Stock Market Investing

The Stock Market has the ability to outperform any other investment asset class in the longer term. Even though the benefit may fluctuate in the short term, in the longer term stocks have been the most beneficial investment amongst the others. In Sri Lanka, the stock market has generated an average market return of 21 per cent during the period 1985-2009 vis-a-vis 14.7 percent average yield was generated by treasury bills. A person can engage in stock market investments in many ways.

In this article we will present to you with some of the tips to invest in the right way with the objective of creating wealth through the stock market.

[Longer term trading]

Maintaining a diversified portfolio

As in any other risk management technique, when investing in the stock market, it is best that you invest in diverse types of assets.

For instance, make sure you do not invest all your money in one single sector. You can spread your investment across several different sectors. The companies listed on the CSE are divided into 20 sectors comprising Telecom, Banking, Finance and Insurance, Diversified, Beverage, Food and Tobacco, Hotels and Travels, Manufacturing, Health Care, Construction and Engineering, Plantations.

An investor needs to ensure that he/she understands each company’s business model and the exposure to business and financial risk before making an investment decision.

In-depth knowledge and access to research data/information pertaining to sector dynamics viz competition, key success factors, driving forces, government policies, global trends etc will no doubt help you to better understand the future direction of the industries/sectors.

Your investments should thus be divided among the sectors that will offer relatively stronger growth prospectus.

Another stage of diversification would be that you can spread your money among various classes of assets such as in Bonds and Treasury bills, rather than investing all your money in stocks.

The allocation of funds in to different asset classes could be done at your discretion. If you are a risk taker then increase your exposure to equity with an asset mix of 70:30.

If you are a risk avoider then you could allocate more funds into fixed income assets whilst channelling a smaller percentage into equity (stock market). Likewise investing in a pool of different asset classes would certainly reduce your risk.

Timing of investment

After deciding what your portfolio is going to look like, you can take the initial steps of investing. First and foremost, you should approach a suitable stockbroker. The investor can discuss with the broker and open an account for him/herself via the stockbroker. At the time of initial investment, it is advisable that you do not invest all your money in at once.

You should invest your money gradually in the market to minimize any market timing risk. After investing in shares that you want, make sure you review them at least once a week to maintain marked to market portfolio positions, which in turn should be compared with your initial investment.

Sustaining your portfolio

Investors should analyze their portfolios regularly to maintain profitability and liquidity. You can add certain securities to your portfolio in the areas in which you want to increase exposure.

These additional securities can either expand the number of securities you hold or be added to existing holdings. By maintaining your portfolio as such, you would realize in a couple of years that it has become a substantial investment to fund your retirement, pay for a second home, or meet whatever goals you set when you started your investing journey.

Presented above are a few tips for investors on how to benefit from stock market investing in the longer-term.

This section below would focus on how an investor can succeed in the stock market through short-term trading.

Short-term trading

Short term trading can be a high risk, high return option. It could be a one day trade or it can last for a few days as well. When it comes to short term trading, investors should be able to well understand the risks and rewards of each of the transactions.

They should also posses the skills of identifying best deals and safeguarding themselves by unexpected losses.

Most of us assume that by following the events of the market at the end of the day, we would be sufficiently updated to make good decisions in the market.

Yet what we don’t realize is that by the time we find out the information, the market has already responded to these facts and events. Thus it is useful for you to be mindful of the following tips suggested by experts in the field to make a better decision.

Step one: Watch the moving averages

A moving average is the average price of a stock over a specific period of time. The most common timeframes are 15, 20, 30, 50, 100 and 200 days. The overall idea is to show whether a stock is trending upward or downward.

Generally, a good candidate will have an increasing moving average that it is sloping upward. If you are looking for a good short-term investment, you want to find an area where the moving average is flattening out of declining.

Step two: Understand overall cycles or patterns

Usually the markets trade in cycles, which makes it important to watch the calendar at particular times. Cycles can be used to traders’ advantage to determine good times to enter into long or short positions.

Step three: get a sense of market trends

If the trend is negative, you might consider doing very little buying. If the trend is positive, you may want to consider buying more.

The reason for this is that when the overall market trend is against you, the odds of having a successful trade drop even more.

Primary market

Having discussed about how you can succeed in short-term and longer term investments in the secondary market, here are a few tips on how to invest in a lucrative primary market issue.

Company history

It is always difficult to analyze an initial Public Offering (IPO) since there will not be many records carrying historical information.

Your main source of data will be the Prospectus, so make sure you examine this document carefully, While concentrating on the financials, pay special attention to the management team, how they plan to use the funds generated from the IPO, and details regarding the allotment of shares.

Flipping

This is when a person resells on IOP stock right after buying it, in order to earn a quick profit. It is not easy to do and your broker may not encourage you in this regard.

The reason is that companies encourage long-term investors who hold their stock and not traders. Yet there are no laws to prevent selling your IPO stock in the first few days.

Conclusion

Before you step into the stock market and pursue trading, it is advisable that you think of how you’re going to invest in terms of your fund availability and the ability to manage those funds.

By doing so, you would be able to utilize your money efficiently and benefit in the long run. Today’s article featured a few valuable tips on how to make the right decisions on investing in the primary market and secondary market as well as in the short-term and longer-term.

Though all of them are universally acceptable suggestions, it should always be you who should make the right decision as the investment is your asset.