NAIROBI, Kenya, Jan 7 – When most of us think about stock markets and how to invest in them we find ourselves being faced with the misconstrued notion that stock markets are for the rich or for experts who understand the intricacies of some mystical world occupied by a certain elite.
Just like any other market, the stock market is game for anyone who has the will and resources to dapple in it.
Shares, Stocks or securities are simply units of ownership in an entity or a company and anyone with some savings can always buy into any stocks. When you own a share of a company you are a part owner of the company and with that ownership comes various powers like voting rights and responsibilities that you will need to understand to be a good investor.
Companies sell shares to raise capital, usually done through an Initial Public Offering (IPO) in the primary market. When the shares are offered, they are usually at a discounted rate simply meaning they cost less than their actual value as an incentive for investors to buy the shares.
Alternatively investors may choose to buy shares which are already listed on the secondary market where trading takes place between the shareholders. A few simple rules can set you on the path to an exciting, enlightening experience and probably to riches you only dreamed of at the beginning.
The next step is to understand the risks that come with investing in the stock market and to figure out how to fund your foray into “investopia”. Investing in shares is closely tied to the performance of the underlying company and there are always risks of losing your cash just as there is potential for making profits so choosing familiar companies with good/profitable track records is a good place to start.
One avenue for gains is dividends which companies pay out of the profits; if the company makes losses it will most probably not pay a dividend. Other gains are called “capital gains” and these come when share prices appreciate, you can then sell for a profit. Capital gains will normally be driven by higher demand for the shares plus good sentiment from investors so seldom will a loss making company’s stock price increase in value as nobody will want to buy into a loser! Sometimes companies reward their shareholders by giving them bonus shares to avoid paying out cash which they need to fund growth.
It is essential to invest only money that comes from savings which has no immediate use rather than using funds that are earmarked for important projects like education or rent.
Never put all your eggs in one basket and, at all costs, avoid investing in a single company or sector in order to diversify your risk. Some sectors are more risky than others; such stocks have greater potential for high returns, whereas less risky stocks offer a soft landing during bad times which are inevitable in any stock market. (Stock market have the highest amount of risk; mutual funds – lower risk; bonds, even lower risk; Treasury Bonds, lowest risk).
Though the stock market involves the highest risk, riding out the problems usually makes more money in the long run; in fact, the stock markets have outperformed all other investment opportunities. Furthermore, lower risk investments, like savings accounts, may not pay enough interest to overcome inflation, so they are not always appropriate.
Select a stockbroker who will be your access to the stock market and provide essential services to enhance your effectiveness as an investor. A good broker will identify your investment profile and advise on the appropriate strategy to attain your goals. The stockbroker also provides you with facilities to track your investments decipher the meanings stock tables and variables that sometimes make investing in stock markets so mystical.
Once you are armed with this information you can now use it to follow the market indicators and make adjustments appropriately as time goes by.
As a parting shot here are a few tips that you should always keep in mind to improve your investments.
First, set targets so that you can know when to exit from a stock and stick to them. If you decide that 20 percent profit is your target avoid the tendency to hold onto the shares once the target is reached in the hope that it will continue to climb. Greed is a dangerous quality when investing in the stock market!!
Secondly, set stop loss points say 10 percent below the entry price and exit when your investment loses so you can have some money to look for more promising stocks, you can then trail the stop loss with the price if it appreciates so that once the price climbs by 10 percent your stop loss will be equal to your entry price.
Third, remember that every trade attracts a transaction cost in the form of commissions payable to the stockbroker and regulatory authorities. Excessive trading will attract high transaction costs which in turn eat into your profits.
Fourth, create a relationship with your investment advisor or stockbroker and keep track of the essential reports they provide for you to track your investments.
Fifth, avoid panic and relax. Stress is a killer so strive to enjoy your investment.
Lastly, attempt to increase your investments over time by progressively buying more stocks.
(Samuel Kimari is an investment analyst with MSc Finance)