Oran Hall | Investment guide to the stock market for beginners
QUESTION: I read an article in The Gleaner that relates to the stock exchange and investing. I would like to know more as to the whole concept of investing, buying and selling shares and understanding the stock market as a whole. I am a beginner or a novice, as one might say. Any information given would be greatly appreciated.
FINANCIAL ADVISER: To invest is to purchase a financial asset with the expectation that it will provide income (dividends, interest, rent) in the future and or the appreciation of principal, and, generally, to be sold at a higher price to realise the capital gain.
There are many instruments in which to invest, including ordinary stock, preference shares, bonds, unit trusts, mutual funds, derivatives, and commodities. The instruments that trade on a stock exchange are primarily ordinary stock, bonds, and preference shares.
The stock exchange is a company or organisation that facilitates and promotes the trading of stocks and other securities that are listed on it, but the traders of the brokerage companies in Jamaica no longer physically go to the stock exchange to trade as it is now done electronically. In addition to being a centralised marketplace for trading listed securities, it provides a mechanism for companies to raise capital.
Only the securities of companies that are listed on the stock exchange trade on it. Companies that list on the stock exchange must meet certain requirements relating to their capital, the number of shareholders, and the percentage of the share capital that they own. The process of listing is carried out with the help of a stock broker, and it is the stock exchange that ultimately gives approval for a company to be listed on it.
The stock exchange has authority to delist or remove the securities of companies that fail to maintain the listing requirements, meaning that it would not then be possible for those securities to trade on the exchange.
Investors who buy shares, or ordinary stock, receive dividends and benefit from capital gains, that is, the profit from selling shares for a higher price than the purchase price. Investors may also incur losses when they invest.
To buy or sell stock on the stock exchange, you should go to any of the stockbrokerage firms authorised to trade on the exchange. For a list of the stockbrokers, see the website of the Jamaica Stock Exchange www.jamstockex.com.
Stockbrokers are able to advise you to help you make suitable decisions, but you must open an account with the brokerage company before you can transact business with it. You can find valuable information on how to open an account as well as the forms required to do so on their websites. You will need to produce two references, proof of address, and your Taxpayer Registration Number.
Once you have chosen the stock you want to purchase, after careful research, you will indicate how many units you want, and the price you are willing to pay, but expect your broker to ask for a deposit of about 50 per cent of the cost of your order when you place it.
You may place a market order, which specifies the number of shares you want to buy or sell at the best available price. You may, however, place a limit order, whereby you specify the maximum price you are prepared to pay or the minimum price you are prepared to sell at.
You may choose to place a day order, which is valid only for the day on which the order is placed.
Transactions are done on a cash basis, that is, you are required to pay in cash or by cheque for the stock you purchase, and you must have clear ownership of any stock you are selling.
Trading takes place on the Jamaica Stock Exchange from Monday to Friday, between 9:30 a.m. and 1 p.m., on a computerised platform. Transactions are settled two business days after the execution of the order by your broker.
The minimum size of orders varies. One broker, for instance, requires a minimum of $25,000, but others require less; another requires a minimum of 100 units of stock but charges a minimum commission of $500. Once the order has been executed, your broker will issue a contract giving details, including commission and other charges, of the transaction.
Although stockbrokerage companies cannot set commission rates as a group, the rates they charge generally hover around two per cent of the value of the transaction on both the buying side and the selling side, and there are fees payable to the Jamaica Stock Exchange: a trade fee that varies, depending on the size of the transaction; and a cess, which is based on the value of the transaction. General Consumption Tax applies to all fees.
Although you may request a physical certificate, today’s norm is for holding securities in electronic form, which is facilitated by the Jamaica Central Securities Depository (JCSD).
This enables transactions to be processed by book entry. Your broker will set up an account for you at the JCSD from the information you provide to set up your broker account.
It is advisable to put all your buying and selling instructions to your broker in writing and to monitor your account regularly.
- Oran A. Hall, principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel. Email firstname.lastname@example.org