Sunday, January 29, 2012

Young Investor Series - Why Should you invest in the stockmarket (Part 3)

One likely pitfall that many thinking of starting young will face will be their limited capital. With a minimum charges of around $30 ($25 for commission and another $5 for GST and clearing fee) per trade, a trade of $3000 will cost $60 of brokerage fees to buy and sell, equating to a 2% loss. However, a smaller capital outlay at the start can prove to be a better investment in the long run.

First of all, let's face the fact that it is highly unlikely for one to be generating high returns continuously in the long run when one just started out even if one may have read tons of investment books. Knowledge is just a tiny portion of investing as compared to experience, emotional stability and patience.

Personally, I have make all kinds of mistakes right at the start which has allowed me to learn in a much less painful way. Think about those who started in a hot bull market, where everything they buy just rises spectacularly and they can double their capital in weeks as they believed they have the "Midas touch". They will continue pouring all their savings into their so called investment, trade with margin and when the bull cycle ended, many faced a near total wipe-out of their capital.

My point is not whether one should start in a bull or bear market, but the younger one is, the lesser capital one will have and thus the lesser the mistakes will cost. Be it a 10% or a 90% loss, one will lose lesser in the absolute term and it will be likely that one can earn those money back by saving and working harder. And of course, unlikely that one will have to support his family. Imagine a 40 years old who losses his lifelong savings and has about 20 years more before he retires.

Another way to look at this will be that the earlier one learned from his mistakes, the longer a period that he has to compound his win. Assuming a super bull cycle of 10 years, a 20 years old will only be 30 years old when he learned his lessons, gained experiences and maintain emotional stability.

Last but not least, investing in stocks will be beneficial to students studying economics, accounting and business, or exploring career path in these area. While I have the habits of reading The Straits Times before I started investing, I will always skip the Money section as I think that it is just too complicated. Now, I read Bloomberg and CNBC even before I have my breakfast. Understanding what's happening in the financial sector will definitely put one at an advantage over his peers when it comes to finding a job.

Thus, starting young is beneficial in many ways and there's not much reason why not to other than maybe the younger one is the more rash and impatient one will be. Even if one is afraid of capital loss, there is no harm in playing around with paper trading though one need to be careful when one decided to switch to real stock investing.

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