Tips for potential Capital Market Investors

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1 Tips for potential Capital Market Investors A financial advisor once told It doesn t matter how good of job someone has, if they want to acquire wealth in this life, at some point they are going to have to invest in something. Investing is something most people will do during their lifetime. They may invest in real estate, gold, life insurance, stocks, bonds or Unit Trusts. Good investing can bring peace of mind, security and the lifestyle you and your family want to live. On the other hand, poor investing or not investing can cause a lot of personal and family stress. Here are a few basic ideas and tips for someone who wants to start investing. We will make more emphasis on investing in the Capital Market in this article; Tip 01 Become educated We live in a world of information and there is a wealth of information about investing. The basics of investing in the Capital Market can be learned from seminars, workshops and educational TV programs conducted by the Securities and Exchange Commission of Sri Lanka (SEC), Colombo Stock Exchange, Unit Trusts Management Companies and stockbroker firms or materials published by these institutions. Remember, these seminars will give you a basic idea about investing but you should make an effort to learn about it further. A lot can be learned from credible websites; you can find books at your library and even talk to your peers. You should never invest in something you don t understand. Visit websites of above mentioned institutions before making your investment decision. Most of these are free, easy to use web sites with objective information on investing wisely and avoiding fraud. If you can t understand the stock market investment and how it will help you make money, ask a trusted financial professional or a stock broker firm for help. If you are still confused, you should think twice about investing in the Capital Market. Tip 02 Start young Albert Einstein supposedly called compound interest the eighth wonder of the world. The younger you start investing, the less you will have to invest to enjoy the same yield. For

2 example, suppose you have a retirement goal of Rs 500,000 and you want to retire at age 65. (For this example, we ll use an average return of 6%) If you start investing at age 35, you will have to invest Rs 498 each month for 30 years for a total of Rs 179,191 to reach your goal. However if you begin to invest at age 55, you will have to invest Rs 3,051 each month, or a total of Rs 366,123 to reach your retirement goal. Money invested while you are young yields a much higher return. Tip 03 Invest for retirement Retirement is the number 1 reason people invest. With a depleting social security system, people are relying more and more on personal investments to ensure the lifestyle they want in the later years. Tip 04 Teach your children about good financial habits. Recent research suggests that direct teaching by parents is an important predictor of a young person s future financial success. Tip 05 Boost your rainy day fund. Many experts recommend keeping about six months of expenses in a saving account/less risky investment to cover sudden unemployment or other emergencies. Tip 06 Pay off high-interest debt. Paying off high-interest debt may be your best investment strategy. Few investments pay off as well as, or with less risk than, eliminating high-interest debt on credit card or other loans. Tip 07 Research before handing over any money. Smart investors always check whether the stock broker firm is licensed by the SEC by using the SEC s website or the website of the CSE.

3 With the Internet and online stock broking service, it s easy to buy and sell securities without ever talking to real persons. However, when you re just getting started, it s a good idea to meet with a broker. Tip 08 Check the background of your investment professional. Many investors do not know that you can check the background of a broker or investment adviser. It s free and easy and a key step for avoiding investment fraud. At all times you should obtain the services from a Registered Investment Advisor (RIA) attached to a stock broker firm. Tip 09 Understand the cost Understand the fees (brokerage) you pay to buy, and sell your investments, in this case investing in the stock market or Unit Trusts. Investment costs shouldn t take you by surprise. Fees do not vary from stock broker to stockbroker, except for the negotiable brokerage Tip 10 Beware of promises of guaranteed returns. Promises of high returns, with little or no risk, are classic warning signs for fraud. If it sounds too good to be true, it probably is. In the stock market there is no guaranteed return. The potential for greater returns comes with greater risk. Understanding this crucial trade-off between risk and reward can help you separate legitimate opportunities from unlawful schemes. Investments with greater risk may offer higher potential returns, but they may expose you to greater investment losses. Keep in mind every investment carries some degree of risk and no legitimate investment offers the best of both worlds. Tip 11 Pay yourself first. Regular automatic deductions from your paycheck or bank account into a savings or investment account will keep you on track toward your short and long-term financial goals.

4 Tip 12 Buy less risky Investments to Start Entering the world of capital market can be an overwhelming and intimidating experience. There is so much information, investment strategies and investment types. Start with some simple investment while you continue to learn. Not only will you be able to start investing earlier in life, but you will also gain confidence as you watch your portfolio grow. Some new investors opt for day trading or trading on huge margins. It is not a good strategy for a new investor. Tip 13 Don t put all your eggs in one basket. The saying, "Don't put all your eggs in one basket," is used often to explain the concept of investment diversification. If you put all of your eggs in one basket, and it falls down, you will lose all of your eggs. However, if you diversify your investments and put your eggs in several different baskets, when one falls down, you will still have the eggs in the remaining baskets. The key to investing wisely is to use different investment vehicles that will perform differently in different market conditions. To continue the basket analogy, a wire basket will help under certain conditions, such as when there is pressure against it, while a plastic basket might help in another, such as when it is raining, and a straw basket might help when it is put on a river. Putting your money in a variety of different investment options (in this case buying shares of different companies which are in different industry sectors) will help protect you from a variety of losses and will reduce the overall risk level in your investment portfolio. Think twice before investing heavily in one company stock or any individual sector. I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. Warren Buffett Tip 14 Know why you want to invest Having a firm understanding of the specific reasons why you want to invest your cash today is essential in determining the kinds of investments you can allow yourself to get into. Are you

5 saving for your child s school fee for the next term? Or are your cash supposed to be your/your family s emergency fund? Then investing in the stock market is not for you. Do you want to save for retirement? Or do you have extra cash that you are willing to invest today and a commitment to put in additional investments every month for as long as you can? Then maybe investing in a stock market (or Unit Trusts) can help you achieve your goals. Tip 15 Your present financial situation You need to begin by evaluating your current financial situation. Consider your assets, your liabilities, your total household income and the amount of discretionary income that you have available to invest on a monthly basis. Your discretionary income is the income that you have left over each month after you pay all of your household expenses. Next, you need to evaluate your current level of cash reserves. Cash reserves can be defined as the assets set aside in the case of an emergency or for an opportunity. Tip 16 Define your investment risk tolerance You need to determine your personal risk tolerance before you start to invest. Your risk tolerance refers to the amount of variance you are comfortable with in your portfolio, and is often defined by how far away the goals that you are saving towards are. Investors are typically categorized as Aggressive, Moderately Aggressive, Moderately Conservative and Conservative. Each investor type is characterized by their investment portfolio, their time frame to save, their expected portfolio returns and their overall tolerance to withstand portfolio value changes on an annual basis. Tip 17 Do you already have an emergency fund? An emergency fund is just a fancy term for the old-fashioned (but time-tested) secret stash the elders used to have. Although in our modern age, you don t have to keep it in the darkest part of your closet anymore. It helps to have something you can dip into when the need arises. It gives us the peace of mind.

6 It does not have to be big, but it has to be there. Never let your emergency fund get into Investments like in the stock market. Keep it in a safe time deposit. Never mind if it is earning almost nothing. Tip 18 Have a solid comprehension of basic economic principals. Before you get started, you should understand basic principles and laws of economics. The stock market closely follows the law of supply and demand. For example, when there is a large demand for the stock of a certain company, the cost of its stock will increase along with the demand. However, if there are more stock available for sale than there are buyers, the unit price of that company stock will decrease. Tip 19 Learn about prospective companies you want to invest in. Do your homework before you invest in prospective companies. Read the company annual report and find out about their products, operations, services and basic business track record. This information gives you an idea of how stable the company is and whether they can deliver on their promise to offer profits to investors. Tip 20 Select companies with staying power. There are so many companies that exist in today's stock market, selecting becomes a major decision for beginning investors. Select relatively stable companies to buy shares. You can go through stock broker research reports for this purpose. But remember you are taking the final decision to invest. Tip 21 Keep an eye on the news. Guesswork is completely ineffective when it comes to investing in the stock market. Good intuition and solid decision-making come from learning about global and local news both politically and economically. When you watch the news, make sure to keep track of the industry

7 your company is in. Even stable companies may go bankrupt or have a major blow that will bring them down. Tip 22 Stockbrokers aren't the final word. A stock broker is there to assist you and to guide. You need to do your own homework. Tip 23 Nothing lasts forever. While everyone is eager to make profits in the stock market, an investor loses their sense of reason when they are fueled by greed. A money hungry investor may forget to check on economic rumors and spontaneously decide to sell or buy with the thought of making major profits and then lose it all. Extreme optimism or pessimism doesn t last forever. Prices will always return to more realistic valuations. You need only two emotions to keep in check while invested in the stock market: fear and greed. Be fearful when others are greedy, greedy when others are fearful. Be wary of gurus preaching new phase of unprecedented growth. Be reminded of the technology and real estate bubbles. Be watchful for opportunities when everyone expects all the world s companies to go bankrupt. Back up your emotions with rational reason. Remember, greed is your enemy Tip 24 It is better to sell ahead than selling at the bottom. There will come a time when you are no longer comfortable with an investment. It may become overvalued by the market or the broad market may just be in a bubble ready to burst. Either way, you will want to sell, but your greed will be telling you to hold on until the right moment before prices go down. Your mind will rationalize this by thinking of the long-term. Expect your ego to give in to cutting your losses at the point of extreme selling which usually happens before the market turns back up again.

8 These are the most important things to consider before you invest into the stock market. Having a financial plan that you implement will increase your chances for financial success and the above tips should help point you in the right direction.

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