Oran Hall, Contributor
I am interested in investing more funds in stocks and need some guidance. I have watched the 'Young Investors' programme on television and have been inspired by the competitors' ability to trade in the stock market. Can you shed some light, please?
FINANCIAL ADVISER: What you see on the 'Young Investors' programme on television is simulated trading. It is not real although it is similar in many ways to real trading.
The Jamaica Stock Exchange facilitates trading in this competition by setting up an equity account of J$100,000 for each competitor. It is able to do so because it has a special software designed for that purpose.
Competitors are able to simulate the buying and selling of stocks that traded that day or the previous day. Trading volumes and prices cannot exceed those recorded for the actual trades.
In regular trading, there must be at least one buyer and one seller for each transaction. As happens sometimes, an investor wanting to buy or sell stock cannot do so because there is not a matching order on the other side.
The simulated trading on the 'Young Investors' competition do not require an investor on the opposite side for a transaction to be completed, so it is much easier to effect a trade than on the real market.
Competitors can trade simultaneously with the real market but this does not affect the day's real trade. Each day's trade affects the portfolios of the competitors. When a competitor creates a portfolio, its value changes as the prices of the real securities change in the market even if the competitor does not trade any of the securities in the portfolio.
The competitors do not have real money and are not able to convert the virtual money to real money.
You need real money to trade on the market. You also must be prepared to put in a lot of hard work to do research and must be able to keep a level head. Not everybody is wired to face up to the challenges of trading in the real market.
In selecting stocks, I suggest the following: know about the company, if it has good management and good plans for the future, if it has a solid place in the market, if its debt burden is reasonable and manageable, for example.
You may also want to know if it pays good dividends and if its price is reasonable relative to its earnings.
Return on equity
Select a company that consistently has a good return on equity, or shareholders' funds. Examine the profitability of the company and its ability to increase profits at a satisfactory level in the future.
Know also about the industry it is a part of by doing some research; examine whether it is in an industry that is experiencing strong and sustainable growth.
There are several kinds of stocks in which you may invest to match your investment objectives. An income stocks pays high, regular dividends. Its price does not generally fluctuate significantly.
A value stock is a good stock that trades for less than it is worth: that is, it is underpriced. It generally has a high dividend yield and trades at a low price-earnings ratio and may also have a low price relative to its book value.
Book value is derived as follows: total assets minus total liabilities divided by the number of issued shares.
The price of a growth stock tends to be high relative to its earnings per share, which is net profit divided by the number of shares, because its earnings are expected to grow above average relative to the industry or the market.
Profits are generally re-invested so dividends are low or not paid at all.
Investing in the stock market is long-term business. It requires patience. Avoid the crowd. And stay focused at all times.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning. Send feedback to email@example.com