Mon | Feb 19, 2018

Briefing | Investing in Jamaica's stock market 2018

Published:Wednesday | January 17, 2018 | 12:00 AMDr Andre Haughton

The Jamaican stock market continues to improve on a yearly basis, and can help to improve your earnings if you learn how to invest wisely. It has brought lucrative returns to many investors and is expected to continue to do so over the foreseeable future given its trajectory in 2015, 2016, and 2017.

As the Jamaica Stock Exchange prepares to host their annual Regional Investment and Capital Market Conference from January 23 - 25, 2018, under the theme Driving Growth: Regional Investment for the Climate of Change, it is necessary once more to discuss stock market, how to invest and more importantly, how to make the best of your investment.

The key here to understand is the correct information to make the right investment decisions in order to minimise the perceived risks associated with your investment. Answers to the following questions are relevant to any potential investment.

 

What does the company do?

 

A broker will always have great advice on which companies he believes will perform well based on his understanding. The broker will most times have more information at his disposal than you. Nevertheless, it is your investment; therefore, it is essential for you to do some homework for yourself. If a broker advises you about a particular stock, please research the company yourself to make sure that you have an understanding of what the company does all around. No one should invest in something they have not researched thoroughly.

 

Is the company profitable?

 

Make sure the company is profitable. No one wants to invest their money in an unprofitable venture, the same holds true for financial investments. You can get information on the profitability of firms from their quarterly or annual revenue statements. It is important to chart the firm's net income in actual amount and in earnings per share.

 

What is the company's earning history and potential?

 

If the company has a history of steady, gradual increase in earnings, then you bookmark this company for investment. If the company's earnings are volatile, then it will require more research before making an investment decision. It is important to scrutinise not just a company's earning history but also its future earning prospects.

 

How does the market value the company's stock?

 

It is all good and well that a company's earnings are growing, what is also important is the value the market associates with the increase in earnings. If a company's earnings are increasing but the stock value is not appreciating significantly then there might be other concerns to investigate.

 

How far from frontier is the company?

 

It becomes important to ask this question. Many investors are compelled to buy into firms that are already doing well. While this might appear to be a sure- shot strategy, it limits the amount by which your equity can appreciate in value. On the other hand, investing in a start-up company that is very far from frontier, might allow your equity more room to grow, hence allowing more room for the value of the equity to increase. Although on the flip side these small companies do have a higher propensity to fail. As a result you must ask yourself the following questions before you invest in stocks:

 

What are the key characteristics of the industry, who are the competitors?

 

Understanding a company requires full understanding of the industry in which the firm operates, including its competitors. A firm is never independent of the market in which it operates. It is important to know the size of the market share that the firm has. Who is its closest competitor? What strategy is that are they planning to use? What impact will their action have on the earning potential of the firm and the value of its stock? Does the industry have dominant market leader, or are a couple of market leaders? Is it an open playing field? Do you have foreign competitors? What is the Government doing to make their doing business easier?

 

Who runs the company?

 

Stock market investors, though in theory, are part owners of the firm they invest in, don't normally get the opportunity to 'chat up' to the management team and express their vision for the firm. This means you must investigate the leadership of the company to make sure their vision, aspirations, and drive for the company are similar to what you expect. Make sure the leader has a good track record and their reputation is clean.

- Dr Andre Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email editorial@gleanerjm.com