Your Investment Options: A Breakdown of Equities
We all know by now that retiring in Singapore is expensive. Rising healthcare costs, high general cost of living and higher life expectancy are all factors that have contributed to the increasing cost of retirement. So how can we retire peacefully without having to worry about money?
Saving our money in a low-interest bank account is certainly not enough. The best way to prepare is really to make your money work harder for you by investing.
Setting financial goals and knowing how you are going to achieve those goals will ensure that come retirement, you will not have to worry about your finances. The best part about investing is that anyone can do it. You do not need to be a financial expert as some people believe. In fact, just learning a few basics can go a long way in securing your financial goals.
With that said, in this article, I will introduce four investment options that can make your money work for you over a series of articles. This is the first of the series, and I will be looking at equities.
Equities refer to stocks of a company. When you buy a company’s stock, you essentially become a part owner of that company. To avoid confusion, investors should know that the terms “stocks”, “shares” and “equities” are often used interchangeably.
As shareholder of the company, you are entitled to dividends, and it also gives you the right to sell your shares to somebody else. Therefore, there are two ways that shareholders can earn money. First is through dividends paid out to shareholders. Secondly, when the shares of your company increase in value, you can sell your shares at a profit. This is called capital gain.
There are a few benefits to investing in stocks, such as:
- Liquidity: Stocks can be easily bought and sold on the stock exchange. This is unlike other investments, like purchasing a property, whereby it may take months before you can purchase or sell your property due to a dearth of buyers or sellers.
- Price transparency: The stock market provides information on the stock price based on the current demand and supply of the stock. This will drive the prices up or down. Any changes in the price will be reflected in the stock exchange, and investors know exactly what the going rate for a stock is at any particular point in time.
- Best returns: Perhaps the biggest reason to invest in stocks is that they provide the highest possible returns compared to any other asset class. No other investing option, be it bonds, commodities or even rare paintings, has historically provided a better long-term return consistently.
However, like any investment, investing in stocks comes with its own set of risks and downsides. Some risks include:
- Capital risk: As you may have guessed, if a stock price can go up, it can also come down. If you are unfortunate enough to choose a stock that depreciates in value, you may end up losing a portion of your capital.
- Volatility: Stock prices are highly volatile. This is both good and bad. It is good because it means that investors can sometimes buy stocks on the cheap. However, on the flip side, it can also be bad for investors who need to sell their shares when prices have dipped. Even if you choose good stocks to buy, stock prices may sometimes still dip below your purchase price due to factors beyond your control, such as a financial crisis.
- Managing your own portfolio: Investors should know that it is unwise to put all your eggs in one basket. The best way to invest in stocks is to diversify across many different companies. However, this means that investors need to do their research and consistently monitor the performances of each company in their portfolio.
The Foolish bottom line
Stocks have been known to outperform other investment vehicles. Choosing the right stock to invest in can be hugely rewarding. Perhaps one thing to take away from this is that because of the unpredictable volatility of stock prices, investors should ensure they have the holding power when investing in stocks. They should also look to invest for the long term. By doing so, they reduce the risk of capital loss.