Equity Securities are one of the largest categories of investments available and have been proven to outperform other asset classes in the medium to long term. Nevertheless, due to a lack of knowledge and the relatively high rates available on repurchase agreements (repos), bonds and similar fixed income securities, investors never had a strong incentive to consider opportunities available on the stock market.
However, with interest rates declining, the current business environment favours equity investments, which will prove beneficial to the growth of entrepreneurship and the longterm development of our economy. The stock market is a powerful wealth generating vehicle, though sometimes misunderstood. It is on this note that I will seek to clarify some of the misconceptions associated with investing in the Stock Market.
Misconception 1: Investing in Stocks is just like gambling economy.
While some investors may speculate on stock price movements, the majority of equity transactions are based on a structured research process in are analyzed.
Misconception 2: The Stock Market is an exclusive club in which Brokers and rich people make money.
The Stock Market allows small investors to participate with minimum trades of 100 shares (which for some stocks can be purchased for as low as JA$50) and the trading volume of a small investor makes it easier for their purchases or sales to be executed. Furthermore, unlike the fixed income market, the rate of
return is not directly linked to the amount of money invested. All shareholders receive the same amount of dividends per share and have the opportunity to trade at the same prices.
Misconception 3: Experienced Investors do not need advice from their Broker.
Equity investments are more sensitive to new information than other types of securities. Investors
therefore, tend to rely heavily on their Broker’s analysis, recommendations and any other relevant information concerning listed companies on the StockMarket. In a rapidly changing financial market, Brokers will have greater access to information such as volume and prices of orders awaiting execution,
which is not generally available to the public.
Misconception 4: Relative valuation (buying stocks with low Price to Earnings Ratios) is the
foolproof method of identifying good investments.
Empirical analysis has shown that this strategy typically generates above average stock returns in the long-run. However, some companies consistently trade below or above industry averages due to specific factors such as management quality or brand loyalty influencing the performance of the organization. Historical ratios may be more relevant if the company has not experienced a significant change in its operations or growth potential. In many cases, consistency is more important than the actual numbers
generated by the ratio analyses.
Misconception 5: Strong trends will persist
Market psychology is affected dramatically when the price of a stock moves strongly in a particular direction. Some investors may blindly follow the trend as they fear missing out on opportunities or realizing substantial decline in the value of their portfolio (as in the case of a decline). Most investors later regret the decision to buy or sell based on these trends. This is especially true in the case where an investor buys a stock after a price run to new or recent highs, only to see the value of the stock slide shortly after the market corrects itself. An analysis of the volumes traded is imperative, as the entrance of a large buyer may cause prices to spike, and their subsequent exit results in the retracement of prices to normal levels. Advice from your broker is especially important in these situations.
As our economy evolves, equity investments are expected to take a more dominant role in our local capital markets. Before you invest in the Stock Market, you should define your investment objectives, understand the risk involved and seek professional advice from a Barita Equity Trader.