Investment is an art of making money through the scientific application of compounding phenomenon. Obviously, you will not find this definition in any investment textbooks. 🙂 This definition of investment is the best I can possibly come out with based on more than a decade of investing and trading experience in various financial markets.
I bought my first stock in the year 2006 and have been investing and trading in equity, commodity and forex markets through spot, options and futures since then. Oh, yes! I did survive 2008 financial crisis – the greatest economic crisis since the Great Depression. 🙂 In this article, I will share the most basic knowledge that you will need to have to invest in financial markets successfully.
Investment Objective: Investing vs Trading
Having an investment objective before participating in the financial markets may sound obvious. However, most first-time investors enter the financial markets without having a clear investment objective. I believe this is the primary reason why new investors are struggling to be profitable in the markets.Â
There are generally two investment objectives. They are either investing or trading. A different financial asset, instrument and strategy may be more suitable for investing but not trading. It applies the other way round. An incorrect combination will likely result in underperformance of the investment results.Â
In addition, the lack of clarity between investing and trading will also confuse a new investor when reading financial news. A long term investor may recommend buying an asset when the market declines due to its more attractive valuation now. However, a momentum trader may advise selling it as the price has now broken a significant support level.Â
An investor invests for two main reasons – capital appreciation and passive income. Capital appreciation means that when an investor acquires an asset, he expects the asset value to increase over time. The investor will also receive a passive income in the form of a dividend.Â
A trader trades to generate active income. A trader’s main objective is to earn sufficient income to cover his expenses monthly. Leverage is commonly used in trading to amplify profit. However, it is crucial to note that leverage is a double-edged sword. That means it will also magnify the losses.Â
Having determined your investment objective, we are now ready to select the financial asset to fulfil the pre-determined investment goal.Â
Types of Financial Markets
So, you have finally decided to either invest or trade in the financial markets. Now, you will have to come to a decision on which financial market you would like to participate. In this section, I will share the different types of financial markets available.Â
There are generally 4 financial markets accessible by retail investors or traders. They are equity, fixed income, commodity and forex markets. Due to the different types of investors or traders participating in the markets, each market has its own characteristics. Some of the markets are easier to invest and others are easier to trade. It is therefore important to choose the right financial market that will help you to achieve your investment or trading objectives.Â
I will go through briefly each financial market below. Again, I may have to write a separate article so that you can understand each of them in detailed.Â
1. Equity Market
At YantoWong.com, I made no assumption that my beloved readers do have prior education in business study. Don’t worry, I knew nothing about all these terms when I entered the financial market during my university days in NTU Engineering. After all, we are all here to learn! I will therefore explain the financial terms encountered in the easiest possible manner to understand.Â
Equity is also commonly known as share or stock. When you buy a piece of equity, that means you become one of the owners of the company, i.e. shareholder.Â
Companies which shares are available to purchase at the stock exchange (such as New York Stock Exchange or Singapore Exchange) are known as public listed companies.Â
You will need to have a brokerage account to enable you to buy a piece of share of public listed company. There are various different types of brokers which you can choose from. Again, I will have to write another article on this to explain them in detailed.Â
Participating in equity market means that you are investing in an equity of a public listed company. Equity market is possibly the easiest financial market to invest in. As long as you know what to look out for, the chances are good that you will make the right investment decision.Â
If you are starting out in the US equity market, you may want to check out this article. It shares the information you need to know about US equity market.Â
2. Fixed Income Market
Fixed income market is also known as bond or debt market. As the name suggests, when you buy or invest in a bond, it means that you are lending money to either government (government bond) or companies (corporate bond).Â
Equity and bond are two conventional financial assets available. The reason why investment textbooks recommends to have a good mix between equity and bond in an investment portfolio is because bond provides certain level of stability despite having a lower rate of return.Â
This article (and blog as a whole) will not cover much about fixed income investment. Yes, you are right! The reason is because I have never bought a single bond before. 🙂 This blog will only contain the financial assets and instruments which I personally invest or trade in. While sharing about financial markets, I believe in putting my money where my mouth is.Â
3. Commodity Market
Commodity market is a financial market where financial assets such as agricultural products, livestocks, energy and metals are traded. The two most popular commodities in the market are crude oil and gold.Â
The financial assets most commonly used to enter commodity market is futures. Futures require a significant amount of initial margin and therefore the participants for this market are largely institutional traders.Â
4. Forex Market
Foreign exchange or forex market is probably the easiest market to trade in. Each financial market has its own characteristics. Forex market has got most of the characteristics that make it easier market to participate as compared to others.Â
It also allows a high leverage, i.e. you are able to trade a large amount of money with only a small margin. However, it is extremely important to note that leverage is a double-edged sword. It cuts both sides – if you win, you win big and if you lose, you could lose big too.
Types of Financial Instruments
Having understood the different financial markets available for you to participate, it is now the time to choose the financial instrument which you will use to enter the chosen market. While there are many different types of financial instruments, we will only go through 3 of them which are commonly used among retail investors or traders. It is also important to note that different financial instrument works better with certain financial market. It is therefore crucial to select the right matching between the financial market and financial instrument to be profitable. Let’s now go through the 3 types of commonly used financial instruments.Â
1. Spot
In simple form, spot means entering the financial market using cash. For novice investors, it is advisable to begin your investing journey using spot. The reason is spot instrument does not contain leverage. That means if you were to take on the wrong side, the losses will not get multiplied.Â
Spot is effective in markets like equity and forex.Â
2. Options
Options trading was extremely popular 10 years back in Singapore. It was marketed as an easy way of making money. Obviously, reality catches up. While it is true that the losses are capped (for options buyers only, not options sellers), the options buyers are fighting against the time decay of the options. That means the price of the options keeps depreciating over time.Â
I personally traded options before I settled with forex trading. I don’t find options trading to be that simple.Â
3. Futures
There are a small group of retail futures traders. Nevertheless, futures are generally a financial instrument used by the big boys, i.e. institutional traders such as those working in banks and fund management companies.Â
Futures is probably one of the very few instruments available if you intend to trade in commodity market.Â
Investment Strategy: Fundamental vs Technical Analysis
Based on personal investing and trading experience, it is clear that fundamental analysis works significantly better for investing and technical analysis works more effectively for trading.Â
I will probably have to write a separate article on the difference between fundamental and technical analysis as these are the two main school of thoughts among the financial market participants. In this section, I will explain briefly the differences between the two of them.Â
Fundamental analysis is based on the information available about a company. This information can be in the form of financial statements, competitive advantage, management leadership and others. Such investment approach relies quite heavily on interpretation of financial statements. I personally use this investment style for investing purpose.Â
On the other hand, technical analysis attempts to interpret the share price of the company to predict the future direction. Technical analysts believe that all the information available in the market has been built into the price of the share. This investment style relies on chart reading, such as candlestick and technical indicators. For trading purpose, I use largely technical analysis with little or no fundamental analysis.Â
The decision on which style to adopt will depend on your objective, whether to invest or trade. Of course, there is no one who will stop you from using both to make investment or trading decision.Â
Final Words
This article provides the very basic information that you will need to understand if you intend to begin investing. I started investing at the age of 24 and have since build up a strong investment portfolio. I know that most people are keeping their money in saving accounts or at best fixed deposit. Frankly, I do find it quite a waste. I see no reason why they have to settle for zero-point-something percent when they can earn a much higher return by increasing their financial literacy.Â
YantoWong.com is still in the infancy phase. Believe me, you are one of the first few readers. Thanks for reading and be assured I will not hold back in sharing what I know so that you can also achieve a higher return on your money. 🙂Â
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