By Kerry-Ann Spencer, ContributorLADIES, IT is time for us to broaden our investment knowledge. For years the most dominant form of investment in Jamaica has been a regular savings account. Though a good way to start, these accounts really only act as a place to hold your funds since savings accounts generally give meagre returns. The good thing, however, is that you are saving, which means you will have money for future expenditure. Now let's learn about how to make attractive returns on our money.
Take the following simple example. Say you had $10,000 cash at the beginning of last year. You then decided to go with what most Jamaicans know best a regular savings account. Say this regular savings account yielded an average return of four per cent per annum. At the end of that year you would have a total of $10,400 ($10,000 plus $400 in interest earnings), after 12 long months. If, on the other hand, you invested the same $10,000 in one of the top stocks at, say, 40 per cent average yield for the same time period, at the end of last year you would have had a total of $14,000 ($10,000 + $4,000 in earnings). This is 10 times greater than the earnings from the savings account.
Talk about returns! Of course, you will have to consider fees and taxes for these investments, which will reduce your earnings somewhat; depending on how much you invest the effects will be almost negligible.
Another important point is that these types of investment also protect us from inflation. As inflation rises, the value of our money depreciates, therefore we must also consider how much real money we will gain from our investments. Take for example, if you placed your money in a regular savings account yielding four per cent per annum, with inflation at 12 per cent, your money is just as good under the 'mattress' because the rate of inflation has depreciated the value of your money by 12 per cent. Nonetheless, we are wise enough to know that keeping our money under the mattress is certainly not a good idea. What we know now is that if we had placed that money in one of the top ten stocks last year we could have averaged 40 per cent return. If you subtract 12 per cent for inflation you are still left comfortably with 23.2 per cent (trust me, it works out).
Since we are now aware of the rewards of stock market investments, and also that compared to other forms of capital investment stocks generally give the greatest return over time, let's learn more about stocks. There are a few questions that you may ask yourself:
WHAT ARE STOCKS?
Stocks are distributed by companies to raise funds to assist in operating the daily business activities or expanding its operations. A company doing this for the first time does so through an initial public offering.
When you buy stocks you are now part owner of a company. Am I guaranteed returns when I invest in the stock market?
No. Stock market investments are risky. However, with the guidance of a knowledgeable stockbroker you will find that once you buy stocks in a profitable company with a sound management team, you can be almost 100 per cent certain of attractive returns in the long run. Risky investments generally give the greatest returns!
HOW ARE STOCK PRICES SET?
Generally, the price that people are willing to buy and sell the stock for is strictly a function of the marketplace. Stocks are just like any other commodity buyers and sellers (demand and supply) come together in a competitive marketplace and transact business at mutually agreeable prices. Demand and Supply is generally based on:
1) Expectation of a company's profitability.
2) Economic factors such as interest rate movements.
3) Expected dividends
4) Large mergers/acquisitions.
THE RIGHT TIME TO BUY
All things remaining equal, it is generally a good time to buy when stocks are cheap. This is effectively measured by the price earnings ratio (P.E. ratio). The famous term used is to 'BUY LOW'. On the contrary, in a 'bullish market' (rapid increase in stock prices) investors can make money even when P.E. ratios are high.
DO I KNOW ENOUGH ABOUT THE COMPANY I AM INVESTING IN?
Ask your broker for an analysis on the company you are interested in. Invest in financially sound companies that have above average earnings growth potential.
For more info on investing in stocks, e-mail Kerry-Ann Spencer at info@mydbg.com.
