong Kong, Japan, New Zealand, Singapore and most of Western Europe. Then there are emerging markets (EMs) like Argentina, Brazil, China, India, Indonesia and South Africa.

Frontier markets comprise developing countries that are more advanced than the least developed countries but are still less established than emerging markets. These are also smaller and considered riskier as compared to an emerging market economy. Countries in this category include Vietnam, Egypt, Iceland, Kenya and the Philippines.

- By size
Stocks are also categorised by size:

• In Singapore, a small-cap stock refers to companies with market capitalisations (caps) of $100 million to $1 billion. Mid-caps are companies with market caps of above $1 billion to below $6 billion each. Finally, large-caps are companies with market caps of above $6 billion each.
• In the US, a small-cap stock is a company with a market cap of US$300 million to US$2 billion. Mid-cap stocks are companies with a market cap of between US$2 billion and US$10 billion. Large-cap stocks are companies with a total market cap of over US$10 billion.

Style of investing

There are also several ways to look at your investments. Are you in it for the long-term or short-term? And do you prefer a portfolio of value stocks, growth stocks, dividend stocks or all three?

Value stocks are shares of a company that appear to be trading at a market price that is lower than the company’s fundamental value.

Growth stocks are counters that are expected to grow at a rapid pace, thereby providing capital appreciation for investors. These stocks usually look more expensive than value stocks as they are calculated using forecasted earnings for their price-to-earnings (P/E) ratio.

Dividend stocks are simply stocks in companies that distribute their profits to their shareholders. Dividend-paying stocks allow investors to hedge against bad times when capital gains are not as easily achieved. Most of the dividend income received is also not taxable in Singapore.

- Fundamental analysis vs technical analysis
Your investing style matters too. One of the most basic ways of looking at it is through fundamental analysts or technical analysis. Fundamental analysis refers to a top-down and bottom-up approach where investors look at a company’s financials, cash flow as well as macroeconomic and microeconomic elements. Technical analysis, on the other end, is generally used for investing in the shorter term, when investors look at the price patterns of the shares.

- Active vs passive investing
In active investing, you try to outperform the benchmark index or indices. This is where you select different individual stocks based on their performance. In passive investing, you follow the benchmark index or indices through a unit trust, a fund, or an exchange-traded fund (ETF).

Historically, passive investing has afforded investors more returns. An active portfolio may also incur trading costs. (see chart 1 for returns on the benchmark indices)

Mutual funds and ETFs

Mutual funds and ETFs are a basket of individual stocks, commodities and bonds that possess common characteristics or fulfil common criteria. These include stocks belonging to the same index, industry or asset class such as the Chinese markets, Singapore-listed large caps, Chinese technology companies and US technology companies.

Investing in a mutual fund or an ETF means you are not putting all your money into one stock. Instead, ETFs offer investors exposure to different sectors and regions due to their diverse nature.

The difference is an ETF is like a mutual fund, except that it can be traded on the stock mark like an individual stock. You can also receive returns depending on the type of ETF that you are invested in.

However, an ETF does not require a minimum investment sum to take part in a mutual fund.

The Edge Singapore’s stock-picking process

If you have read our paper, you would have noticed that we have an annual global portfolio where we feature 10 stocks that are chosen and filtered to suit varying investor profiles, sorted according to risk.

Here, our analyst shares his stocking picking process in detail.

The first part of the process is dividing stocks into two main buckets. The first bucket is stocks that you can understand better than the average person and the second bucket is stocks you think you can understand or would like to understand. An example of the former would be say someone whose job is in the medical industry would generally understand healthcare sector companies better. Usually, this can be done by filtering companies based on industries and sectors. The latter bucket of stocks can be kept on a watchlist until investors can comprehend how the general industry and business work.

Next, given the stock market is made up of the value and price of individual stocks, the easiest way for investors to filter stocks is to pick out companies that have been beaten down over a specific time, say more than 20% over one year. Investors can also pick out stocks that have given significant returns over the same period. These companies usually have a higher possibility of being misvalued as stocks can be overpriced and overvalued or underpriced and undervalued. Investors can briefly go through the annual report or the company’s website to better grasp the business.

Following that, investors can briefly look at the financials of these companies. It is important to skim through the three financial statements and look for the key themes. These include revenue, net income, operating cash flow, free cash flow, margins, yields, liquidity and solvency. Investors can then filter out, say two companies with the best-looking financials and the two companies with the worst-looking financials. Next, investors should attempt to study the management’s comments, discussions and analysis from annual reports or financial statements regarding the company and the business. This will help investors understand the key factors that make a company successful or underperform in their respective sector or industry.

Beyond this, a deep dive into the potential company should be done. This is a subjective process for the individual investor as some may choose to focus on quantitative financial ratios while others may choose to prioritise qualitative business aspects. There is no one way to do this because different companies require different analysis methods, based on the understanding of the individual investor.

Ultimately, the investor should arrive at a price they think the stock should be trading at. Depending on the disparity between this value and the trading price of the stock, investors can invest in companies they think are undervalued and avoid companies they think are overvalued.

Key words

• Ask: The lowest price where a seller will sell his or her stock in a company.
• Basket: A collection of multiple securities that have a similar theme or share similar criteria.
• Bid: The highest price in which a buyer is willing to pay for shares in a company. A bid means you’re competing against other buyers in the market. When buying a stock, you will be paying the ask price.
• Buy: A move where you accumulate shares or positions in the company.
• Sell: The opposite of buy, where you dispose of your shares.
• Sell contra: A sell contra order is essentially shorting. It is to sell stocks you do not own; you then have three days to buy the stocks to cover your position. The reverse is true for buy contra orders. It is illegal to short your stocks. If you find yourself shorting your positions, you will be asked by your broker to buy your positions back the next day.
• Index: A measure of a basket of shares using a standard form of measurement. It is also usually a bunch of stocks that are rebalanced periodically. For instance, the benchmark Straits Times Index (STI) comprises the top 30 largest companies on the SGX, and it rebalances every quarter.
• Lot: A lot refers to the number of units bought on an exchange. On the Singapore Exchange (SGX), a round or board lot for equities comprises 100 shares. For Spac warrants, ETFs, American Depository Receipts (ADRs) and fixed income instruments, board lot sizes range from one to 100.
• Odd lots: An odd lot refers to an amount that is lower than a round lot. The SGX has a unit share market to facilitate the sale of odd lots.
• Stock split: A stock split is where a company issues more shares to its current shareholders without changing its market cap. A stock split will also lower the market price of individual shares, making it more accessible to retail investors. For instance, a 5-for-1 split means each investor will own five times more shares, with each share worth five times less.