When it comes to the world of investment, there is an
infinite amount of knowledge that a person can acquire to help make
them a better investor. With the financial markets constantly
evolving, it might be daunting for a first-time investor to learn
all the various investing knowledge at once.
Thankfully, there are certain investing principals that would never
change. What works for investing legends such as Benjamin Graham,
Peter Lynch and Warren Buffett in the past can still work for us
today.
If you are new to investing, we like to share with you 6 investing
terms that can help you in your investment decisions.
One of the first things most investors would look is the
Price-To-Earnings ratio, more commonly known as the P/E ratio. The
P/E ratio refers to how much you are paying to buy a stock for
every $1 that it is able to earn. For example, a P/E ratio of 10
would imply that an investor would need to pay $10 for every $1
that the company earns.
P/E ratio is important because it helps you measure just how
expensive or cheap a company is compared to other companies in the
same sector.
For example, based on the current price as of the time of writing,
we can see from SGX StockFacts that the P/E ratio for the
three telecommunication companies in Singapore range from 13.2 to
15.9, with M1 having the lowest P/E at 13.2, and SingTel having the
highest P/E at 15.9. That means investors pay about $2.70 more for
SingTel stocks as compared to M1 stocks to earn each dollar.
Source: StockFacts
The lower the P/E ratio is, the cheaper the stock costs to own. At
the same time, it is worth asking why the stock might be cheaper
than its peers in the industry. Could the company be taking on more
debt to earn the return, hence making it exposed to higher risk? Or
perhaps the company had a good one-off year with high profits
brought in, leading to a very low P/E that will eventually revert
back to the mean in the following years to come. These are all
questions that an investor, even a new one, needs to ask.
One main limitations of the P/E ratio is that it can only be used
for companies that are actually earning a profit. At the same time,
just because a company did not make a profit for the year does not
mean it is suddenly worth nothing. Assets that a company owns that
are on its balance sheet have a tangible value to it.
The Price-To-Book ratio, also known as the P/B ratio, is used to
measure the company’s market value (i.e. its share prices) against
its tangible book value (i.e. assets that it owns minus
liabilities). A P/B ratio of 1 means that the company market value
is the same as its book value.
A P/B ratio that is greater than 1 means that the company’s market
value is higher than its existing book value. For example, the
company could be worth $200 million while its assets are worth $100
million.
A P/B ratio that is lesser than 1 means that company’s market value
is actually lower than its existing book value. For example, the
market value of the company might be $100 million while the assets
on its books are worth $150 million.
Based on a search that we did on SGX StockFacts for real estate companies,
we can see that it is common to find companies that have a P/B
ratio which is lesser than 1. That is because real estate companies
tend to hold quite a fair bit of assets on their books in the form
of the properties that they have own and have yet to sell.
Source: StockFacts
One way of understanding the differences between P/E and P/B ratio
is to think of the P/E ratio as the salary from your job and the
P/B ratio as the properties that you own. Some people may have high
salaries but little assets. Others may have a lot of assets but
little earnings.
If your objective to invest is to enjoy passive income, then
knowing which stocks pay out regular dividends to its shareholders
will be important. Dividends refer to a sum of money that is paid
regularly from the company to its shareholders out of its profits
or reserves.
It is important to note that not all companies pay out dividends.
There are companies that do not have a habit of paying out
dividends even when they are doing exceedingly well. One such
company is Google, who prefers to retain all profits in the company
to cater for future growth.
Another aspect to take note of is whether or not the company has a
dividend policy in place, or a consistent track record of giving
out dividends. It would be foolish for an investor to invest in a
company that gives the highest dividend yield without taking into
consideration the company’s ability to continue sustaining this
high dividend payout.
Telecommunication companies tend to provide stable dividends pay
out to its shareholders due to their stable cashflow. Based on the
information we found from StockFacts, dividends yields are range
from 4.5% to 6% per annum, for the three telcos in Singapore.
Source: StockFacts
When you think of buying a stock, the first thing that usually
comes to mind would be how much the stock costs today.
While that by itself isn’t wrong, it may not necessarily be the
most accurate way to look at the price of the stock, especially if
your intention is to invest into the stock over a period of time,
rather than to put in all your money at one go.
Since our investment into the stock is to be made over time, we
think it makes more sense to be looking at the volume weighted
average price of the stock, rather than to base it on what the
price of the stock is today. Volume weighted average price takes
the total value of the stock that has been transacted over a
certain period (e.g. 6 months) divided by the total volume traded.
It gives us a better picture of how much the stock is over the past
period.
For example, a stock might be worth $1 today but may have a volume
weighted average price of $0.95 over the past 3 months when you
were busy accumulating it. Hence the price you paid for the stock
is closer to $0.95, and not the $1 that it costs today.
The same logic applies when selling a stock. Unless your intention
is to sell all your stocks in one single day, it would more
accurate to be looking at the volume weighted average price of the
stock over a period of time.
Market capitalisation is the term used to describe the total value
of the company. In simple terms, it tells you how much a certain
company is worth in total based on the current stock price.
To calculate market capitalisation, simply take the stock price and
multiple it by the number of shares that the company has
issued.
For example, DBS have about 2.5 billion shares issued. Since each
share costs about $15.68 as of the time of writing, the market
capitalisation of DBS would be about $39.2 billion dollars.
Generally speaking, most people would prefer to invest in companies
that have a higher market capitalisation (i.e. bigger companies).
That is because companies with higher market capitalisation would
tend to have higher liquidity. Some investment funds may even have
an investing mandate that allows their fund manager to only invest
in companies that have a certain minimum market capitalisation.
Source: StockFacts
Probably the least familiar of all the 6 things we covered today,
Beta is a measure of volatility of a stock compared to the rest of
the market.
A beta that is lesser than 1 implies that stock is less volatile
than the market. A beta that is greater than 1 implies that the
stock is more volatile than the rest of the market.
For example, a stock with a beta of 1.1 is likely to be 10% more
volatile than the market. Investors who are less inclined to take
risks may prefer to invest in stocks that have a lower.
Whenever you buy a stock, it is worth finding out what is the
stock’s beta is, especially if you are new to investing. This gives
you an idea on just how volatile a stock is, compared to the rest
of the market.
If you are new to investing, SGX has a stock-screening platform
that would be ready made for you to get started on shortlisting
stocks that are worth looking at based on your
requirements. StockFacts is a free platform that allows
users to find suitable stocks based on criteria that they have set
in place. You can easily use this platform to compare between
different types of stocks that you are looking at within your
shortlist. Best of all, you don’t even need to sign up to use the
platform. Just head over to the StockFacts page and start using.
These could be criteria that we have mentioned above, or other
criteria that you think are important which you want to screen for
in your search.
To be an informed investor, you will also want to stay up to date
with the latest news happening in the stock market. Do follow
the SGX My
Gateway Facebook Page so that you will receive important
updates pertaining to the market.
If you wish to find out more about SGX StockFacts, or want to learn
more about investing in general, do head down to
the My First Stock Carnival organised by
SGX at Civic Plaza in Ngee Ann City on 7 & 8 May. The event
runs from 11am to 9pm. Who knows, you might just learn what you
need to get started on your investing journey.
This article was written in collaboration
with SGX. All views expressed in the article
are the independent opinion of DollarsAndsense.sg