I read your article in the Sunday Gleaner of February 24, 2013. I am thinking of investing in the stock market. Do you think it is a good idea?
FINANCIAL ADVISER: Investing in the stock market is a personal matter. It is a decision which each person must make for himself or herself but there are some factors which suggest some persons are better suited for it than others.
It is important to know what you want to achieve from taking positions in the market and over what period of time. If, for example, your objective is income, it is not the place for you because the primary reason for investing in the market should be to make capital gains.
Further, the stock market is not suited for the short-term; it is for the long-term. In fact, if you see yourself as an investor, it would mean that you intend to be in the market for the long-term over which time your money will work for you.
If your interest is in buying and selling regularly, that is, holding positions for a short time, you are a trader and not an investor.
Traders spend a lot of time watching the market and surrender much of their potential returns to trading expenses. I do not recommend the stock market for trading.
You also need to determine the level of risk you are able to tolerate. If you do not have the mental and financial capacity to tolerate losses, even fluctuations in the value of your investments, the stock market is not for you.
It is not the place to put your grocery money or your children's school fees and certainly not for worriers or persons who keep wondering if they made the right choices. Quite frankly, although I would expect you to make good choices, you should be prepared to make losses from time to time. Beyond that, some stocks are not very liquid, meaning it is not easy to sell them.
Even good stocks can sometimes take time to sell particularly if the market is weak. There is a real risk that the market could be soft at the time you desire to sell.
Although it is not necessary to be an expert to invest in the stock market, it is advisable to know how it operates and to have some knowledge of the companies in which you plan to invest. A serious investor must devote time to research.
Do this even if you plan to engage the services of a professional so you can understand what is happening with your money. This means that the investor needs time to do research and to evaluate the performance of the portfolio.
There are good reasons for investing in the stock market. It is the best means for making investments that give a real return over the long-term. By this, I mean a yield that beats inflation.
Additionally, most companies pay a cash dividend. Furthermore, capital gains on stocks are not taxed except cases in which such gains exceed 50 per cent of the individual's income.
Stocks listed on the stock market represent companies from many different sectors of the economy and there are opportunities to invest in foreign-based and operated companies.
Companies listed on the stock market vary. They do not all respond the same way to the same event. Some tend to generate good dividend yields, others generate good capital gains, some tend to trade at low ratios relative to their earnings while others trade at high multiples.
The stock market opens the door to a diversified investment portfolio.
There is a downside. I mentioned liquidity challenges and the demands on time earlier. Let me add the risk of capital loss, that is, selling at a lower price than the stock was bought for and warn that investors should not be obsessed with timing when to buy.
We are all humans and have limitations and thus cannot accurately predict the highest price or the lowest price at which a stock will trade.
A good approach to take in investing in the stock market is dollar cost averaging by which the same amount of money is invested in particular stocks over time. Sometimes the purchase price will be high, other times low but it usually averages out at a good level.
Ultimately, you will need a good stockbroker if you decide that the stock market is the place for you. We are well-served with brokerage houses and stockbrokers. Your experience hinges on the choice you make in this regard.
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 firstname.lastname@example.org