Fundamentals 101 – Stocks

Stocks are probably the most popular form of investment. They are the things that get the most press, and have second to second news.

But what exactly is a stock and how do you take advantage of it? Read the rest of this article to find out!

What is a stock

In the most basic term, a stock is a partial ownership of the company that the stock belongs to. By buying a stock in a company, you are now considered an owner of that company and so you are now able to get a share of all profits (or losses!) of the company, and would also be entitled to dividends that the company may issue.

How does a stock work

In order to understand how a stock works, let's use an example.

Say you bought 1 lot of stock in AirAsia (1 lot = 100 shares) for a total cost of RM100. Let's also simplify the example and say AirAsia has a total of 1,000,000 shares (or 1000 lots) and is worth RM 1million. That means each share is worth RM1 (which is why your total cost was RM100).

By buying 1 lot, you would now own 1/1000 of AirAsia.

Now let's pretend that AirAsia made RM1,000,000 in profit. That means that your share of that profit is 1/1000 of 1million (or RM1000).

Now let's pretend that because of this great profit, the company is now worth RM 2million. Assuming nothing else changes, the value of each share is now worth RM 2 (2million value divide by 1million shares = RM2).

You can now sell your shares for a total of RM200, which would mean you would have made RM100 from your initial investment.

Different types of stock investments

Although the way stocks work are pretty much the same, there are different types of stock investments:

Dividend paying stocks

Dividend paying stocks means the company regularly pays out a part of their profits back to their stock holders.

For example, let's say of the 1million AirAsia made, they decided to pay out 300,000. That means each share will be entitled to RM0.30 (300,000 / 1,000,000 = 0.30). Because you own 100 shares (1 lot), you would be entitled to RM30.

Real Estate Investment Trusts (REITS)

REITS are a special type of dividend paying stock. At its core, REITS are companies that invest in real estate and are required to pay out 90%+ of their income to their stock holders.

Growth stocks

Growth stocks are typically companies in their growth phase. These companies tend not to give any dividends because they believe they can make that money be worth more in the future by investing it into their company.

Blue chip stocks

Blue chip stocks are known to be the biggest, longest lasting companies. These are usually your banks, insurance companies, and consumer goods. They tend to pay out a dividend, but the reason they're considered blue chip is because, unlike a growth stock, they tend not to grow much year on year. But they tend to be very stable as businesses (and thus, as investments)

What should you do with this information

The examples used in this article have been simplified a lot. In the real world, there are a lot more parts related to a stock, the price, and what determines the price.

Unless you are willing to spend years learning all of this, investing in stocks as a primary or secondary place to invest your money is actually not recommended as the big majority of people will lose money. However, once you have a solid foundation of income and investments, putting in a portion of your wealth in stocks is fine.

If you're not willing to spend years learning stocks, we would suggest either putting your money into a unit trust or an index fund.

If however, you understand that you will most likely lose money, and go on an emotional roller coster, the best way to buy into stocks in Malaysia is to open up a trading account with Rakuten Trade as they will give you the best rates when buying or selling stocks