Wed | Dec 19, 2018

Oran Hall | Buying stocks to get a certain return?

Published:Sunday | November 18, 2018 | 12:00 AM
The Jamaica Stock Exchange building at Harbour Street, downtown Kingston.

QUESTION: I really want to start buying shares from local companies, even maybe from foreign companies like Amazon, but really I am looking at next year, by God's will. How much money would I have to invest in order to get back what I invested, plus earn 50 per cent profit on what I invested?

- Juleen

FINANCIAL ADVISER:

Investors do not buy shares directly from companies - not even in initial public offerings. In such cases, they buy from the stockbroker handling the issue and other selling agents. The company is then listed on the Jamaica Stock Exchange (JSE) if it satisfies the requirements for listing.

Thereafter, the shares trade on the stock exchange. Owners of shares sell to individuals, companies, pension funds and other buyers through the stockbroker of their choice. The stock-broking companies are dealer-members of the JSE. It is their representatives who execute the trades on the stock exchange. Trades are executed electronically.

 

PURCHASING STOCK

 

If you are able to do your own analysis to determine which stock to buy, you may make your decision and give instructions to your broker indicating the amount of stock you wish to purchase and the price you are prepared to pay. There is no guarantee your broker will succeed in buying the stock for you. It is quite possible that the supply may be less than the demand or that the price may move above your preferred price.

If you are not able to determine which stock to buy, there are investment advisers at the stockbroking companies who can help you make that decision.

The individual stockbroking companies determine the minimum sum that their clients can invest through them, but the size of the investment is not what determines the level of success of the investment.

How well the investment turns out depends on the particular stock you select and the state of the market. If a company is making good profits and the outlook for making good profits in the future is positive, the price of its stock will very likely increase and make it possible for the investor to make a profit.

Sometimes investors make a very good profit in a short time. The price of the stock may double in a year or less, but it may take years to double in other cases. In fact, it may not double at all if the company does not do well.

 

State of the market

 

Sometimes the profits of a company may be good and the prospects for profits in the future may be positive, but the price of the stock may not move meaningfully for quite some time. A primary reason for this could be the state of the market. There are times when the market is not doing well overall, and the prices of even good stocks do not increase significantly as a result.

Notwithstanding what I said previously about significant short-term gains from investing in shares, it is best to take a long-term approach to investing in them. By long term, I do not mean months, but years. Good stocks will do well over the long term despite fluctuations over the course of time that you own them.

One approach some investors take to investing is to determine the return they want from the investment. You mentioned 50 per cent. Some investors sell and realise their profit when the target is reached. Others change their minds - sometimes to their advantage, but other times, to their disadvantage.

You do not have to wait until you have amassed a large sum to buy stocks. You may set aside a sum to buy at fairly regular intervals. The advantage of this approach is that although you will buy at high prices, you will also buy at low prices.

You should note that you will incur commission and other charges each time you buy and sell equities. You should take this into consideration when you are calculating your returns. The returns you make on

equities go beyond the capital gains you make when you sell for more than you paid for the stock. Your returns also include dividends, which are distributions made to shareholders from the profits of the company. Compared to capital gains, dividends are not usually significant.

Perhaps now is a good time to begin to learn about the stock market and how it operates. You could also begin to familiarise yourself with some of the listed companies and learn how to analyse their performance.

- Oran A. Hall, the principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. Email finviser.jm@gmail.com