What is Stock: How to Buy, Types of Stocks and Risks of Stock Investing
One of the most popular capital market instruments you frequently hear is stock. Sometimes, many people say that stocks are dangerous and risky. Is that really true? Let's discuss it!
What are Stocks?
Stocks are evidence of an investor's capital participation or ownership in a company. By owning stocks, investors have rights to the company's income, assets, and even have a voice in the General Meeting of Shareholders (GMS). Of course, the percentage of stocks owned determines the extent of the rights held.
How Does the Stock Market Work?
A company that issues shares offered on the stock exchange is called an issuer. In order to be traded on the stock exchange, which in Indonesia is the Indonesia Stock Exchange (IDX), the issuer must first go public through a process called an Initial Public Offering (IPO), where the company's shares are first sold on the exchange. After the IPO, the shares are traded in the secondary market. The price of stocks can fluctuate based on the law of supply and demand. If there are many transactions and it is easy to find investors who are selling or offering stocks, the stocks are considered liquid. The demand and supply of a stock can be influenced by various factors, including the company's performance and business prospects, economic and political conditions, market sentiment, and many others.
Types of Stocks
More and more people are starting to invest in stocks to achieve their financial goals. There are several reasons why stocks have become a popular choice for many people, one of which is the ease of investing anywhere and anytime. The Indonesian capital market also recognizes two main types, namely the conventional capital market and the sharia capital market. Sharia stocks re a type of stock that complies with the principles of Sharia in the world of capital markets. So, before you start investing in stocks, it is important to familiarize yourself with the various types of stocks available.
Benefits of Stock Investment
The benefits of stock investment include:
- Dividends: Dividends are a portion of the company's profits distributed to shareholders. The amount of dividends to be distributed is proposed by the Board of Directors and approved at the General Meeting of Shareholders (GMS).
- Capital Gain: Capital Gain is the profit when an investor sells stocks at a higher price than the purchase price.
Risks of Stock Investment
Investing in stock investment instruments certainly comes with risks, including:
- Not Receiving Dividends: Generally, companies distribute dividends when they have good performance. However, when a company experiences a decline in performance or losses, it may not be able to distribute dividends.
- Capital Loss: Capital Loss is the opposite of Capital Gain. This happens when we sell stocks at a lower price than the purchase price.
- Liquidity Risk: If an issuer goes bankrupt or undergoes liquidation, shareholders' rights are at the bottom of the priority list, meaning they will be paid after all the issuer's obligations are settled. Shareholders may end up receiving nothing.
- Stock Delisting: For various reasons, stocks can be delisted from the exchange, making them no longer tradable on the stock exchange.
Before buying stocks directly, it is important for investors to understand their investment risk profile. Stocks are investment instruments with high potential returns, but they also come with high risks. High risk, high return. Stocks are suitable for those with an aggressive risk profile. In addition, expertise, data, and time are needed to analyse stocks before purchasing them.
How to Buy Stocks
For investors who want to buy stocks on the stock exchange, such as the Indonesia Stock Exchange, they need to open an account with a securities company that is a member of the exchange. In the account opening process, investors will be required to submit documents such as identification cards, customer knowledge forms, and make an initial deposit, among others. Investors also need to open an investor fund account at a designated bank for transaction purposes. Stock transactions are usually settled within 2 exchange days, so for example, if an investor buys stocks today, they must provide their funds within 2 exchange days and receive the stocks on the same timeframe.
Stock trading is conducted by the Indonesia Stock Exchange (IDX), and currently, stocks are no longer traded in physical form but in scriptless form. The central settlement of stock transactions is carried out by the Indonesian Central Securities Depository (KSEI), which has the function of conducting clearing activities and ensuring the settlement of transactions in the capital market, while investors' stocks are held and recorded by the KSEI. The IDX, KSEI, and KPEI are self-regulatory organizations (SROs) under the supervision of the Indonesia Fincial Services Authority (OJK).
Stock trading can be done through sales representatives working at securities companies, but with technological advancements, online trading services are now widely provided by securities companies, allowing investors to directly trade through their platforms.
How to Monitor Stock Ownership
Investors will receive transaction reports every time they make stock transactions and monthly reports regarding their stock ownership from the securities company. However, nowadays, investors can independently monitor their securities and/or fund ownership data online through the AKSes facility launched by the KSEI.
Types of Investors in the Stock Market
In the stock market, there are several different types of investors, depending on their investment goals, approaches, and risk tolerance. Here are some common types of investors:
- Long-Term Investors: These investors aim to maintain their investments, such as stock investments, for the long term, usually for years or even decades. They tend to focus on the company's fundamentals and conduct in-depth analysis before making investment decisions.
- Short-Term Investors: These investors tend to engage in more active trading and often take advantage of price movements, such as short-term stock trading, to gain quick profits. They use technical analysis and various trading strategies to make investment decisions.
- Value Investors: These investors look for stocks that are considered undervalued or priced lower than the intrinsic value or true value of the stocks. They hope that the stock price will increase over time as the market recognizes the true value of the company.
- Growth Investors: These investors look for stocks of companies with high growth potential in the future. They tend to focus on innovative companies with unique products or services and operate in rapidly growing industries.
- Dividend Investors: These investors look for stocks of companies that consistently pay dividends. They rely on dividend income as a source of passive income and tend to be more stable in facing market fluctuations.
- Speculative Investors: One type of investor in the stock market who has a riskier approach and tends to take shorter positions in terms of time. They often invest in start-up company stocks or more volatile sectors
Difference Between Stocks and Equity Mutual Funds
There is another way to invest in stocks if you have limitations in terms of time, funds, or expertise, namely through equity mutual funds. Equity mutual funds provide indirect access to the stock market.
Although stocks and equity mutual funds are investment instruments in the capital market, they have differences. Equity mutual funds are a type of mutual fund where investors' funds are invested by Investment Managers in stocks listed on the Indonesia Stock Exchange. Stock mutual funds tend to have higher returns compared to other types of mutual funds but also come with higher risks. On the other hand, stocks are valuable documents that indicate ownership in a company. When you buy stocks, you become the owner of the company.
Here are 4 differences between stocks and equity mutual funds:
- Fund Management:
- Stocks: Investors or traders manage their funds independently.
- Equity Mutual Funds: Funds are invested by Investment Managers.
Risk Level:Stocks:
- Risks of stock price decline and issuer liquidation.
- Equity Mutual Funds: Risks of decrease in Net Asset Value (NAV) of unit participation.
Potential Returns:
- Stocks: Returns come from capital gain and dividends.
- Stock Mutual Funds: Returns come from the increase in participation unit value.
Fund Withdrawal Process:
- Stocks: Funds from stock sales are deposited into the Investor Fund Account (RDI) on T+2 (2 exchange days after the transaction date).
- Equity Mutual Funds: The fund withdrawal process takes longer as it involves Investment Managers.
It is important to recognize and understand which mutual fund suits your goals and risk profile.
For more information about investments, you can read educational materials from Schroders Indonesia here or follow Schroders Indonesia on Facebook.
Sources: www.ojk.go.id , www.idx.co.id
DISCLAIMER
INVESTMENT IN MUTUAL FUND INVOLVES RISK. PRIOR TO DECIDING TO INVEST, PROSPECTIVE INVESTORS MUST READ AND UNDERSTAND THE FUND PROSPECTUS. PAST PERFORMANCE DOES NOT GUARANTEE / INDICATE FUTURE PERFORMANCE.
The views and opinions contained herein are those of the author(s) on this page and are not necessarily represent views expressed or reflected in other Schroders’ communications, strategies or products. This material is intended to be for information purposes only and is not intended as promotional material in any respector offer or solicitation for the purchase or sale of any financial instrument, and cannot be regarded as warranty as to performance or profitability of the portfolio under Schroders’ management. This material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations and also may not be circulated, published, reproduced or distributed to any other person without our prior written consent. The content in this material and all confidential information relating to Schroders must be treated by you in the strictest confidence. Confidential information includes (but is not limited to):
• Schroders’ proposed investment strategies, processes, know-how and details of the proposed investment mandate;
• fee and commission arrangements;
• information about other Schroders’ clients;
• any third-party information which are subject to confidentiality restrictions;
• fund holdings data; and
• our staff details.
Confidential information should not be disclosed to any third party and should only be disclosed to those of your employees, agents and professional advisers who are required to see such information for the purposes of assessing the proposal. You should ensure that these persons are made aware of the confidential nature of such information and treat it accordingly. You acknowledge and agree that unauthorised disclosure or use of confidential information would cause irreparable harm, damages would not be an adequate remedy and we shall be entitled to all forms of equitable relief. You shall return and/ or destroy all confidential information at our written request. You shall not disclose any information or make any announcement relating to this material or its subject matter without our prior written approval except as required by law or by any legal or regulatory authority. Reliance should not be placed on the views and information in this material when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can goes down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Some information quoted herein was obtained from external sources we consider to be reliable. Information and opinions herein have been compiled or arrived at by Schroders from sources honestly believed to be reliable and in good faith, but Schroders may not have undergone verification or due diligence examination into the accuracy of such information and does not warrant its completeness or accuracy. No responsibility both directly and indirectly can be accepted for errors of fact obtained from third parties or negligence of or loss resulting from the use of this material. The data disclosed in this material may change according to market conditions. If any regions/sectors are shown in this material, such data is for illustrative purposes only and should not be viewed as a recommendation to buy/sell. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know and include some forecasted views. However, there is no guarantee that any forecasts or opinions disclosed in this material will be realised. These views and opinions herein are our current views and may change without notice. Nevertheless, this disclaimer does not exclude any duty or liability that Schroders has to its customers under the prevailing laws and regulations in the Republic of Indonesia. PT Schroder Investment Management Indonesia, 30th Floor Indonesia Stock Exchange Building Tower 1, Jl. Jend. Sudirman Kav. 52-53, Jakarta 12190, Indonesia. PT Schroder Investment Management Indonesia as an Investment Manager is licensed and supervised by the Indonesian Financial Services Authority (OJK).
Topics