Sunday 9th January, 2005

 

Get in on the stock market

 
 
 
 
 
 
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Money Matters
with Raziah Ahmed

The “January effect” is a tendency for the returns on small-company stocks to be higher in the month of January than in other months.

In a study of returns since 1926, two trends were noted: small companies out-performed larger companies in terms of returns to the investor in 90 per cent of the years, and some 40 per cent of the average total return each year for small company stock occurs in January.

The best quality stocks on the market are what are called “blue chip” stocks. These have long records of earnings and dividend payout, and represent equity in mainly large, well-established companies. How, then, do you determine just where to get in on the stock market? And which stocks do you buy?

First you will need to establish what portion of your savings can be placed in a high-risk investment, and what portion must remain in low-risk vehicles. Next you must establish your strategy. Two well-known strategies are day trading, and buy and hold.

Day traders follow the market every day, and buy and sell on the basis of stock market indicators, and government or institutional policy decisions. This is a fast-paced, dynamic place to be, which requires spur of the moment decision-making, based on real-time access to a multitude of data and information, as well as a high tolerance to loss. This is really for the experts or the happy-go-lucky.

The preferred strategy is to buy and hold. This requires initial study and estimations on future growth and expansion in terms of stated corporate objectives, quality of management, and economic outlook for country. For example, for people who bought certain bank shares when Barclays Bank sailed out bought at $2-3 per share, the share price now is phenomenal! You may check the daily listing of stock market prices in the newspapers.

There are other shares whose values have not increased over the years, or which have lost value over the years. In general, an organisation sells shares to the public when it needs to raise money for its operations. It does not issue and sell shares to the public just because it wants the public to share in its profits.

There are other ways to raise money, available to the organisation. For example, the organisation can to go to a bank and borrow the money. It is an astute business decision, based on many factors.

The investor must be on the lookout for what appear to be good prospects.

There is also something called market efficiency. This implies that good prospects, or good opportunities for investors to make a mint are grabbed up very quickly, and are off the market before the rest of the investors even realise what happened.

Recently, I found in the business literature an interesting way to better explain market efficiency. When you go to check out at a supermarket you tend to choose the shortest line. You estimate the number of people in line and the items in their shopping carts and may make an intelligent guess about whether they will pay by cheque, card, or cash, and estimate how long they may take to complete their transactions, etc.

When a space opens up in another line, only one or two people will move fast enough to get ahead into that line, while all the lines stay more or less the same length. So too with excellent stocks coming available on the market!

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