Stock-Trading Basics

Stock-Trading Basics

Sunday, September 20, 2020

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I've always wondered why basic money management isn't taught in our prep, primary and high schools. I'm not referring to subjects like commerce and economics, electives for older students. What I'm talking about are courses on simple financial concepts geared toward making even the youngest students conversant in the language of money. In all my time as a financial advisor, the common thread in the reason people, especially women, do not invest more is that they feel they don't understand and are therefore intimidated by financial matters. Nobody had spoken to them really about simple money concepts although they are aware of some of the terms, but they don't have the language to break those terms down and therefore making better decisions about how money can assist in their future financial well-being. The result: Debt and poverty, and at the very least, hand-to-mouth living, passed down from one generation to the next.

One of the best ways to generate wealth is to begin investing. Think about how long the average person works for — roughly 40/45 years before retirement kicks in. Imagine at the end of that time only being able to look forward to a pension, which in all probability will not be able, on its own, to take care of your expenses for the remaining time you have left, which, these days, let's face it, is becoming longer and longer. Sure, more and more people at this stage are looking towards a second wind — consultancy work, developing a hobby into a little business, freelancing, etc — but what if those plans are thwarted by unforeseen variables: A major medical emergency, for example?

This is the nest egg that investment can provide.

Investing in the stock market is the most common way for beginners to gain investment experience. It is also an excellent way to grow wealth over the long term. But it can seem like a scary endeavour. You can buy stocks and then sell them back at a higher price sometime in the future to make a profit. Purchasing units of an equity fund is also a great alternative for someone new to investments or one who does not have time to constantly monitor the markets. Stocks are basically small chunks of a company, the shares (or stock price) of which reflect the value of the company. And while they can provide the opportunity to provide high yield over the long term, the truth is that this means they can, conversely, provide the potential for greater risk, especially in the short term. Are you risk-averse? Remember, stocks don't have a set price. This is what makes them so dynamic; the prices change from second to second each day, making them volatile, more so than other types of assets. So, if you're nervous that your investment in a stock could be worth considerably less if you decide to sell it, you may want to think carefully about your decision to invest in stocks.

If you do decide to go the stock route, there are different types to consider:

Growth stocks, which are shares you buy for capital growth (and not so much dividends) in a company expected to grow at over-average rate for the market. Facebook, the company,is a good example of this kind of stock.

Value stocks are stocks that trade at a value lower than their fundamentals.

Dividend or yield stocks, which are the stocks of choice for investors interested in earning an income. They are from well-established companies that distribute dividends back to shareholders. In stocks like these, pay close attention to yield and stability in the core business.

New issue stocks, also known as initial public offerings (IPOs), which are offered when a company is making its shares available to the public for the first time. An example of an IPO is the Wigton Windfarm Limited ordinary shares, or the more recent, much-talked-about TransJamaica Highway IPO, which Finance Minister Nigel Clarke had targeted to have 90,000 investors subscribing to, so as to enable more “ordinary” Jamaicans to participate.

The next step is to get acquainted with the stock market. The stock market is a place where shares of public listed companies are traded. It facilitates stock brokers in trading company stocks, along with other securities. In other words, it's the meeting place of stock buyers and sellers buying and selling stocks that are listed on an exchange. You already know of the New York Stock Exchange, the largest exchange in the world. But it would be remiss of me not to mention our very own Jamaica Stock Exchange, it should be noted here, was the fifth best-performing exchange in the world for 2019, as per a Bloomberg report. In 2018, it was actually the number one performing exchange.

While some adventurous investors will decide on a DIY approach to stock trading, securing the services of a qualified, reliable stock broker you can trust to help you navigate the choppy waters of stock trading and not perform risky behaviours with your money is advisable.

Legendary investor Warren Buffett famously called investing “the process of laying out money now to receive more money in the future”. Investing in the stock market is a good way to see your money grow over time, benefiting you and the people who are dependent on you.

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