BEING a wealth advisor these days certainly keeps you busy with the ever changing investment climate. More than ever before, being able to keep your clients and investors updated and informed of various investment options is what makes you stand apart from your competitors. It is my hope that after you read this introduction to the world of global markets, you will become a more knowledgeable investor.

There is no doubt that investing has become more globalised with many more markets and assets around the world becoming available to individual investors. I will touch on some of these various markets which include currencies, commodities, equity market indices, treasuries and shares.

Currencies are the world’s largest and most active trading market followed by treasuries, equities and commodities. Currency trading is done in pairs with one currency being traded against another, for example, EURUSD or the GBPUSD. The US dollar is the world’s reserve currency. On any given day the US dollar could appreciate relative to the Euro (EUR) and British pound (GBP) but decline relative to the Japanese yen (JPY) and Canadian dollar (CAD). The USD and JPY are seen as more defensive currencies because of their low interest rates. Investors tend to borrow money at lower rates in these countries and try to earn higher returns elsewhere. Traders tend to favour countries with political and financial stability and higher economic growth.

Like other markets, currency values tend to be based on supply and demand. In Jamaica, our currency has devalued by approximately eight per cent since January 2012 based on Bank of Jamaica data. Inflation has also eroded the value of the JMD over the years, which has lead to higher interest rates. Of note, Jamaica has experienced inflation rates ranging from seven per cent to 22 per cent over the last 12 years.

Commodity prices are impacted by changes in the supply and demand of a particular good being traded. Commodities fall into a number of groups that share similar influences. Some commodities are precious metals (gold, silver); energy (gasoline, crude oil), base metals (copper), grains (wheat, corn, soybeans) and others (coffee, sugar). Differences in each market tend to be related to weather conditions in producing areas and changing demand conditions worldwide. For example, demand for base metals is a result of emerging market economies (China, Brazil and India) that are expanding their infrastructure (Brazil hosting the 2014 Football World Cup and the 2016 Olympics). Commodities are tradable via Exchange Traded Funds (ETFs) and futures contracts.

Another type of diversification is to invest in baskets of shares across a wide variety of industry groups to gain exposure to wider business opportunities and mitigate the risk of one sector underperforming. Although sector trading has become more popular in recent years, trading broad market indices is the primary means that investors use to increase their diversification over individual stocks. These indices, such as the Dow Jones Industrial Average, are based on a basket of the largest and most actively traded companies on a particular exchange or in a particular country. There are differences between indices depending on what sectors make up the largest weightings in the basket.

Government bonds known as treasuries are another very active trading market giving the investors the opportunity to trade off of grander macroeconomic trends in various countries. Over time, bond prices tend to fluctuate depending on economic conditions. Investors tend to demand higher interest rates from countries running high rates of inflation. Bonds tend to be issued at a price of 100 known as par. If bought at a higher price, it is said to be at a premium and if bought at a lower price, it is said to be at a discount. Bonds are expected to be redeemed at no less than par. The interest rates on most bonds are fixed.

Shares are issued for many reasons; primarily to raise capital to expand businesses. Another reason companies issue shares is to generate a higher profile with potential customers and the public. In Jamaica, we have had at least 20 companies list since 2008 through initial public offerings (IPOs). This market has been hailed as one of the most successful in the world and is being emulated in other Caribbean countries.

Investors looking to make money in the stock market are usually trying to do so through two ways. Capital gains; from making a profit on a favourable price move either by buying low and selling high or by selling high and buying back lower, and through income; in the form of dividends paid out from a company’s profits. In Jamaica, there is no capital gains tax but dividends are taxed at five per cent. Some companies that pay dividends have a yield in the range of four per cent to in excess of nine per cent. This is considered attractive over funds on deposit or repos as the yields on these instruments are lower and the tax rate is 25 per cent. Some factors that can impact market expectations are macroeconomic variables, changing commodity prices and company specific factors such as earnings, dividend changes and other business developments.

Based on the various investments mentioned herein and risks factors affecting same, I would urge investors to seek the advice of a professional and discuss the various investment options based on their available funds, needs and risk tolerance.

Deborah Vieira is a Wealth Advisor at Stocks and Securities Limited and can be contacted via dvieira@sslinvest.com.