Newbie's Guide to the Stock Market Pt.1

Hello.

I've been wanting to set-up a page dedicated to guiding wanna-be investors, traders or stock dabblers out there who want to learn a thing or two. Firstly, let me first say that all the information that you will ever need is out there. You just have to Google it. In my writing, I will try my utmost best to cover every aspect of the markets in very simple language. Hopefully, you will be able to pick-up some lingo along the way, that will ease you into the market environment.

There's nothing difficult to it, and there's nothing too fancy that you can't understand. People out there who try to get your business will try to make it sound complicated, fancy and sophisticated, but trust me, after you get the hang of what I'm about to divulge, you would most easily think that those fancy brokers and stock analysts out there are really spitting out plain BS. If you are a firm believer in taking your OWN action to make yourself a small fortune, then you should by all means carry on reading.

My teachings should mainly relate to stocks in KLSE, but core principles can be used to trade elsewhere in the world.

Cheers!




Part One: Setting up a brokerage account

For many of you out there who are just starting out, I would definitely suggest opening a brokerage account with the bank you make your deposit or having a savings account with.

Maybank Investment Bank (located near Bangsar LRT)
CIMB Investment Bank (located next to Tropicana City Mall)

These are the two I'm familiar with. As for other banks you might have to make a phone call to find out.

The reason I suggest opening an account where you have your savings, is for ease of transaction. You can easily transfer money to and from your brokerage account to your savings/deposit account. For beginners, you SHOULD opt for a CASH UPFRONT account. Do not be tempted by the leverage these banks offer.
By leverage I mean, if you bank in RM5,000 they can offer you up to RM10,000 or RM15,000 to purchase stocks.

Since "Leverage" would not be a main topic to be discussed here, I might as well explain it now that I've brought up the matter. While it is useful, any beginner should not leverage their money in any manner. Say your stock is bought at RM1.00. Your RM5,000 account with leverage of up to RM15,000 might allow you to purchase 15,000 units of shares instead of 5,000 units of shares.

If your share drops to RM0.50, your total loss would be RM0.50 X 15,000 = RM 7,500
Noticing that your account is short of RM2,500 your broker would call you to top it up.
That said, if you do not want to top up, you are forced to force-sell your shares, and still owe the bank the balance. 

If of course your share increased to RM1.50, by using leverage to purchase 15,000 units of shares, you would have made RM7,500 on your RM5,000 capital. That is more than 100% return on your initial capital.

But, please bear in mind that these "conveniences" might come with certain terms and conditions. Some banks allow a T+3 rule. Meaning that whatever loss or profit must be settled within 3 working days after purchase of shares. Please check with your brokerage.

Thus, to not complicate things for beginners, if you only stick to purchasing what your RM5,000 initial deposit might allow you to buy, say 5,000 units of shares, then you can still hold and wait for your share price to maybe increase in price. (Please note that I do not include calculation of brokerage fees, thus RM5,000 might buy you lesser than 5,000 units of RM1.00 shares.) 

Upon confirmation of registration, you will be able to trade online immediately. You could of course utilize both online trading or call up your broker to make a trade. Most prefer to trade online, as it is cheaper. To give you an example, if an online trade cost RM10, using a broker might cost you RM40.

Also, every month, you would receive a letter of statement from Bursa Malaysia showing the shares of companies you own or traded. It might not be up-to-date but it serves as a reminder nevertheless. Part of your trading fee goes to Bursa, and part of it goes to your brokerage and remisier (if you use one).