Value Investing is the sure way to Wealth

In this section, we intend to provide a short course to value investment, the first step is to help you understand your present financial situation and your financial goals. We will need you to consider whether you are ready for value investing.

Introduction

They are two friends - Sara and Bo. Sara starts investing at age 25 whereas Bo only start investing at age 35. At the age of 45, Sara will have $251,282 more than Bo. At age of 65, Sara will have $671,824 more than Bo, achieving close to $1.6 m. This story tells us to start investing as early as possible. If you invest at a later age, you still can catch up but will require a larger amount of investment.  This is the beauty of compound interest.

From Investopedia, Compound Interest is interest calculated on the initial investment ("Principal") and also on the accumulated interest of previous periods of investment. Compound interest is "interest on interest", this will grow at a faster rate than simple interest. The rate at which compound interest grows depends on the frequency of compounding, the higher the number of compounding periods, the greater the compound interest. To illustrate how to harness this tool, Sara bought a share A, the share issues a dividend of $1 per share. This $1 ($1/share x 1 share) is re-invested into the share A. Every instances share A issues dividend, Sara will reinvest into the share to grow her holding in the company.

In simplistic terms and ideal world, you just need to buy shares in the right company, be patient and continue to reinvest dividend and money in a systematic approach.

This is the sure way to wealth.

What are shares?

Shares are issued by companies for the purpose of raising capital from investors. When you buy a company’s shares, you own a stake in the company. Shareholders are entitled to be paid a share of declared dividend. There are two classes of shares which are ordinary and preferred shares. Ordinary shareholders have a right to attend and vote at general meetings. A general meeting provides a platform for shareholders to engage the company's board and management to express your views and gather necessary information affecting the company.

There are broadly two classes of shares – ordinary or common shares and preference or preferred shares. In this guide, we use “shares” to refer to ordinary shares.

Ordinary shareholders have a right to attend and vote at general meetings on matters such as a major acquisition/disposal or the appointment of directors. A general meeting provides a forum for you to engage the company’s board/senior management and voice your views on matters affecting the company.

Shares are mostly traded in board lots of 100. If a share is priced at $1, you would pay $100 to invest in one lot of shares (excluding transaction costs).

Understanding the cost of investing in shares 

In Singapore, most of the brokerage firms charged a minimum fees between $18-25, under $50k is approximately 0.28%, between $50-100k is approximately 0.22% and over 100k is 0.18%. For those who intend to trade for quick bucks, there is another hurdle to overcome, you need the stock price to go up enough to cover for the brokerage commission in order to first break even before you can make profit. Therefore, you will be benefiting your broker if you trade very often, making him rich first before you. A highly recommend read is "Where are the customers' yachts?".