Ayanna Kirton, Staff Reporter
INVESTING MONEY is putting that money into some form of "security" - a fancy word for anything that is "secured" by some assets. Stocks, bonds, money market funds, certificates of deposit are all types of securities. As with anything else, there are many different approaches to investing.
Keisa Ansine, Equities Analyst at Mayberry Investments, encou-rages first time investors to answer the following questions before putting their hard-earned cash into an investment company.
What are your goals? Is this money for retirement? A down-payment on a house? Your child's education? A second home? A car?
How much money can you devote to a regular investment plan? What kind of risk profile do you have as an investor?
Some securities are high risk, which means the investor can get a higher return. A 'risk averse' investor will opt for a more secure, low risk investment.
Other advisors suggest that potential investors should seek answers to questions that are not clear.
In the end, investing is a lot of numbers. You need to get used to that. If you are not mathematically inclined, rest assured, a simple calculator can make a world of difference!
You can see exactly what you need to get to your destination by asking yourself some more pointed questions:
How much will college cost when my child needs to go?
How much does my dream house cost?
How much yearly income is reasonable for retirement?
The more specific you can be, the more likely you are to set and achieve reasonable goals.
After you have a rough idea of how much money you'll need and how much time you have to get there, you can start to think about what investment vehicles or instruments might be right for you and what kind of returns you can reasonably expect.
One rule of thumb when you begin to invest is: Be free of high interest debt. Why? Because a dollar of debt can quickly compound into a few hundred dollars of a larger debt. Does it make sense to try to save money at the same time your debts are piling sky high?
The first thing you should do to prepare for investing is to pay down all of your high-interest debt, such as credit cards. You should invest only your disposable income, that is, money that you have left over after you have met all your other financial obligations.
Putting away as much as you can afford is always the smartest move any investor can make. You could start with a goal of trying to save 10 per cent of your gross annual income.
RISK TOLERANCE
Before you start investing, you should determine your investment style as well. One thing to consider when figuring out your investment style is your risk tolerance.
Risk: How comfortable will you be if you invest in something in which the price changes every day - sometimes not the way you want it to change? There are various degrees of risk across the investment spectrum, from government bonds, which are considered risk-free as they are guaranteed by the government, to shares or stocks, where you can and often do lose all of your money. You need to consider how comfortable you will be seeing your investment decrease in the near term while you wait for it to increase over the long term.
WHY INVEST?
Savings provide funds for emergencies and for making specific purchases in the near future, usually three years or less. Safety of the principal - the initial amount of money you put in - and liquidity of the funds, that is, ease of converting to cash, are important aspects of saving dollars. Because of these characteristics, saving dollars generally yield a low rate of return.
Investing, on the other hand, focuses on increasing net worth and achieving long-term financial goals. Investing involves risk of loss of principal and is to be considered only after you have adequate savings.
Saving: Safe, easily accessible, low-risk, used for short-term goals.
Investing: Involves risk, volatile in short-term periods, offer potential appreciation, that is, increase in value, for mid to long term goals.
Investment instruments: Whet-her you need money next week or in 50 years will dramatically affect what investment instrument you decide to use. After determining your goals and how much money you will need to get there, you will also know how soon you will need the money and will be able to make the appropriate choices when you are ready to invest.
Investing for the short term: Only invest money for the short term that you're actually going to need in the short term. Invest money in the stock market that you won't need for at least three years, and preferably five years or longer. If you'll need your cash next year for a downpayment on a house or for a family vacation, use one of the shorter term and safer havens for your cash, such as money market funds or CDs.
Money market funds: Money market funds usually pay better interest rates than a conventional savings account, but below what you could get in certificates of deposit.
Jamaica Money Market Brokers (JMMB) offers two attractive options to persons who want to invest but do not necessarily have huge sums of money to put aside. One is the Jamaica Money Market Brokers Cheqmate Account, where funds are invested in different money market instruments such as treasury bills and corporate paper issued by private companies. This is a low risk investment option. Another, the Save Smart Account operates like a savings account. With a minimum of $1,000 you can invest in the money market while being able to add to and take from your funds. Your money is invested in a pool of safe, low risk, fixed income investments such as Government of Jamaica Treasury Bills. JMMB manages the fund and invests on behalf of their clients. Their web site, www.jmmb.com, breaks down all their products and services in simple financial terms.
Certificate of deposit (CD): This is another short term, low-risk investment instrument. It is a specialised deposit you make at a bank or other financial institution. Also referred to as a "timed deposit", the interest rate on a CD is calculated on a daily basis.
Capital & Credit Merchant Bank, explains that certificates of deposit can have a duration or maturity period of 30, 60, 90 or 180 days, depending on the investor's preference, and usually require a minimum deposit of $20,000.
Interest is paid at regular intervals until the CD matures, at which point you get the money you originally deposited plus the accumulated interest payments. However, a withholding tax of 25 per cent is deducted from the interest paid. The Jamaica Deposit Insurance Corporation (JDIC) usually insures CDs offered by banks.
LONG TERM INVESTMENTS
Stocks/shares: A stock is a way for an individual to own part of a business. A share of stock represents a proportional share of ownership in a company. This is also known as having equity in that company. As the value of a company changes, the value of the share in that company rises and falls. Unlike the banking world where deposits are guaranteed, stocks can lose value. When you're investing in the stock market, you need to think long-term. Don't invest any money in stocks that you'll need in the short term.
There are two types of stocks: Common or ordinary stock and preferred stock. Anyone can own a common stock. There are no restrictions on who can purchase those stocks. As the company acquires more assets and the stream of cash it generates gets larger, the value of the business increases. This increase in the value of the business is what usually drives up the value of the stock in that business. Common stock holders have various rights, including the right to elect directors and to vote on other business conducted at shareholders' meetings.
Preferred Stock: The holders of these stocks have certain rights and privileges over common stockholders. There are different classes of preferred stocks and different rights apply to each class. The most popular types give the preferred stockholder:
the right to receive dividends, that is, the proportionate distribution of profits of a company to its shareholders at fixed rates prior to payment of dividends to ordinary stockholders, and
the right to receive a proportionate share of the company's assets before ordinary stockholders if the company goes bankrupt or is dissolved for any reason.
The best way for investors to protect the money they put into stocks is to do research and ask questions. The smart investor is interested in the performance of the company in which he invests. Information on a company's performance can be obtained through its prospectus, a document that is available from the company in question, which outlines its financial position and provides general information about the company.
The Jamaica Stock Exchange urges potential investors to do the following before and after buying stocks/shares:
Get as much information as possible about the company in which you need to invest,
seek professional investment advice from a broker or other qualified persons,
learn how to read and understand basic financial statements and reports which companies listed on the Stock Exchange are required to publish,
try to develop the habit of reading and understanding financial publications,
after buying shares, monitor and track your investments by maintaining a daily stock work sheet.
Investment analysts often encourage first time investors to pay attention to how stocks perform so that the best choices are made when purchasing them. They also assure first timers that the rise and fall of stock prices is common, usually based on the trend of the market and not necessarily unique to particular stocks.
Stocks can be bought through a stockbroker, the direct link between you, the investor, and the stock market. The broker provides investment advice and acts as an agent for people who wish to buy or sell shares.
It is more expensive to buy stock without going through a broker. Your stockbroker charges a fee (commission) each time you buy or sell a stock. When you buy a stock you pay your broker for the value of the stock plus the commission and other charges. The commission is agreed upon between the stockbroker and the client.
Stockbrokers can be contacted at any of the brokerage firms authorised by the Jamaica Stock Exchange. Some of these firms include Victoria Mutual Wealth Management; Dehring, Bunting, & Golding, and Mayberry Invest-ments.
Government issued bonds/ treasury bills: A government issued bond or 'government paper' as it is often called, is a very secure way to invest and provides investors with a steady flow of income. Occasionally, the government will need to borrow money and it is usually very difficult for them to do so with only the promise to repay it within a certain time frame.
This is where bonds come in. Not only does the government pay back the amount they borrowed, but also pay a little extra in the form of a fee (interest) for the privilege of borrowing the money.
These long-term investments are a form of 'indebtedness' that are sold to the public in set increments (usually in blocks of 100). In return for loaning the government the money, the lender gets a piece of paper that stipulates how much was lent, the agreed-upon interest rate, how often interest will be paid, and the term of the loan. Government bonds provide guaranteed returns.
There are three important things to know about any bond before you buy it: the par value, the coupon rate, and the maturity date, which allows you to analyse the bond and compare it to other potential investments.
Par value is the amount of money the investor will receive once the bond matures. This means that the entity that sold the bond will return to the investor the original amount that it was loaned, called the principal.
Coupon rate is the amount of interest that the bondholder will receive, expressed as a percentage of the par value. Thus, if a bond has a par value of $1,000 and a coupon rate of 10 per cent, the person holding the bond will receive $100 a year. The bond will also specify when the interest is to be paid, whether monthly, quarterly, semi-annually, or annually.
The maturity date is the time when the bond issuer has to return the principal to the lender. After the debtor pays back the principal, it is no longer obligated to make interest payments.
