Oran Hall | Understanding the investment world
QUESTION: I am 19 years old and I just read one of your articles. I would appreciate if you would help me understand the investment world and how a young guy like me can start off.
FINANCIAL ADVISER: The investment sector is a critical part of the economy. It includes the issuers of financial instruments, the purchasers of the instruments, the financial instruments, trading mechanisms, financial intermediaries and the regulators of the sector.
One important reason the investment sector and the financial system - of which it is a part - exist is that there are persons, organisations and corporate bodies which have surplus funds while there are others which do not have sufficient funds to carry out their activities.
Governments also play an important role as they often require funds, beyond the intake of taxes, to finance projects and the other activities of the state. They may choose to raise funds on the local market.
Some countries have surpluses, while others do not have enough to meet their commitments. They are, therefore, able to lend their savings to others. Their residents are also able to invest their savings in other countries, which explains how residents of one country invest in bonds and equities in other countries through the market mechanism.
Borrowers issue bonds which trade in the bond markets. Some bonds are listed on the exchanges and trade on them but others trade over the counter. There is a wide range of bonds characterised by differences in their features including how interest is determined and paid and with what frequency, and how they are secured. Governments are major issuers of debt instruments.
But debt is not the only source of funding for economic activity. Investors are also able to become part owners of businesses by buying stock or equity in businesses. When such businesses are listed on stock exchanges, existing stockholders have a means by which they can sell their stock and prospective investors have a mechanism through they can buy stock.
Financial instruments such as stocks and bonds are first issued in the primary market, that is, they are sold by the issuer to investors often with the help of a middleman.
The market also facilitates the transfer of the ownership of these instruments from current owners to new owners in what is called the secondary market. The stock exchange is an important mechanism for facilitating the trading of stocks on the secondary market.
The system is now so developed that investors in Jamaica are able to buy and sell securities in foreign markets either by employing a financial intermediary such as a local stock broker or by, in some cases, trading directly in those markets. Thanks to technology.
Regardless of the type of financial instrument in which trading occurs, it is the market which determines the price. It is thus very important for inexperienced persons or persons who lack the time to manage their own investing activities to engage the services of a competent and trusted financial firm or professional to assist and advise.
Investment companies are also important in facilitating the administrative work which is associated with the trading of securities in the financial markets.
Many factors affect investment markets and performance: interest rates, government policies, performance of the economy, performance of companies, conditions and developments in the economies of major countries, particularly those that are trading partners of your own country, and developments in international financial markets.
The investment world is known for its uncertainties and surprises and requires patience. It does not promise overnight riches and requires that participants educate themselves continuously, making note of trends and aligning their own positions with the state of the markets.
A young person who asks questions is on the right track. Keep asking the right questions and read, watch and listen to matters pertaining to investments.
You do not need a lot of money to enter the market. But as a young person, you should be careful how you invest, especially if your resources are limited. Determine how much you can invest and when. Be constant. Do not invest funds you are likely to need for recurrent expenses.
Set clear goals to guide your investment programmes. Determine what portion of your funds you want to invest in low risk securities such as bonds and in higher risk instruments such as stock. There are quite a few other instruments many of which are quite complex.
Determine if you have time to attend to your portfolio or if you would prefer to leave it to professional managers. If the latter is the case, you could consider unit trusts, which provide much scope for diversification, flexibility and ease of management.
If you save, you will have resources to invest, so make a budget and use it to create savings. That is the perfect way to start.
n Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.