MUIGThe Beginner’s Guide.

Monash University Investment Group Malaysia

The Beginner’s Guide to Investing.

Welcome, to the Beginner’s Guide where we will teach you a thing or two about investing without trying to confuse you with complex financial terms, graphs or equations.

Written By:Ryan Poh Yueng HaoRonald Fedora

A Brief Introduction.

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First off, I have to confess that we know nothing about investing. Zero. But wait, before you run off and never come back, we have to explain what the Monash University Investment Group (MUIG) was trying to achieve by asking us to write about investing when, in reality, we are people who probably only know just as much you do about investing. Siao ah this MUIG people!

The reason being is, Ronald and I, we both dream big. We strive to be the great investors one day and eventually earn millions. Does this sound like you? If you clicked on the “Beginner’s Guide” and you are still reading this article, chances are, you are a newbie who is just as confused as we are about investing. And just like you, we are starting from scratch, which is exactly why MUIG assigned us to write the Beginner’s Guide in the first place. We are here to do the dirty work for you. We are tasked to dig deep and tap into various sources (e.g internet, books) to gather as much as we can on our weekly topics. Once we master a certain concept, we will then break down what we learnt and attempt to explain it to you in a less complicated way, just like how a mother bird would chew food for her nestlings first before feeding it to them so that it’s easier for them to digest. Yes, there is no need for you to scratch your heads at complex investment terms and concepts anymore, since we are here to do that for you. We hope this guide will aid on your journey to become great investors one day.

Let’s begin my nestlings.

“I made my first investment at the age of 11. I was wasting my life up until then.”

- Warren Buffet

Before I bring you along on this epic journey to becoming the next Warren Buffet, I will share two experiences which I believe everyone in this era, should have experienced at some point in their lives, which may or may not relate to stocks. #disclaimer

Feel free to scroll down to the section, “What are Stocks and the Stock Market?”, if you wish to skip to the part where you would actually start to learn something.

However, if that’s not the case and you don’t mind a bit of story-telling, here you go

Experience 1: The iPhone User Experience

Are you an iPhone user? If so, it is likely that when you pulled down your notifications bar, you have encountered these weird numbers before. Question is, has these numbers ever intrigued you enough, to search it up on Google, or did it just drown among the other thoughts in your subconscious mind?

As for the sad souls who were not able to relate to what I am trying to say, here’s a more general scenario that I am sure at least 74.85% of you have experienced.

Week 1

Teach Me Like I’m 4: Stocks.

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What I see on my iPhone everyday and do not understand.

Experience 2: The sad non-iPhone User Experience

Imagine you just bought the morning newspapers and read the most amazing headline ever. The headline was so mind blowing that you almost spilled your morning teh tarik. “What?! No way!”, you gasp silently.

I. Must. Read.

*heavy breathing*

You quickly turn to the page where you can find a more detailed article written on it. After a short read, you feel disappointed because the article was not as amazing as you thought. Taking another sip of your teh tarik, you leisurely browse through the page after page in hopes of finding a headline which

would catch your interest again. But then all of a sudden you realize, “Oh, I have arrived to another section”. From here on, you begin to furiously flip through the pages skipping all the other sections so that you can finally reach the “Sports” section. And as you flip through, you see:

The Business Insider.

Meh.

Advertisements.

Meh.

The Stock Market.

Meh.

More numbers you don’t care about.

Meh.

Sports.

Finally!

Well, today I will be writing about the numbers you don’t care about.

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After much hard work reading through many references, and countless facepalms, I finally managed to familiarize myself with stocks a bit better.

Part I: Stocks

Imagine a local favorite candy shop in your neighborhood, owned by Mr. Lee, who also happens to be your neighbor. All the kids in your neighborhood would always seem stop by Mr. Lee’s candy shop every evening after school.

One morning, you awoke with the most brilliant idea, “Why not buy the candy shop from Mr Lee, so all the children would buy from me instead?”. You check your wallet and come to a dreadful realization that RM100 wouldn’t be enough to buy the candy shop from Mr. Lee. Well, how about RM1000? No, of course not.

If that is the case, then how much should we pay for Mr. Lee’s candy shop? The first crucial step in determining the shop’s worth is by roughly estimating how much does the candy shop make in a certain time frame. Let’s say that Mr. Lee’s candy shop manages to make RM200 everyday, that means that we can safely say Mr. Lee makes about RM6000 a month, or if we take it a step further, we can say he makes RM 72,000 a year. Then let’s suppose that we are able to safely predict that his shop will still be able to produce this amount for the next 10 years. Then,

Teach Me Like I’m 4: Stocks I

What are Stocks and the Stock Market?

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“When you are young, work to learn, not work to earn.”

- Robert Kiyosaki

we could consider that his entire candy shop is worth RM 720,000 (which is RM 72,000 for ten years).

In reality, there are many other things to consider. But nonetheless, the basic principle that is simply to figure out how much a company can be expected to make in a certain time frame, which we should not worry about because, there already exists big companies that do this tedious calculations and considerations for people like you and me. So, let us just leave it to them to tell us how much Mr. Lee’s shop is really worth, and we will just focus on whether to buy it or not.

For the sake of simplicity, let us just stick to RM 720,000. So, we then go out of the house, and knock on Mr. Lee front door. He opens the door to greet you, and you explain your brilliant plan of buying his shop from him from RM 720,000. He gets excited because he is going to be one rich old man and quickly he shakes your hand. After some paperwork, it’s settled. It’s your shop and now all the kids buy from you! This is all well and good, IF we actually had RM 720,000 and want to own the whole company. Now, let’s suppose we only have half of that amount. Sad face. What do we do now?

If Mr. Lee is willing, you can buy half of his company instead of the whole thing. This simply means that we own 50% of his candy company. Which also means that half of his profit from his candy shop will go to you and the other half will go to him. Since we want to sound cool, we then call ourselves investors, and

instead of telling people that you own 50% of the company, you tell them that you own 50% of the stock in that company. When a company is set up in a way that you can buy pieces of it, those pieces are called stocks. Coolness overload. There are two ways to thick about stock: shares and percentages.

So far, what we talked about are percentages. We bought 50% of Mr. Lee’s company. Similarly, we can also choose to buy only 10% of the shares in Mr. Lee’s company for (RM 72 000) if we want to save some money, or even choose to buy only 1% of the shares for RM 7200, and so on.

This is not all, you often hear people talking about shares when they talk about stocks. What the heck is that? Well, now let us imagine Mr. Lee wants to break his company into 100 pieces and sell the pieces to the public, if anyone is interested. To buy his entire company, you need to own all 100 pieces which also costs you RM 720,000. This would mean that if the company makes money, you get all the money. But let’s say we only have RM 7200, to spare, we can only afford 1 piece of his company. This means that if Mr. Lee’s company makes RM100, you will get RM1.

So now, instead of you coming up with the brilliant ideas, Mr. Lee suddenly decides to be smart and, instead of breaking his company to just 100 pieces, which is RM7200 a piece, he breaks it to a thousand pieces! Now it takes 10 shares to own 1% of his company, but each share is only RM720. Mr. Lee can even

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choose to break his company to a ten thousand pieces if he wishes to, which makes a share cost only RM72. It is up to him. This makes it a lot more affordable for the public.

This is the basic concept regarding stocks, where companies break their companies to pieces, or shares, and then sell them to the people who will buy them, more commonly know as, “investors”. And this act of buying shares is called “investing”. The reason they are buying shares in a company is because they think, in the long run, they will eventually make back more than what they paid because they are getting a piece of all the money that a company makes.

But when a company is enormous, worth billions of dollars, even a thousand shares is simply not enough. They need to have many, many shares in order to make sure that shares are affordable for the public. Some companies have millions of shares of stock.

Yes, at least now you understand what means when you own a part of a company. But, that is still not the whole picture. When you own part of a company, you don't JUST get some of the money it makes. You also get to make decisions.

“Really?! I get to make decision as well?”

Yes, you do.

Everyone who has shares in a company has the right to vote for what the company will do next. The amount of voting power you have is equal to the percentage of shares you have.

Imagine that a company is owned by three people: Ali, Jane and Raj. Ali owns 40% of the total shares, and Melissa and James each own 30%, which is less than what Ali owns.

Now let’s reimagine a scenario where the candy company is trying to decide whether to sell a certain toy. Ali thinks it is a good idea, but Jane and Raj disagrees and says that it is a bad idea. Well, even though Ali has more shares of stock in the company, and more voting power, he will still be out voted by both Jane and Ray. This is because together Jane and Raj have 60% holds the majority when compared to Ali's 40%.

When a company has a lot of share holders (people who own stock in the company), meetings called “shareholder meetings” will be held from time to time. In these meetings, everyone gets to vote based on the shares they own. The company’s next move will based on whatever the prevailing vote decides.

So, what if there are a lot of people who own shares, but one of them owns more than half of all the shares? Would that person be able to outvote everyone else, no matter how many other people there are?

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The answer is yes. If a single person owns more than half of all the shares, then they are given this super power which is what you would call, a "controlling interest" in the company. This means that they get make any decisions for the company, whether it is a bad idea or not, and out-vote everyone else.

Part II: The Stock Market

Hopefully with my explanation earlier, you now have a greater understanding on what exactly are stocks. Now let us move on to the Stock Market. Now, imagine a new company selling comic books is owned by Mr. Loh, and his company seems to be doing much better than Mr. Lee. Initially we said that Mr. Lee’s company is worth RM720,000 but now, Mr. Loh’s company is worth TWICE of that (RM 1,440,000).

Now, imagine that Mr. Lee’s company have a total of 100 shares of stock each valued at RM7200 each and Mr. Loh also has a total of 100 shares each valued at RM 14,400. This means that two shares in Mr. Lee’s candy company is equal to one share in Mr. Loh’s comic book company.

Suppose that we already own two shares in Mr. Lee’s candy company, which are worth RM14,400, just enough to buy one share of stock in Mr. Loh’s company. When we looked into both companies, Mr. Loh’s company seem to be doing way better maybe because the kids in town seem to like comic books more than candies. With that, we decided to sell our two shares in Mr. Lee’s company and buy one share of stock in Mr. Loh’s company. This idea of selling and buying shares of stocks, is called stock trading.

Now here is where it get’s interesting. How much a company is really worth is never constant. It changes frequently. We said

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earlier that Mr. Lee’s company has been making RM200 everyday for ten years, but all of last year, his company was only making RM100 per day! So, does this mean that his company is still worth RM720,000? The reason why this happens might be due to the rough time the company is having or even simply because the company is losing value. If we owned a stick in the company, we would have to make up our minds, which is it exactly. So, if a company is losing, we will most probably want to sell our stocks and buy stocks in a company that is doing better.

There can be a lot reasons to assume that a company is doing better, or even worse. It may have been because we heard a rumor that Mr. Lee, even though he has only been making RM100 a day, he stepped up his game and developed a new recipe which makes his candies taste way better than it did before. So, if we say “Wow, his candies will definitely attract all the kids to buy his candy again!” and we decide to buy a lot of stock because we think that the stock is actually worth more than Mr. Lee says.

Similarly. we might have even heard a rumor that an even better candy company is going to be opening right next to his Mr. Lee’s candy shop. In this scenario, we might say “Oh no, we have a lot of shares in Mr. Lee’s company, and we better sell our shares in Mr. Lee’s company fast! Or else. we will lose money since the kids will all prefer the new shop instead.” You can clearly see that rumors and emotions plays a big role in this. Just like gambling.

In the real world today, it is not just the two companies (Mr. Lee’s candy company and Mr. Loh’s comic book company), but there are hundreds of companies like this. And now, imagine, thousands of people all trading stock in each company at the same time. This is what you call stock exchange. If you take the value of all the companies and add them up together, you will get an average that you could make use of, to track over time how well on average are the companies are doing.

Let’s say that all the companies combined are worth a million ringgit, and there are only five companies. This means that the average value of a company would be RM100,000. Remember what I said about how the value of these companies can fluctuate over time? This simply means that the companies combined can be worth two million dollars, the very next DAY, with an average of RM 400,000. It constantly changes.

If we choose to keep track of this fluctuations, we can create a graph, which gives us a clear and good picture on how well the companies in the stock exchange are doing. This helps us further in determining whether or not investing in more companies is a good idea, or a bad one.

Here you go, this is what the numbers mean on your newspapers and on your iPhone notification screen. The numbers are just values taken out from this graph which I mentioned, but only this time, it is not just 5 companies but hundreds, or even thousands!

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Just a simple example: How to read the Stock Market?

Using this screenshot from my iPhone, we will be only focusing on the stock information of the Apple Company (AAPL). The information is pretty basic. We can see that Apple's current share price is US$113.29, and to the right of that in green, we see how much Apple's share price has gone up for the day, in this case $0.37.

If you tap the green rectangle, however, the display changes to reveal Apple's current market cap.

If you tap the green rectangle again, the information changes yet again, this time displaying Apple's daily gain or loss as a percentage.

So with just a few taps, one can quickly toggle through Apple's market cap and information as to how the stock is performing percentage-wise or terms of dollars and cents.

There you have it, the basics of stocks and the stock market, and also a tiny bit on how to read the stock market. However, if you look at the stock market in your newspapers, or launch the “Stocks” App itself, on your iPhone. You’ll see something like this:

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You can easily see that it is much more complex than that. But you can ignore it for now. I will touch more on that next time, because now we will move on with our final section for the week, “The Types of Stocks.”

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The “Stock Market” section of a newspaper.

Screenshot of the “Stocks” App on my iPhone.

Since you understand what exactly are Stocks and The Stock Market, it’s time to delve a little bit deeper and explore the types of stocks out there.

But before you start going into stocks ask yourself:

• Are you looking to make quick money?

• Are you willing to spend time learning patiently?

• Are you willing to make difficult choices in uncertain situations?

• Are you willing to stay updated and stay informed?

• Do you have patience in discipline in general?

If your answer is no to any of these questions, stock investing (or other investments) may not be for you. But a little understanding could never hurt anyone.

Teach Me Like I’m 4: Stocks II

The Types of Stocks.

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The first thing you want to do before playing stocks is to know as much as you can about what is a “stock” and how to use them as one of the tools in achieving your financial goal. Once you are ready you need a brokerage account. There are many brokers out there, and choosing one can be a daunting process. Again, it is good to know more before you start.

Buying a stock is buying a claim over the corporation’s assets and earnings. Having a stock belonging to a corporation means that you have a percentage ownership of it.

The two main types of stocks are:

• Common stock: The owner of this stock is allowed to vote at shareholders’ meetings and receive dividends (share of the company’s profits) that are given out.

• Preferred stock: Generally similar to common stock but without the voting rights. However, owners of preferred stocks have special privileges above owners of common stock, such as receiving their dividends first before anybody else should a corporation go bankrupt.

The most important step in buying stocks is to gather information. You need to be well-informed about your stock before you make a purchase. After its ownership, you should continue to be informed about the industry or the corporation whose stock you purchase.  

Once you’re all set, now comes the most important question: how to pick winners in the stock market?

Let’s take the analogy of two sheets of paper. One brand of paper is priced at 0.10 cents per sheet, and the other is priced at 0.15 cents per sheet. Upon quick inspection, you realize that their quality (based on grams per square meter (GSM)) are very similar. This suggests that the paper that costs you 0.15 cents is overpriced. On the other hand, if their prices are equal but the quality of one is much lower than the other, then the higher quality, although more expensive, may be the one you wish to buy.

This analogy is applicable to stock markets as well. If both stocks are comparable and similar, the one with the lower price will be of more value to you as an investor. Likewise, a company that is run by better people and better systems is worth more to the market and to you as an investor. Therefore, it is your job to find the highest value as possible for every dollar you are going to spend investing.

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