Basic investing considerations
Before you take to the stock market, it is important to spend some
time thinking about what you want to accomplish and how to do that while
staying within your risk tolerance levels. Careful thought before and
during your investing career will do more to help your results than
trying to chase the latest hot stock. After all, it's your money - you
should know what you are doing with it and why.
Understand investment needs and financial ability. To earn from your
investment, the asset or product you invest in, must grow your capital.
You should first think about your investment goals, the time horizon for
achieving them and the amount of money needed to attain these in the
context of the level of risk you are prepared to take.
It is a precautionary measure to invest only the money that you don't
immediately need and won't need in the foreseeable future. Share
investments in particular work best when they are held long-term. If you
suddenly decide to sell your shares because you need the money, you
should be aware that you would be incurring unnecessary transaction fees
and there could be a possibility of losing money at the point you decide
Know what products are available in the market. When you have
established your objectives you can then consider a range of products
and investments that will assist you in constructing a suitable
portfolio for your purposes.
Although you can consider making your own investment decisions by
informing yourself well, it is always more prudent to ask a qualified
financial professional who is well versed in advising the public about
investment options. Make sure you understand what you are investing in.
We cannot stress enough that you should seek professional advice if
you fail to fully understand the features of an instrument, the
investment-worthiness of the issuer (the company issuing shares) or if
any other doubt or confusion arises about the product or its issuer.
Decide on what level of risk you can allow. You need to be aware that
there is an element of risk involved if you expect a return on your
investment. Before buying shares you need to decide what level of risk
you are prepared to take. Are you looking for shares that don't carry
too much risk, or are you prepared to accept higher risks in return for
the prospect of higher returns? Investing in shares is riskier than
other forms of investments, but offer a greater chance of a higher
return. Higher the potential return, higher the risk to your funds.
Investing your money in various companies helps reduce the overall
level of risk. Not every investment decision you make will produce the
desired result, but spreading them evens out the odds. As we indicated
previously in last week's column, the best way to minimise risk is to
diversify your investments between different companies and sectors.
The recently launched S&P/CSE Sector and Industry Group Indices will
help you in this regard as it acts as a representative benchmark for
investors, especially if you are looking to diversify your investments
in different sectors.
Choose the right approach. The manner in which you approach the share
market depends on your time-frame. In general, investors who take a long
term view of the market, reap the most rewards. For those investors who
have a short term investment time-frame, timing is important as they
have to closely keep track of short term movements in prices to find
advantageous trading opportunities.
Familiarise yourself with the manner in which the share market moves
just by observing it. You can do this by visiting the CSE website
www.cse.lk. You will see the performance of the overall market as
represented by the ASPI or the index of 20 selected companies the S&P
SL20, as well as how individual shares perform under different market
The website also offers online education that is designed for
investors who are starting out under the 'CSE Education' section.
Do your homework
Any investment activity entails gathering knowledge. Especially with
share investments you have to be prepared to 'do the homework' on the
companies you are investing in. This means you have to keep abreast of
what's happening in the country, industry and elsewhere which may affect
your investment. You would also have to acquire the basic skill of
analysing a company's annual reports, accounts and other statements to
understand how the company that you invested in is performing and how
its share price may move accordingly.
Consult your investment advisor or stockbroker to get the latest
market information about shares you hope to buy or sell. Making
decisions based on rumours, particularly if you yourself cannot explain
the choice in a rational manner is certainly not advisable.
Conscientious investors also set appropriate benchmarks to measure
the performance of their portfolio. Your portfolio is successful if it
is achieving or surpassing your investment targets. Particularly if you
are an investor who has a large proportion of shares in the portfolio,
remember that the overall market can vary significantly over time and
will impact the performance of your portfolio.
Therefore, it is useful to consider the overall market performance
(in the case of the CSE the reflector is currently the ASPI) as the
benchmark. You can also compare the performance of your shares in
comparison to the sector they belong to.