Stock Investing: 5 Things Beginners Need to Know


Understanding the risk and goal for your investment is a good start to make a successful investment, including in stocks. Watching stock prices go up and down can be pretty scary, especially for beginners. This has prevented a lot of people from investing – stock is deemed aggressive and high risk.

Borrowing a quote from an American investor guru, Warren Buffett, “Risk comes from not knowing what you're doing”. The more you know about the stock market and how it works, the more comfortable you may be.

Here are a few things you need to know as a beginner to the world of investing:

1. What is a stock?

Buying a stock, or commonly referred to as a “share” or an “equity” investment, is like purchasing a piece or a whole of a company. Thus, when you are buying a couple of share from PT Astra International, that makes you own a piece of PT Astra International.

It is often compared to gambling and though it involves some risk, it is actually quite different. Here's why: With gambling, you win all or lose all. In the stock market, you never actually lose the entire amount you invested, unless, of course, the company you invested in closes down or goes bankrupt.

2. How do we get money from the stock market?

Basically, there are two ways to make money from the stock market:

Capital Gain

Capital gain is simply profit from the purchasing and selling price.

Take the example of buying property. If you buy a house for Rp 500 million, and then sell it at Rp 750 million, you will get a profit of Rp 250 million. The difference is that you are selling stock of a company, not housing units.

So, if you bought 100 shares of Unilever Indonesia in July 01 2009, you would have paid Rp 1,160,000 (100 x Rp 11,600). Now if you sold those shares in June 2, 2014, it would have gotten Rp 2,927,000 (100 x Rp 29,275). Your capital gain would be Rp 1,767,500.

Dividend

Dividend is a profit distributed to shareholders, usually at the end of the fiscal year. How much will be distributed – will depend on the shareholder agreement though – normally will be not more than 30% of overall net profit.

3. Why invest in a stock market?

A (carefully picked) stock, could give returns that are much better than other investment vehicle like certificate of deposits or a bond. Moreover, the government also gives tax incentives for stock market investments.

It is probably one of the few investment vehicles that can overtake inflation.

4. How to buy a stock?

One could buy stocks at Indonesia Stock Exchange (IDX) at a minimum of 1 lot, which is equal to 100 pieces of shares. Thus, if you wanted to buy a PT ABCD’s stock, with per share price is Rp 5,875, you must have at least Rp 587,500 for initial capital to buy. Broker’s fees range from 1%-3% plus 10% tax.

You can make transactions through a broker and online. There are many brokerage companies that provide online platform for their customers. The easiest way is to go to one of the securities companies that you are familiar with.

[Read: 5 Steps to Open an Online Stock Trading Account]

5. Some important letters you need to know

Financial ratios are like an indicator on you car’s dashboard. Some of financial ratios indicator that you can look at a prospectus are:

  • Price-Earning Ratio (P/E Ratio)

For a large cap stock, the ideal P/E ratio should not be more than 20, and for small cap stock (growth stock, small capital, and speculatio), the ideal ratio should not be more than 40. Price to earnings ratio shows price relative to the real profits its company is generating. A stock is either undervalued (cheap), fair (priced about right), or overvalued (expensive).

  • ROE Ratio

Return on equity (ROE) shows how much profit is generated for every penny of capital, the investor have invested. ROE should ideally be growing at least 10% yearly.

  • Revenue growth

Revenue growth should be increasing from last year by at least 10%.

  • Debt to asset ratio

Debt to asset ratio should be less than 50%. Otherwise, the company may be in danger of not being able to pay back its debts.

Ideally, one should compare a company's ratios with competitors in the same industry. To get more explanation about stock investing, read our Money Basics: “How to Open a Stock Account and How Much It Costs”.

Read also: 5 Ways Investing is Like Choosing the Right Outfit

Select clients to share this article with:

Select all
Name Email

You currently have no clients.

×
×
×
×