Getting started in shares - Part 3 : Basic investing considerations | Sunday Observer

Getting started in shares - Part 3 : Basic investing considerations

Before a potential investor engages with the stock market, it is important to understand the motive for such investment and what is expected out of it. One would need to spend some time and understand to a certain extent the risk associated with it, prior to embarking on an investment of this nature. After all, it’s your hard earned money – you should know what you are doing with it and why.

Investment needs and financial ability

A successful investment would refer to one which would grow your capital and result in earning a substantial return.

Depending on what you’re looking for, a good investment could share some common characteristics which would also depend on how attractive the investment vehicle is perceived to be.

Such characteristics could be safety, predictable outcomes and guaranteed returns. Prior to making a selection on an investment method you should think about your investment goals, the time horizon for achieving them, the amount of money needed to invest, and the level of risk you are prepared to take.

A good investor would invest the money that he/she does not need immediately and is willing to have it invested for a long period. Share investments in particular work best when they are held long-term.

If you suddenly decide to sell your shares because you need the money, you should be aware that you would be incurring unnecessary transaction fees and there could be a possibility of losing money at the point you decide to sell.

Options

Once you have established your objectives you can then consider a range of products and investments that will assist you in constructing a suitable portfolio for your purposes. Although you poses the right to make your own investment decision by informing yourself well, it is always advised to be more prudent and also get advice from a qualified investment professional who is well versed on the subject matter, in order to fully understand what you are investing in.

We cannot stress enough that you should seek professional advice if you fail to fully understand the features of an instrument, the investment-worthiness of the issuer (the company issuing shares) or if any other doubt or confusion arises about the product.

Risk appetite

A potential investor would need to identify his/her risk appetite prior to deciding on a stock to purchase. Are you an investor that is seeking to invest in a security that is considered to be less risky? Or are you prepared to accept higher risks in return for the prospect of higher returns?

Investing in shares is riskier than other forms of investments, but offer a greater chance of a higher return. Higher the potential return, higher the risk to your funds. However you should also note that there are shares which over a period of time have been identified to pay a stable dividend and is perceived to be less risky in comparison.

Portfolio diversification

Diversification is the strategy used to mitigate the risk factor with regards to an investment. The famous investment adage ‘don’t put all your eggs in one basket’ is the best way to explain the term diversification.

If equities are the only form of investment made by an investor, it would be considered a smart move to diversify between multiple companies which would always reduce the risk factor involved with regards to a share investment. In this way, losses made on some investments can be absorbed by gains made in others, keeping the overall return on investments positive.

Spreading your money across various industries and companies helps reduce the overall level of risk. Not every investment decision you make will produce the desired result, but spreading them evens out the odds.

You could choose to use from an array of options available to diversify your portfolio. The CSE Sector classification and Industry Group Indices will help you in this regard as it acts as a representative benchmark for investors, especially if you are looking to diversify your investments using different sectors.

The right approach

The manner in which you approach the share market largely depends on your objective which would enable you to decide on the time frame of this investment. In general, investors who take a long term view of the market, reap the most rewards. For those investors who have a short term investment timeframe, timing is important as they have to closely keep track of short term movements in prices in order to find advantageous trading opportunities.

For new investors prior to making large investments in the market, it is advised to familiarise yourself with how it works. This can be done by either visiting the CSE website www.cse.lk or by installing the CSE mobile app which is available on the app store and the play store. You will be able to see the performance of the overall market as represented by the ASPI or the index of 20 selected companies the S&P SL20, as well as how individual shares perform under different market conditions.

The CSE also conducts a number of investment related workshops around the country tailored to capture the interest of new investors.

Do your homework

Any investment firstly entails gathering of knowledge. Especially with share investments you have to be prepared to do some homework on the companies that you have invested in and the companies that you wish to invest in.

This means you have to keep abreast of what’s happening in the country, industry and elsewhere which may affect your investment. You would also have to acquire the basic skill of analysing a company’s annual reports, accounts and other statements in order to understand how the company that you invested in is performing and how its share price may move accordingly.

Consult your investment advisor/stockbroker to get the latest market information about shares you intend to buy or sell. Making decisions based on rumours, particularly if you yourself cannot explain the choice in a rational manner is certainly not advisable.

Also constantly check the CSE website on which all corporate disclosures are disseminated, which would enable you to make a calculated decision.

Conscientious investors also set appropriate benchmarks to measure the performance of their portfolio. Your portfolio is successful if it is achieving or surpassing your investment targets. Particularly, if you are an investor who has a large proportion of shares in the portfolio, you must note that the overall market can vary significantly over time and will impact the performance of your portfolio.

Therefore, it is usual to consider the overall market performance (in the case of the CSE the reflector is currently the ASPI) as the benchmark. You can also compare the performance of your shares in comparison to the sector they belong to. - Colombo Stock Exchange

(To be continued)

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