AD­VI­SORY COL­UMN: Un­der­stand­ing unit trust and stock trad­ing

Jamaica Gleaner - - BUSINESS - – Tee­sha

QUES­TION: I’m in­ter­ested in do­ing a unit trust or a stock trade. I’m so blank as to where to go with the in­vest­ment. Can you please give me some ad­vice as to where I could get started and give the names of in­sti­tu­tions that may of­fer the trade for the in­vest­ment? What are the pros and cons of these in­vest­ments? Is it prof­itable to in­vest in lo­cal of for­eign cur­rency? FI­NAN­CIAL AD­VISER: There are six unit trusts in Ja­maica. They are linked to well-known fi­nan­cial in­sti­tu­tions. These unit trusts of­fer a va­ri­ety of di­ver­si­fied funds cater­ing to the needs and ob­jec­tives of in­vestors. Units in the unit trusts may be pur­chased from the unit trusts them­selves or from other fi­nan­cial in­sti­tu­tions linked to them.

The unit trust man­age­ment com­pa­nies are Barita Unit Trust, JMMB Fund Man­agers, NCB Cap­i­tal Mar­kets, Sagi­cor In­vest­ments (Sigma Funds), Sco­tia As­set Man­age­ment, and VM Wealth Man­age­ment.

To pur­chase or­di­nary stocks, or shares, you need to make con­tact with one of the twelve stock broking com­pa­nies which are bro­ker mem­bers of the Ja­maica Stock Ex­change. One place to source the list of these bro­kers is www.jam­stockex.com/in­vestor -cen­tre/jse-bro­kers/

You may also make con­tact with one of the fund man­agers, port­fo­lio man­agers or wealth man­agers to make pur­chases of stock. These are not bro­ker mem­bers of the stock ex­change, but as li­censed se­cu­ri­ties deal­ers, they are able to source the stock for you, but through a bro­ker mem­ber of the stock ex­change.

Al­though both the unit trusts and stock bro­ker­ages are staffed by per­sons who are able to guide you in se­lect­ing the stocks or unit trust funds which are most suit­able for you, it is im­por­tant for you to re­alise why you are mak­ing the in­vest­ment so that the se­lec­tion can align to what you want to achieve. Things can go aw­fully wrong if you make the wrong se­lec­tion.

I would also sug­gest that you learn as much as you can about these in­vest­ment in­stru­ments be­fore tak­ing ac­tion. You should avoid ven­tur­ing into the in­vest­ment world blindly, for al­though it can be re­ward­ing, it can also be cat­a­strophic.

There are good rea­sons why you should in­vest in unit trusts. The fol­low­ing list is not ex­haus­tive. Unit trusts are man­aged by pro­fes­sional in­vest­ment man­agers, thereby mak­ing it un­nec­es­sary for the in­vestor to spend time se­lect­ing in­vest­ment in­stru­ments, de­cid­ing when to buy and sell, and mon­i­tor­ing the per­for­mance of in­di­vid­ual in­vest­ments.

The in­vest­ment funds are di­ver­si­fied, thereby re­duc­ing

Al­though charges are not as high as they used to be, unit trusts are gen­er­ally costly: they in­cur trans­ac­tion charges when they buy and sell in­vest­ment in­stru­ments just as other in­vestors do, they charge man­age­ment fees, which are charged against the funds, and may also take a spread.

When unit trusts take a spread, they quote two prices – a bid price and an of­fer price. The for­mer is the price they buy units for from in­vestors, and the lat­ter is the price they sell units for. In such cases, in­vestors need to en­sure that they do not sell for less than they pay for the units.

Al­though in­vestors do not par­tic­i­pate in the day-to-day man­age­ment of the funds, it is nec­es­sary for them to de­vote time to eval­u­ate their cir­cum­stances and the avail­able unit trust op­tions to de­ter­mine the most suit­able ones for them.

In­vestors ben­e­fit from the gains they make when they trade or­di­nary stock. They also tend to re­ceive cash dis­tri­bu­tions – called div­i­dends – from prof­its. These are not gen­er­ally very sig­nif­i­cant and are gen­er­ally paid once or twice per year.

On the other hand, in­vestors may in­cur losses when they in­vest in stocks and may have se­ri­ous chal­lenges sell­ing when the de­mand is weak for a par­tic­u­lar stock due to gen­eral mar­ket con­di­tions or to the gen­eral unattrac­tive­ness of the stock it­self. Fur­ther, given how the stock mar­ket op­er­ates, in­vestors do not al­ways suc­ceed in pur­chas­ing the stocks they or­der.

It can be prof­itable to in­vest in both lo­cal cur­rency and for­eign cur­rency, but there is also the risk of in­cur­ring losses. One sig­nif­i­cant ad­van­tage of in­vest­ing in for­eign cur­rency is the pro­tec­tion it of­fers against the de­pre­ci­a­tion in the value of the lo­cal cur­rency.

You have taken the first step. Fol­low this up with re­search and seek fur­ther ad­vice from rep­utable pro­fes­sion­als.

I

PER­SONAL FI­NAN­CIAL AD­VI­SOR

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