Dos and don’ts in stock market

3 June 2013 03:48 am

The stable and growing stock market in Sri Lanka has attracted new investors while existing investors continue to invest. The current momentum in the market would prevail only if all types of risk a market is vulnerable to is kept under manageable limits. This could be attained by an efficient market that is fuelled by informed and disciplined investors who make wise decisions. The tips given below will manifest the above stated.


 Steps you should follow when investing in market

•  Be vigilant on economic and financial news. Evaluate your investment decisions and portfolio daily. Economies are subjected to change. New businesses would boom while others subside. A smart investor should be aware of these changes.
• If you intend to trade on credit, sign a Credit Agreement and if you intend to let your investment advisor trade on behalf of you, sign a Discretionary Account.
• Reassure that the investment advisor allocated to you holds a valid ‘Investor Advisor Licence’.
• Diversify your portfolio as it minimizes risk. However, if your investment is very small, diversifying might not be the ideal pick.
• Have a holistic view on investment and financial goals. Draw up a financial plan.
• Enter the market with the correct mindset in order to maximize your earnings. The equity market is a form of investment and not a saving. Hence, it is advised to invest with a long-term horizon.
• Question your attitude towards risk and choose your stocks accordingly.
• Deal with licenced stockbroker firms licenced by the Securities and Exchange Commission of Sri Lanka (SEC). There are only 29 stockbroker firms licenced by the SEC. You could obtain the list from the websites of the Colombo Stock Exchange (CSE) or the SEC.
• Read and understand the terms and conditions of the forms and agreements given to you by the licenced stockbroker firm prior to signing.
• Investor is king. You should make the final decision on the stocks you are going to invest. Your investment advisor would assist you to make the correct decision.
• Don’t invest all your money at once. If you have one million rupees, invest within a certain time span under different market conditions.
•  Educate yourself prior to investing in the stock market. Investing in the stock market is subjected to ups and downs of the market. It does not offer guarantied returns.
• It is strongly advised to take part in investor education programmes and watch TV programmes organised by the SEC and the CSE.
• See opportunities in the cyclic nature of the market.
• Selection of stocks should be done with great caution. Review the performance of the company before you invest. Look into the financial performance, future business plans, etc. The annual report of the company will entail the relevant details. These reports could be accessed through the website of the Colombo Stock Exchange (CSE), the website of the company and the office of the licenced stockbroker you deal with.
• If you intend to invest in an Initial Public Offering (IPO), you should read the prospectus issued by the company. Read and evaluate the following before investing.

1. Objectives of the issue
2. Risk factors pertaining  to the issue
3. Financials of the issuer
4. Outstanding litigations and defaults

•  If your grievances are not resolved by the broker firm contact the CSE in writing.
• Inform your investment advisor on the transactions you make via Internet trading. For an example, a client informs the advisor that he intends to buy 100 shares of company A at Rs.5.00. Later on, the client executes the said transaction via Internet trading without informing the advisor. On the other end, the investment advisor also purchases the said amount of shares for the client. Such confusion can be minimized if there is a good coordination between the client and advisor.
• Build your core positions around dividend stocks when the market goes down and divert to stocks that bring about capital gain when the market is booming if you are looking at short-term returns. However, it is advised to look into long-term investments.
• New investors could maximize their opportunities by looking at long-term investments while trading on speculative stocks should be attempted only by seasoned investors.
• Keep note of the instructions given to the broker and the Brought/Sold Notes received from the broker. It will come in handy if any form of discrepancy occurs.  
• Keep track of your Central Depositary Account (CDS) regularly. In case of any dispute/differences in your account, contact the compliance officer of the licenced stockbroker firm you deal with.
• Payments to the stocks you purchase should be via the licenced stockbroker firm.

Steps you should not follow when investing in market

• Do not panic and start selling when the market is experiencing a dip in the short run. This results in financial panic in the stock market.
• Do not trade from anybody else’s account and in turn do not reveal your Internet trading account passwords to others.
• Refrain from signing blank forms at the point of opening the account or signing any other agreement required in trading.
• Do not expect unrealistic gains in the market.
• Do not engage in unethical trading practices with the hope of gaining short-term profits. Unethical trading practices would have a negative impact on the market. Moreover, you will be convicted by the regulator or the judiciary.
• Do not be influenced by advertisements/advices/rumours/unauthentic news promising unrealistic gains and windfall profits of listed companies. Invest only if such news is issued by a reliable source. News of this nature will be published on the website of the CSE.
• Do not trade excessively on credit. However lucrative a market may be, don’t be tempted to trade on credit unless you have the financial credibility.
• Do not be guided by unrealistic upward movements in stock prices that are witnessed within a very short time period. It is risky to invest in such stocks. One should attempt these stocks only if he/she is a seasoned investor.
• Do not indulge in impulsive investing.
• Do not give wrong/contradictory/incomplete information in the CDS registration forms.
• Do not allow others to trade in your account.
• Do not misuse Internet trading facilities. New investors should not overestimate their trading skills on speculative stocks and trade on their own via Internet trading. New investors tend to engage in impulsive trading that would reduce one’s profit and at times bring about negative returns.
• Do not average (continue to purchase shares at lower levels when the price continues to drop drastically) the price of stocks that are not fundamentally backed when the price continues to drop. In such an instance, it is better to exit the stock.

Retail investors play a pivotal role in the stability and the performance of the market as the market is driven by investor sentiments that influence demand/supply for stocks. If we shape and influence (positively) these sentiments, markets would bring about profitable investment opportunities. The tips unfolded above would assist you in becoming a wise investor.
“Your investment decision is a pathway towards greater growth and stability in the market. Hence, be a wise and well informed investor”