Demystifying The Stock Market

Equity Securities are one of the largest categories of investments available today, and have been proven to outperform other asset classes in the medium to long term. Nevertheless, due to a lack of knowledge and the relatively high rates available on repurchase agreements (repos), bonds and similar fixed income securities, investors never had a strong incentive to consider opportunities available on the stock market.

However, with interest rates declining, the current business environment favors equity investments. This will prove beneficial to the growth of entrepreneurship and the long-term development of our economy. The stock market is a powerful wealth generating vehicle, though sometimes misunderstood. It is on this note that I will seek to clarify some of the misconceptions associated with investing in the stock market and provide a better understanding on how these securities work.

Misconception 1: Investing in Stocks is just like gambling
The Stock market provides an effective means of raising capital for companies seeking to expand and contribute to the long-term growth of the local economy. While some investors may speculate on stock price movements, the majority of equity transactions are based on a structured research process in which key considerations about the profitability and growth prospects of the company are analyzed.

Misconception 2: The Stock Market is an exclusive club in which Brokers and rich people make money
The Stock market allows small investors to participate with minimum trades, and the trading volume of a small investor makes it easier for their purchases or sales to be executed. Furthermore, unlike the fixed income market, the rate of return is not directly linked to the amount of money invested. All shareholders receive the same amount of dividends per share and have the opportunity to trade at the same prices.

Misconception 3: Experienced investors do not need advice from their Broker
Equity investments are more sensitive to new information than other types of securities. Investors therefore tend to rely heavily on their Broker’s analysis, recommendations and any other relevant information concerning listed companies on the Stock Market. In a rapidly changing financial market, Brokers will have greater access to information such as volume and prices of orders awaiting execution, which is not generally available to the public.

Misconception 4: Relative valuation (buying stocks with low price to Earning Ratios) is the foolproof method of identifying good investments
Empirical analysis has shown that this strategy typically generates above average stock returns in the long run. However, some companies consistently trade below or above industry averages due to specific factors such as management quality or brand loyalty influencing performance of the organization. Historical ratios may be more relevant if the company has not experienced a significant change in its operations or growth potential. In many cases, consistency is more important than the actual numbers generated by the ratio analyses.

Misconception 5: Strong trends will persist
Market psychology is affected dramatically when the price of a stock moves strongly in a particular direction. Some investors may blindly follow the trend as they fear missing out on opportunities or realizing substantial decline in the value of their portfolio (as in the case of a decline). Most investors later regret the decision to buy or sell based on these trends. This is especially true in the case where an investor buys a stock after a price run to new or recent highs, only to see the value of the stock slide shortly after the market corrects itself. An analysis of the volumes traded is imperative, as the entrance of a large buyer may cause prices to spike, and their subsequent exit results in the retracement of prices to normal levels. Advice from your broker is especially important in these situations.

As economies evolve, equity investments are expected to take a more dominant role in capital markets. Before you invest in the Stock Market, you should define your investment objectives, understand the risk involved and seek professional advice.

Mutual Fund Advice

There Is Nothing to Fear with Mutual Funds

Some investors are scared because of the potential to lose their principal. However, mutual funds must be purchased in a portfolio context. Your advisor will assess your financial goals, risk tolerance, time frame and costs associated with the fund thereby assisting you in making the correct decision.
• There are Mutual Funds, such as Money market Mutual Funds that are very conservative and will preserve your principal. Good mutual fund advice.

• For those who have higher risk appetites, there are many growth funds that will fulfill their needs.

• For those who would like to gain exposure to specific assets, whether on gold, oil, emerging markets or even specific sectors (such as the health sector), there are Mutual Funds just for you.

Benefits of Mutual Funds

Professional Management – Mutual Funds are a relatively inexpensive way for the average investor to benefit from the expertise and insights of some of the world’s best money managers.
Diversification – Mutual Funds invest in a broad range of securities and asset classes which reduces volatility and risk through diversification.
Economies of Scale – The volumes involved in mutual fund transactions lead to costs lower than what you would pay for an individual transaction.
Liquidity – Investors can easily sell their units at anytime (usually subject to an initial minimum holding period).
Simplicity – You get the benefits of a diversified portfolio with just one purchase.

Risk of Mutual Funds

Interest Rate Risk – This is the risk that bond prices will decrease in value when interest rates or yields increase.
Market Risk – Since the prices of securities held in the Fund fluctuate in the market, the NAVPS (Net Asset Value Per Share, i.e. the price per share) could fall or rise.
Credit Risk – This is the possibility of an issuer of a security held in the Fund defaulting on its obligations under that security and not repaying its obligations on time or at all.
Foreign Exchange Risk – When the Fund buys an investment that is denominated in a currency other than US dollars, changes in the exchange rate between that currency and the US dollar will affect the value of the Fund.
Political Risk – The value of the assets of the Fund may be affected by uncertainties such as international political developments, changes in government policies and taxation.

Why Now is a Good Time to Invest

Major world economies are recovering, market rates are trading at historical lows. The best mutual fund advice we can offer is that there’s NO TIME LIKE THE PRESENT. Investing in Mutual Funds is a great opportunity to diversify one’s portfolio. While historical returns are not predictors of future returns, it is a good starting point in the selection process with your mutual fund advisor. When choosing a Mutual Fund to invest in, make sure you do your homework and evaluate the positives and negatives in order to make sure the fund is right for you.