REASONS TO INVEST
Saving money in your bank account is only the start of your investing journey. With deposit rates remaining low at less than 0.15% per year¹, we have to find investments that generate returns higher than that to stay ahead of inflation.
Shares are one of the most common investment choices that allow individual investors to generate higher returns on their savings, and have several advantages:
Shares can increase in value over time.
This is the first way shares generate higher returns for us. When we buy shares in a company, we are effectively acquiring a piece of the business. Over time, as the business expands, its revenues and profits grow. When this happens, the value of our ownership in the business should increase too. The resulting increase in share prices over time is the Capital Growth that we earn.
“Capital Gains” is the term that investors use to refer to the actual profit that we recognise at the time we sell our shares. Conversely, if you sell your shares at a price lower than what you bought it for, that’s a “Capital Loss.”
Shares can pay us a revenue when we hold them.
The second way shares generate higher returns for us is when companies we own pay us dividends. When companies make a profit, they can choose to reinvest those profits back into the business to accelerate growth, hold on to it for future opportunities, or distribute back to their shareowners as dividend pay-outs.
For those of us who want to receive a revenue stream from our investments (we call this “Passive Income”), we look for companies that consistently pay dividends. Dividends can be paid quarterly, semi-annually, or annually. When we receive the dividends, we can choose to reinvest in the company by buying more shares, and over time, increase our stake in the business.
Shares let us invest in different types of companies with small amounts of money.
Each of the 700 over companies listed on the Singapore Exchange are different businesses serving different markets, with different growth cycles. Investors can easily invest in more than one company with only a minimum of 100 shares each. This allows us to spread our risk, so that we do not have large amounts of our investments tied to only one company.
Another convenient way to diversify our investments is through Exchange Traded Funds (ETF). These are funds (or portfolios of company stock) that are bought and sold through the Singapore Exchange. For example, the Straits Times Index (STI) ETF is a fund that is designed to replicate the performance of the STI. The STI consists of 30 of the largest capitalised, most actively traded stocks listed on the Singapore Exchange. We can purchase units in the STI ETF through a single investment. This is a common way for new investors to start investing in the stock market.
We can buy and sell shares quickly and easily when we want.
Another advantage investors have when we invest in shares is that we can easily and quickly buy or sell them, and in flexible amounts. We only need to purchase (or sell) a minimum of 100 shares in any company or ETF (Exchange Traded Fund), and can do so quite quickly through brokers’ online trading services or by calling their representatives.
We can see the price of the shares we want to buy or sell.
Because shares and ETFs are traded on the Singapore Stock Exchange, we can see the price of the shares as they are being bought and sold (this is known as the “market price”). We can decide if we want to transact at the market price, or if we want to buy/sell at our desired price (although if our desired price is different from the market price, it may take longer to find a counterparty who agrees to transact at our price.)
Note: While together these advantages apply to shares on the Singapore Exchange, not every share will offer all 5 of these advantages all the time, and certainly not at the same levels. When we invest in a company we’re interested in, we should be familiar with what the company’s business is and what their returns, risks and dividends are. There are several tools and resources that we can turn to for this information – you can learn more about this in [Understanding The Basics, Helpful Tools, and More Resources] sections.
¹Source: Monetary Authority of Singapore Average of Past 10 years Banks Savings Deposits Interest Rates