Author: Ho KhinwaiKhin Wai is a Year 3 Banking and Financial Services student from the School of Business Management (SBM). He started his foray in finance in 2011 and has his roots in value investing. Archives
December 2013
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Introduction to Exchange Traded Funds15/10/2013 Exchange Traded Funds (ETFs) in Singapore have come a long way since their first inception in 2002, when the first local ETF, STI ETF (formerly known as streetTRACKS STI ETF) made its debut on the Singapore Exchange. ETFs are a type of security that mimics an index's movement, such as the Straits Times Index (STI) in Singapore, and is traded on SGX along with other common stocks. By buying into an ETF such as the STI ETF, the investor gets a wide and diversified exposure into a basket of Singapore stocks that make up the STI. With an ETF, an investor can be said to own ALL 30 of the Singapore blue-chip stocks that make up the STI, without directly investing into each stock individually! Advantages 1. Information readily available If you have ever heard of a unit trust (or mutual fund), you would know that the trading prices are not shown for each minute or hour. Trading prices of unit trusts, which are termed as NAVs(Net Asset Values) are only updated at the end of the day, and they only reflect the prices from the previous day of trading. ETFs work in the same way as unit trusts, in that their underlying assets are a basket of assets that seek to mimic a particular industry or index. However, the main difference is that as they are traded on an exchange like SGX, investors can see price changes immediately, trading volumes and price charts of the ETF at the click of a mouse button! As you can see, ETFs are much superior to unit trusts in terms of liquidity. 2. Lower expense ratio As ETFs trade like stocks on SGX, they only incur trading costs like a normal stock would (GST, broker fees, clearing fees...) which are much lower than a unit trust's fees. Unit trusts are actively managed as compared to ETFs, which are passively managed, which means managers don't actively trade to raise the fund's performance and take a relatively laissez-faire approach to management. Hence, unit trusts incur fees such as management fees, loading (commissions), administrative fees, trustee fees and so on... As you now realize, it is much profitable to be investing in an ETF than a unit trust. 3. Diversification As mentioned, underlying assets of ETFs include a basket of assets that seek to track an index or some other benchmark. In an STI ETF for example, you actually hold an underlying of 30 blue-chip stocks from all types of industries in STI! This provides the investor with diversification benefits that allow the investor to spread his risk across the underlying portfolio. For example, if the commodities market in Singapore tumbles due to sudden news, STI will not be significantly affected, as the stocks from other industries (such as Financial) will offset or minimize the impact from commodity stocks like Olam and Noble. Types of ETFs In Singapore, there are 3 classes of ETFs for investors to choose from - Equities, Bonds and Commodities. Equity ETFs track a stock index such as the STI (STI ETF), bond ETFs track a bond index (eg. ABF Singapore Bond Index Fund) and Commodities ETFs track a particular commodity index (eg. SPDR Gold Trust) There are also other kinds of ETFs that track a particular country's or region's index. Some of the common examples are: Lyxor ETF MSCI India (tracks India's index), CIMB FTSE ASEAN 40 ETF (tracks the ASEAN index). Other interesting ETFs that have appeared on the SGX are money market(CASH) ETFs (eg. DBX SINGAPORE CS) and inverse ETFs which has prices go the opposite direction of the particular index direction (eg. DBX S&P500 SH; shorting S&P 500 index). Risks in ETFs While I may have painted a slightly fancy picture of ETFs as an asset class, do note that there are also risks involved in investing in ETFs. Firstly, you may lose all or part of your invested capital in ETFs as they are not guaranteed products like Fixed Deposits. Secondly, ETFs may not be able to exactly replicate the performance of the particular index due to fees, timing differences and other factors. Favorable price changes in the index may thus not result in a similar movement in the ETF. Third, investors who invest in ETFs that track overseas indexes or assets that are denominated in a different currency must be aware of the Foreign exchange risks involved. Currency fluctuations may hence eat up part or all of your gains! Lastly, investors who favor exotic ETFs (eg. ETFs that track index of a country like Bolivia, maybe?) may face liquidity risks as they may not be able to find a buyer or seller to enter or exit the transaction at the price you want. The bottom line is that ETFs are a revolutionary financial product that can be of enormous benefit to the so-called average investor. In my opinion, no portfolio should be without at least one or two ETFs.
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Understanding Stock Market Lingo20/9/2013 Have you ever been on a stock trading platform or on SGX.com and found that there are some pretty confusing stock terminology that you stop to think for a moment about why you even bother to invest in the first place? You’re not alone. Entering the stock market can be a daunting task, with quite a steep learning curve. If you’re blindly invested without having sufficient knowledge about investing, you could potentially be burned by your mistakes – and you may not even know it. Warren Buffett gives us a piece of wisdom, “Only when the tide goes out do you discover who’s been swimming naked”. NCPS NCPS stands for Non-Cumulative, Non-Convertible Preference Shares. You may be wondering what this means. As with all technical jargon, let’s break it down. Preference Shares are shares which carry a higher priority and standing over normal shareholders. Preferred shareholders who have these shares get the right of dividend payment during the lifetime of the company, if anytime the company decides to issue dividends. If the company winds up (hopefully not), preferred shareholders will receive their part of the liquidation amounts before normal shareholders. Also, preferred shares usually have a fixed rate of dividend. So what this means is that you can consider preference shares as a bond, which pays you periodically, and at a fixed rate. Non-Convertible basically means that the holders of the preferred shares are barred from any additional rights to CONVERT their preference shares into ordinary (normal) shares. As you might have guessed, CONVERTIBLE preferred shares will receive this extra option. As such, convertible preference shares will most likely be priced higher than non-convertibles. This is as convertibles give the investor BOTH the (1) assurance of a fixed rate of dividend, plus (2) the opportunity for capital appreciation, while non-convertibles only provide the investor with (1). Non-Cumulative indicates that the shareholder is not entitled to any arrears of dividends (the dividends that are “owed” by the company to the investor, for the years the company did not pay out dividends – hence it accumulates). This means that if the company did not pay dividends in 2013, NCPS investors will not get dividends as well for that year. Again, cumulative shares tend to be pricier. So now we have explained the whole term, you might be wondering “Is this type of equity available in our Singapore market?” The answer is yes! One of our more familiar NCPS is: OCBC Bank’s 5.1%NCPS 100 (Ticker: F4B.SI). 5.1% indicates the fixed rate of dividend per annum (year). The 100 at the end indicates trading size of 100 shares. This means the minimum buying of 1 lot will be equivalent to owning 100 NCPS shares of the company. There are also other variations of preference shares like Hyflux’s CPS. (Hyflux 6%CPS 10). You may have guessed it – CPS stands for Cumulative (Non-Convertible) Preferred Shares. Preference shares also vary in terms of redeemable/irredeemable, participating/non-participating, classes, lot size, maturity, voting rights, etc… CD/XD This is a more commonly seen remark on stock screens. Let’s take a closer look… A CD is not your old circular disk that contains your files and documents. CD in stock market lingo stands for Cum-Dividend. A stock with a “CD” sign in the next column of your stock screener means that that stock is entitled to receive a dividend that has been declared, but not paid out yet. So, if you buy a stock with a CD, you will receive the dividends that they have declared for that period. A little language nugget here – “cum” basically means “with” in Latin. XD comes right after a CD period. XD stands for Ex-Dividend. XD is the cut-off date that the company sets to end the entitlement of dividends to shareholders for that period. This means anyone who owns the shares before the XD date will be entitled to the dividends, while investors who have just bought on or after the XD date will not receive the dividends. ADR ADR stands for American Depository Receipts. ADRs are basically stocks that trade in the United States, but the companies of these stocks are not incorporated in America. Let’s take Baidu for example (Baidu is a Chinese web-services company incorporated in China). If Americans wanted to trade Baidu shares, they would have to go to China and open a trading account with them to buy the shares. This ridiculous process is simplified with ADRs, where Americans can now buy a bundle of Baidu shares (as one lot), using their own American trading accounts and paying with their own currency. In Singapore, this process is the same. One such ADR listed on SGX is from Baidu. BIDU ADR 10US$+ (Ticker: K3SD.SI). BIDU represents the name of the company – Baidu. For example, if Baidu is trading at US$150 per share, one ADR would cost US$150 X 10 = US$1500. 10 refer to 10 shares of Baidu that equal one lot. US$ refers to the trading currency of the ADR. + refers to single-listed ADRs. This means that the Baidu ADR stock is only listed on the US stock exchange, NASDAQ, and no other stock exchange. ------------------------- So, now you know three of the many jargons and abbreviations used in the stock market! Understanding some of these lingoes will definitely help you in your investing journey by broadening your knowledge on the different types of equity. Came across any other terminologies not listed here? Leave a comment down below, and we might answer it on our next article!
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Walmart is a large-cap company.
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Okay, we know what a stock is already (If you don’t, refer to my previous article below.) Today, we will be looking at what MARKET CAPITALIZATION for a share means. Market Capitalization, or Market Cap for short, is a type of measure used by investors and traders to categorize shares in the market. Market Cap reflects the market value of the particular company, and gives indication to how big the company currently is. In determining what stocks to buy, some traders may use Market Cap to retrieve a list of only those companies that are of a certain size. There are three “sizes” in the market – Small Cap, Mid Cap and Large Cap. First things first, there is a formula for calculating Market Cap. No, it doesn’t involve algebra or calculus! Market Capitalization = Market Price of One Share X Number of Shares Outstanding Three Capitalization Classes Small Caps: Small-cap counters are those stocks whose market values are below US$2 billion. In Singapore, there are many counters that fall within this range. Some of which are Challenger (573.SI), Sheng Siong Group (OV8.SI) and Blumont Group (A33.SI). Small-cap stocks are usually priced less than S$1 per share. However, be mindful that not all small-caps stocks are priced under S$1. One such counter is Boustead Singapore Limited (F9D.SI), with a price of $1.29 as of 6 September 2013. Small-cap shares are generally more price-volatile due to their smaller size. Hence, their share price may rise four- to five-fold within a shorter time period than their peers with a larger market cap. This is one reason why traders and investors who have a larger risk appetite favor small-cap stocks. However, do note that shares like these may also tumble faster and stronger under conditions that prove to be unfavorable to the company. Small-caps may also be favored due to their growth potential. As smaller companies, they may have room to open more outlets, capture more market share and expand overseas. We could probably see these expanding companies earn larger profits and as part-owners of the company, we, too, get a cut of the increased profits in addition to the rising share price. With such a catch, wouldn’t you like to own all of these small caps too? Not so fast. The thing about small-caps is that many don’t do well enough to have the capability to expand overseas. Increased inflation, labor crunches, increased competition and operation costs and bad fundamentals have sapped away much of their earnings. Mid Caps: Middle-Capitalization shares are stocks with market values between US$2 billion and US$10 billion. Some of these shares are Olam (O32.SI), Starhub (CC3.SI) and ComfortDelGro (C52.SI). Mid-cap stocks generally grow faster than large-cap stocks but slightly slower than small-caps. Mid-caps are usually established companies with at least five years in business. Investors and traders may prefer to invest in mid-caps or large-caps due to their long-standing track record or performance. These companies generally have stable and solid business models and sustainable profits, and are favored among those who have the holding power. Large Caps: Large-cap stocks are the big players in the market. Market values of these shares are more than US$10 billion. These solid, sturdy companies are usually the big brothers of their industry. In Singapore, you might be familiar with SingTel (Z74.SI), Keppel Corp (BN4.SI) and SIA (C6L.SI). Not surprisingly, our three local banks, DBS, OCBC and UOB are all in this class too. Many of these large-caps have a good history of earnings and sales and are familiar names in the country. Investors who favor large-cap stocks find themselves sleeping soundly every night as market fluctuations do not affect their share price much. Also, share prices of large-caps are pretty steep (with some as high as S$50), which may turn off investors who do not have that much investment capital. While large-caps are the cream of the crop, investors and traders may not want to own them. Because of their huge size, these companies find it difficult to move into new markets or take advantage of new, profitable ventures as quickly, and as flexibly as the smaller cap companies. Growth is slow and quick, astounding stock returns are unlikely. Using market cap as a stock filter can be very useful when first deciding to invest. This is as the general characteristics of the different classes cater to different profiles of investors, different risk appetites and different investment strategies and horizons. Although using market cap can greatly help in your investment decisions, it pays to ultimately be prudent in your decision, and analyze the company’s fundamentals fully before jumping in.
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Stocks. Shares. Many people are familiar with these two words in the investment arena. After all, these words are flashed every single day if you watch the business news, along with “up by 4%”, “down by 5.2%” and the like. However, do you REALLY know what a stock is? By definition, a “stock” or “share” is a part ownership in a company. It is NOT an invisible gambling ticket which will earn you millions instantly if you hold the right one. Using the definition, we can understand that when we hold stocks or shares, we are partly invested in a company. We become owners of a company, in a theoretical sense. This is the simplest concept, yet the most foundational and essential concept, if you want to be on your way to financial freedom through stock investing. Many people ask me, “There are so many stocks for me to choose on the market, how do I go about picking one?” Well, there are certain investors who use the dart-and-arrow method (which I do not recommend). There are others who invest because of tips from friends and family (which I also do not recommend). Then, there are others who select stocks solely based on quantitative factors (such as ROE%, EPS, PE Ratio). And, there are people, like Warren Buffett, who choose stocks that are familiar names, and that both quantitative and qualitative factors show signs of good growth. Well, I’m not going to say which method is more “correct”, but using the initial definition of a stock, I would go with Mr. Buffett’s way of stock selection. The reason is simple. Imagine you could be the CEO of ANY company in Singapore. Which company would you choose? You’ll obviously have so many choices, right? And, you’d obviously pick the one that looks financially stable, prospects look good, and is not taking on too much debt, right? Yes you would! Now, apply this thinking to your stock selection, and you’ll never have any problems with finding the wrong stock again. Look at DBS Group (D05.SI). The largest local bank in Singapore since merger with POSB in 1998, DBS Group Holdings is one of the strongest banks, with steady cash flow, low borrowings, and worldwide presence. Unsurprisingly, the stock has also been giving shareholders a pretty decent return (with dividends) if one was to invest in it two or three years ago, right after the Financial Crisis of 2008. Regardless of whether you’re a growth investor, value investor, technical trader, market timer or any kind of investor, the definition applies. A great stock with a great business will never go wrong in the long run. |