Taking the first steps towards investing
QUESTION: I am interested in investments. I need to know the amount of cash one needs to have to start and the various aspects of investment.
– Angella
FINANCIAL ADVISER:
To invest is to acquire an asset expecting to make a return in the form of income, capital gains or both, and the income generated depends on the type of asset. Investing goes beyond buying securities, which are financial assets which can be traded. Thus, it is possible to invest in real estate or a business.
Investing is using money to make money, so everybody engages in investing in some way or the other. Perhaps, you have invested before and even have some investments, but it is likely that you are interested in investing in securities of which there are several types.
The ones we hear most about locally are stocks, bonds, debentures, preference shares, unit trusts and mutual funds. The last two allow so much flexibility in their composition, they give investors scope to participate in the ownership of several types of assets in several different sectors of the economy and in several different markets.
It is also possible to invest in assets such as currency, precious metals like gold and silver, commodities like grains and oil, and cryptocurrencies, which are virtual currencies, for example. Some of these are volatile and speculative and require great skill and understanding of the markets and what is happening in the local economy, as well as the global economy.
Some forms of investing require deep pockets as well, while others are such that several investors can participate in them. Unit trusts are a good example of the latter. It is best for potential investors to stay clear of investment instruments they do not understand, as well as those that do not match their risk profile.
Investors should know that no investment comes with a 100 per cent guarantee. The expected returns are not always realised for many reasons. For example, conditions can change in the market, in the economy and in the entities that issue the various instruments. The word associated with this is risk.
EXPECTED RETURNS
As you contemplate investing, it is important to understand the extent to which you are able and willing to tolerate these variations from the expected returns. This may mean stock prices not rising as expected, thus negatively affecting your stock portfolio or your investment in capital growth unit trusts or mutual funds.
It is also possible that the issuers of debt instruments, such as bonds and debentures, may fail to honour their commitment to pay interest when due, and even to repay the principal sum borrowed.
Consider also that it is necessary to align when your invested funds can be made available to you with when you may need your money. Thus, if you are going to need your money in a short time, investing in assets like stocks which may lose value and may sometimes be hard to sell, is not the best option.
But stocks may be just right for you if you plan to keep your funds invested for a long time, if you are able to tolerate the fluctuation of prices, and if your main concern is long-term capital appreciation.
To get quick access to the funds you invest, it is best to invest in unit trusts and mutual funds, which are quite liquid instruments.
Although some forms of investment require much money, real estate, for example, it is possible to invest indirectly in them through pooled funds. Thus, it is possible to invest in real estate by investing in a real estate investment trust.
INVESTMENT DECISION
Many people leave their decisions totally to investment professionals. It is best to have some basic knowledge of what the instruments are and how they match particular needs so that the investor is in a position to make an informed contribution to the investment decision. It is time to start reading relevant literature and listening to and watching financial programmes.
You will notice that I am focusing on the more basic instruments, because it is best to start with what is more readily understood and available.
If you are interested in stocks, bonds, unit trusts, I suggest that you check the telephone directory under’ Investment Advisory & Securities Service’. The Jamaica Stock Exchange website – jamstockex. com/investor-centre/jse-brokers – also has a list of the stockbrokers.
The minimum sum required to buy ordinary shares varies. For example, one stockbroker requires $10,000 and another $25,000, although some brokers require a higher amount. To buy units in a unit trust, you would need at least $2,000 to invest in the money market fund and $10,000 in the capital growth fund of a particular unit trust. Another unit trust sets the minimum investment at 200 units.
Enjoy your journey.