Very often I get clients who ask me the questions “How do I invest in stocks? How do I start? What do I need to know?” Some people understand the market very well and for others it seems complicated and mysterious. For those of you who are investing for the first time, here is some information you need to know.

Shares, or stocks (I will use the terms interchangeably throughout the article), represent a fraction of ownership in a business. Ownership of shares is documented by issuance of a share certificate. A share certificate is a legal document that specifies the amount of shares owned by the shareholder as well as other specifics of the shares, such as the par value( if any), or the class of the shares.

A business may declare different types of shares, each having distinctive ownership rules, privileges, or share values.

Stocks typically take the form of either common/ordinary shares or preferred/preference shares. As a unit of ownership, common/ordinary shares typically carry voting rights that can be exercised in corporate decisions. Preferred/preference shares differ from common shares in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders.

Preferred shares are a hybrid investment as they have the fixed income quality of a bond while remaining a unit of ownership. In the event that a company needs to be liquidated, preferred shareholders have a higher claim to assets, and therefore compensation, than common shareholders.

In Jamaica, the Jamaica Stock Exchange (JSE) handles the trading of the shares and ensures that the companies listed on the exchange follow the required rules and regulations. The Jamaica Central Securities Depository (JCSD) facilitates electronic clearance and settlement of trades and offers shareholders the ability to view their accounts via the internet. The JCSD is also responsible for the safe keeping of physical certificates for equity and fixed income securities.

The JSE is comprised of the “Main Market” and the “Junior Market”. Companies listed on the Main Market are mature businesses that include Carreras Limited, Desnoes & Geddes Limited and Pan-Jamaican Investment Trust Limited.

The Junior Market allows investors to put capital into legitimate small and medium sized companies (SMEs) whose shares trade on a special JSE platform. This represents an exciting opportunity for SMEs to raise capital, and to contribute to the growth and development of the Jamaican economy. This opportunity exists through an Initial Public Offering (IPO). There are currently 13 companies listed on the Junior Market; for example, LASCO Manufacturing Limited, Honey Bun (1982) Limited and AMG Packaging and Paper Company Limited.

Below are a few useful tips when considering buying stocks:

Do not use your emergency money to purchase stocks: Why? When you purchase stocks many times stock prices will fall below the price you purchased it for. Since January 2012, stock prices have fallen over seven per cent making it a good time to buy stocks but not necessarily to sell, especially if you purchased your stock when prices were considerably higher. Holding a stock portfolio should be a medium to long term investment.

Risk: As I mentioned above, there is always risk when investing in the stock market. Are you going to have a sleepless night if the price of your stock falls below what you paid for it? If yes, you may not be an ideal candidate for this type of investment or certainly your portfolio should have fewer stocks. If, however, you are young, you can afford to take more risk than someone who is a lot older or closer to retiring.

Diversify: Basically, do not put all your eggs in one basket. Spread your risk across different sectors/industries and different currencies if you can.

Buy shares in companies that you understand: Consider products or institutions that you use frequently, for example, food, banking and insurance. These are things that one can relate to. If you have an account at a commercial bank then you may want to consider buying shares in National Commercial Bank Jamaica Limited or Scotia Group Limited. If you buy a certain brand of food you may want to invest in LASCO Manufacturing Limited, Grace Kennedy Limited or Jamaica Broilers Group. Make your investments relevant to you.

Liquid or Illiquid Stocks: This simply means that some stocks trade daily versus others that do not. If you need to sell a stock(s) it is better to have ones that trade daily than those that trade infrequently. With illiquid stocks, sometimes it means waiting weeks before the stock may trade.

Price: Stock prices carry 52-week highs and lows and fluctuate on a daily basis. If you are buying or selling a stock you can buy at market or set the price at which you want the transaction to occur. There are times when you have to be patient and wait for the market to trigger your price. Remember, buy low and sell high. When stock prices fall, it creates an excellent opportunity to buy more of the same stocks, especially if these are stocks that offer consistent dividends.

Fees: There are four fees associated with the purchase or sale of each stock; a JSE fee, a JCSD fee, the broker’s commission and GCT. It is important to take these costs into consideration before you buy or sell your stock(s) to know the full price of the transaction.

Information: Get as much information as you can about the company you are investing in and keep yourself informed by listening to the news and doing your own research on the internet. The JSE website is a good place to start, www.jamstockex.com, or contact us at Stocks and Securities for more information on local and international stocks.

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