Factors to consider when picking shares to invest into

There are several factors that can influence return on investors (i.e. dividend and capital gain) for investors in shares. Some of the key factors to consider when investing in shares are: (1) demand and supply of shares of a company you have invested into or are considering to invest into; (2) economic variables such the economic growth as measured by the Gross Domestic Product (GDP), inflation, interest rates and exchange rates; (3) company specific performance and news; as well as (4) psychological or market cycle-related factors. Let us detail each of these:
1. Demand and Supply
Share prices react to demand and supply of shares in a particular listed company. An increase in demand of shares means an increase in price, unless supply increases to match it. If an increase in demand is accompanied by a decrease in supply, the rate of share price rise increases. In other words, if more people want to buy a share (demand) than who want to sell it (supply), then the price moves up. Conversely, if more people wanted to sell a share than who wants to buy it, there would be greater supply than demand, and the price would fall.
Understanding supply and demand is easy. What is sometimes difficult to comprehend are factors what makes people demand (like) a particular share and dislike another share. This comes down to figuring out what news is positive for a company and what news is negative for a company?. There are many answers to this question and any investor you ask has their own ideas, strategies and responses to this question.
So, What influences supply and demand?
While supply and demand affect share prices in the market, it’s just as important to ask what influences supply and demand?
(i) Earnings (Profits)
Earnings are the amount of profits (after taxes) that a company produces during a specific period. Earnings are probably the most important word when you are dealing with the share market as they are the main determinant of the businesses’/companies’ share price, because earnings and the circumstances relating to them can indicate whether the business will be profitable and successful in the long run. In more developed markets (and in some emerging markets) business’s earnings are typically compared to analyst estimates and guidance provided by the business itself. In most situations, when earnings do not meet either of these estimates, a business’s/company’s stock price will tend to drop. On the other hand, when actual earnings beat estimates by a significant amount, the share price will likely go up.
Hence, a change in the direction of earnings or earnings forecasts cause a market reaction, which then affect the demand and supply for a share.
(ii) Profit (or loss) warnings
Profit (loss) warning is a declaration issued by a listed company to investors. It warns investors that the profit of the company in the coming period will obviously decline or even have a loss compared to that of the previous period. Investors should be aware of the possible loss when buying or selling its shares. Normally (and mostly in relatively advanced markets), in the weeks leading up to their reporting season, companies usually try to prepare the market for a profit rise or fall. This is currently the case in our listed companies. In August of this year, 2016 we at the DSE, introduced a rule that requires companies listed in the DSE to publish a profit (or loss) warning reports few weeks before period end informing investors what to expect in their periodic financial statements publications.
A profit (or loss) warning usually paves the way for a share market price reaction before the actual result is announced. When a warning alerts the market that the company is poised to announce a big profit increase, the reaction is equally quick with a price rise in the shares.
(iii) Analyst research reports
Market analysts are always trying to anticipate what is ahead, rather than accurately diagnose the here and now. Part of the analyst’s job is to predict share prices movements. They do this by getting to know companies, through top down and bottom up researches, and they prepare forecasts and projections of the companies’ share prices. Through this process, investors can gauge the good and bad earnings news and the share price adjusts accordingly. We are yet to get good research analysts in our market in both the equity and fixed income space but we should aim at this, as a value addition to investors; stockbrokers and financial/investment analysts should be judged based on some of these research and analysis works to better inform their clients.
(iv) Reporting seasons
In Tanzania, public listed companies are mandated to publish reports of their earnings twice a year (once in every six months) i.e. interim results and final (also called audited accounts). Investors, especially sophisticated retail and institutional investors pay a good attention at these times, which are referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their earnings projections. If a company’s results surprise (are better than expected), the price jumps up. If a company’s results disappoint (i.e. are worse than expected), then the price will fall. For most of the year, expectation of profit is what influences the share price, as it is investors normally pays to buy future company’s earnings and cash flows.
However on the few trading days when the interim and final reports are released, a company’s actual profit results affect the share price. A profit report that doesn’t meet expectations usually results in a fall in the share price.
(v) Market Liquidity
In the business, economics, investment, and finance fields — the term market liquidity refers to an asset’s ability to be sold (turned into cash) without causing a significant movement in the price and with minimum loss of value of the asset. The ease of buying or selling a share can be a major influence on a share price.
If company’s shares are rarely traded, then even just a single active buyer or seller can decisively influence the share price in the short term. Non-liquid shares are usually more volatile in price than liquid shares.
Liquidity is an important factor towards influencing demand and supply of shares. It refers to how much investor interest and attention a specific share has. Blue chip (a company with a reputation for quality, reliability, and the ability to operate profitably in good and bad times) shares are usually highly liquid and therefore highly responsive to news; for the average small companies, the situation is less so.
Availability of trading volume (or free float) is one proxy for liquidity. But it is also a function of corporate actions and communications (that is, the degree to which the company is getting attention from the investor community). Large companies’ shares have high liquidity: they are well followed and heavily transacted. On the other hand, many small companies’ shares normally suffer from an almost permanent illiquidity because they simply are not on investors’ immediate attention.
As we have indicated above; earnings, market liquidity, market analysis reports and news are key factors that influence demand and supply of shares, which in turns affects and influence returns on shares investment and hence factors for consideration when investing in shares.
In the next week’s article we will focus on other factors that you, as an investor, should pay close attention into when you consider to invest in shares that are listed in the stock exchange or are being sold in the primary market via Initial public Offering (IPO) but with a clear intent for these shares to subsequently be listed into the secondary market (the stock exchange) to provide investors with an opportunity for continuously buy and sale the said shares in a market whose prices (and value) are determined by the forces of demand and supply. This is especially important now because we envisage (in the next few weeks and months) to have a handful of companies selling shares via the Initial Public Offering (IPO) and subsequently list into the Dar es Salaam Stock Exchange. Therefore a relatively good knowledge and investing skills in shares, especially for retail private individuals, is fundamental to enable sustainable success.

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How to become a Value Investor in Shares

Choosing the right shares to invest in is a combination of various factors, these may range from from art, science, timing, to luck. It sometimes may seem like there is no proper reason why and how one may succeed or may fail in the process of investment in shares. When you talk to investment analysts and experts, you may get different types of opinions, which in some cases are contradictory. You may hear about someone’s “successful system” or you may come across a book titled “Make a fortune in the Share Market”. Then you read stories of people who lost a fortune on investing in shares. Does any approach work with some consistency? What is it that an investor is supposed to do?
The most tried-and-true method for picking good shares starts with picking a good underlying company (the company that have issued the intended shares). This is why it is key that you know how to determine the value of the company. Don’t rely on luck to help you choose good shares: good homework, proper research, and common sense are your best diagnostic tools towards right investment in shares.
What constitutes a good company? How do you know if you are buying a share at the right value? And what is a good price? (It is important here to determine the way in which an individual determines the intrinsic value of a company as opposed to the market (i.e. demand and supply) driven approaches)
If you pick a share based on the value of the company that is issuing the share, you are a value investor – i.e. an investor who looks at a company’s value and judges whether (s)he can purchase the share at a good price. (Is the share price a fair representation of the company’s valuation?) Value investors analyse a company’s fundamentals (profits/earnings, customer base, efficiency processes and systems, productive assets base, and so on) and buy the share if the price is low relative to these factors. It is because of the need for knowledge, skills and experience to carry analysis and research that some economies (such as India and others) encourages retail private investors to consider investing in shares in an indirect manner i.e. using fund managers rather than a direct investment. However, learning to understand how to carry investment analysis and research is not as hard for a determined and disciplined person — what I am writing here is encouraging us, private individuals to become more educated on how we approach our share investment process. Read on:
When you look at determining the value of a company, the most important items to consider are:
The balance sheet of the company so as to figure out the company’s net worth
The income statement which will help you to figure out the company’s profitability
Ratios that let you analyse just how well (or not so well) the company is doing relative to other companies in a similar sector or relative to other periods so as to benchmark against the trend
A value investor doesn’t buy a company’s share because it’s cheap (and sometimes ; he/she buys it because it is undervalued (the company is worth more than the price its share reflects – its market value is less than its book value (or NAV)).
It is important to note that, the key aspect of a company’s value, besides its net worth, is its ability to generate profit and that companies have values the same way many things have value.
And so, when you hear someone quoting a share at Tsh. 2,000 per share, the price largely reflects the share’s market value as determined by forces of the market (i.e. demand and supply). The total market valuation of a company’s share is referred to as the market capitalisation which is the multiplication of the total number of shares issued by the company to its shareholders (investors) and the price per each share.
The challenge with market based valuation is that it is not always a good indicator of a good investment, i.e. listed companies may have good market values, yet they prove to be not very well performing companies, fundamentally, and subsequently not good investments. Often investors and analysts misunderstand the difference between the market-driven value of the share and the true value of the underlying company — i.e. the intrinsic value.
Then, there is a concept of book value that looks at a company from a balance sheet perspective (assets minus liabilities equals net worth or shareholder’s equity). It is a way of judging a company by its net worth to see whether the share’s market value is reasonable compared to the company’s intrinsic value. The closer the share’s market value is to the book value, the safer the investment. Remember that you never base a share investing decision on just one criterion such as book value — it has to be a combination of factors.
A company’s intrinsic value is directly tied to its ability to make money — the revenue earning capacity. In that case, many analysts like to value shares from the perspective of the company’s income statement. A common barometer of value, which we will learn about next, is expressed in a ratio, commonly known as the price to earnings ratio. The price is a reference to the company’s market value (as reflected in its share price). Earnings are referenced to the company’s ability to make money. The commonly known term that indicates the company’s profit per each of its issued share is called earning per share.
Earning per share is simply the earnings or profit a company achieves per share. In other words, if a company has earnings of Tsh. 1 billion per annum and it has issued 1million shares, the earnings per share would be Tsh. 1,000. The earnings per share is a very important number because it indicates how profitable a company has been in generating profits to its shareholders. It is used to measure the performance of a company as well as the value of a company. It is also a key input into the price earnings ratio, which we will discuss shortly.
The growth of a company’s earnings per share is an important indicator of how well the company is doing. When making a decision about what share to buy, a company that has experienced growth in its earnings per share each year is a company you should be more likely to invest in than one that has never achieved growth.
The earnings per share of all companies is shown on the companies’ annual reports, for the listed companies it can also be obtained in the DSE website and also on data vendors and financial media outlets such as Bloomberg and Thomson Reuters who has subscribed to DSE for data. It is important you look at this figure carefully before making a decision as to which shares to purchase.
We have discussed above the importance of the earnings of a company. We look now at the mechanics of computing the basic earnings per share of a company.
Earnings/profit per share is simply the earnings or profit you make on each share you own in a company.
In order to calculate earnings per share we need the following:
Net income (last line of income statement)
Number of shares outstanding
How to calculate earnings per share (EPS)
The formula to calculate EPS is as follows: EPS = Net income/number of shares
So far we have introduced the concepts of market value, book value, earnings and earnings per share. Next we will dwell on some ratios that are key in shares investment. The ratio we are about to explore relate closely to the concept of earnings and how its impacts the concept of market value.
What is a ratio? Why is important in the accounting, investment, economics and finance? A ratio is a helpful numerical tool that you can use to find out the relationship between two or more figures found in the company’s financial data. A ratio can add meaning to a number or put it in a better perspective. Ratios sound complicated, but they are easier to understand than you think.
Let assume that you are considering a share investment and the company you are looking at has earnings (or profits) of Tsh. 1 billion this year. You may think that is a nice profit, but in order for this amount to be meaningful, you have to compare it to something. What if you find out that the other companies in the same industry (and of similar size and scope) had earnings of Tsh. 3 billion? Would that change your thinking? Or what if you found out the same company had earnings of Tsh. 2 billion in the prior period? Would that make you rethink? Probably YES.
The key ratio to be aware of is the Price to earnings ratio (P/E) – commonly referred as P/E ratio.
The price to earnings (P/E) ratio is very important in analysing a potential share investment because it’s one of the most widely regarded barometers of a company’s value, and it’s usually reported along with the company’s share price, among other key figures. The major significance of the P/E ratio is that it establishes a direct relationship between the company’s operations – as measured by earnings (or profits) – and the share price in the stock exchange.
So before you say a certain share is expensive or is not expensive by looking on the nominal figures – consider to first look at the P/E ratio.
The P in P/E stands for the share’s current price. The E is for earnings per share. The P/E ratio is calculated by dividing the price of the share by the earnings per share. If the price of a single share of share is Tsh. 2,000 and the earnings (on a per-share basis) is Tsh. 200 per share, then the P/E ratio is 10. If the share price goes to Tshs. 3,000 per share and the earnings are unchanged, then the P/E is 15. Basically, the higher the P/E ratio, the more you pay for the company’s earnings i.e. the higher the P/E ratio the more the investor is required to pay to buy the company’s earnings (or profits). Just remember before you say a certain stock is too expensive or not expensive or when a P/E ratio is referred to, as high or low, you have to ask the question, “Compared to what?”
Why would you buy shares in one company with a relatively high P/E ratio instead of investing in another company with a lower P/E ratio? Keep in mind that investors buy shares based on expectations. They may bid up the price of the share (subsequently raising the share’s P/E ratio) because they feel that the company will have increased earnings in the near future. Perhaps they feel that the company has great potential (a pending new invention or lucrative business deal) that will eventually make the company more profitable. This in turn would have a beneficial impact on the company’s share price.

The fundamental strategy and analysis for investment in shares

Despite some existing theories on investment strategies in securities market — there is broadly no right or wrong strategy in investment – there is only good timing and a good selection of securities to invest into, and then there is bad timing and bad selection of securities. Concentrating and putting faith in one theory and dismissal of another is neither a sensible nor a profitable strategy for all but the very lucky. Usually it is best to consider using what is known as the top-down and bottom-up approaches to securities analysis and valuation. Doing this will give you a better chance of understanding which securities to buy, and the best time to buy.

Top-down and bottom-up are both strategies of information and knowledge processing used in a variety of fields, including investments management. In practice, they can be seen as styles of thinking in the process of investing. The top-down approach to share valuation is when we look at all the broad economic and political factors first before we look at a specific company related factors. Top-down approach starts with the big picture and then it breaks down from there into smaller segments. The bottom-up approach is when we look at the company’s figures in detail. It is important that we first look at broad factors such as economy and sectors before we look at a specific company factors. Today, we will dwell on the basics of how to value shares and companies.

The top-down approach to share valuation

To determine the value of a particular company or shares, one must pay close attention to its operating environment as well as the operating strategy and performance of the company. The state of the global, regional and local economy, events in the political arena and changes in an industry/sector can have profound effects on individual companies over which they have no control. In buoyant markets all shares may rise, like a rising tide will float all ships, and the reverse is also true in a falling market.

In some cases we tend to think that a company that has a good product and strong marketing strategy might be the right company to invest in. But is this enough to ensure growth in the company’s earnings? what about outside events which the company do not have direct control over them? To understand how the outside events can affect a company, consider the following example:

The invention and expansion of the internet has brought with it fundamental changes in the way some industries operate. In particular, the internet is increasingly used to provide financial services and market accessibility such as in banking services, stock market investments, service delivery, in insurance business, etc. How is the company you are considering investing into equipped to deal with the opportunities and challenges associated with the continued shift towards electronic commerce or digital transactions?

The key point to pick from this example is that in analysing the outlook for a company’s share price it is necessary to consider a wide range of factors that will impact on the company’s current and future earnings. Some of these factors are ‘internal’ to the company in the sense that they are directly subject to the company’s control. Examples of which include management capability, marketing strategies and new product development.

However there are many factors that will affect a company’s earnings performance that are largely ‘external’ to the company in the sense that the management of the company has little or no control over them. Some of these factors may be broad developments that impact across the economy, such as the political landscape, the outlook on economic growth, macroeconomic factors such as interest rates, inflation, foreign currency exchange rates, monetary policies, fiscal policy, etc.

Taking a top-down approach to analysing a company’s prospects involves looking first at the broad macroeconomic, social and political environment. The focus of analysis is then progressively narrowed to consider the more industry specific or even regional influences on a company’s earnings. This pattern of analysis has the benefit of ensuring that relevant information is included in a consistent way.

This also makes sure that important background information is fully taken into account so that the interactions between broad macro-economic conditions and more industry specific factors will be highlighted.

Below is the process of a top-down approach to share analysis and illustrates the narrowing focus:

1. Global economy and international political situation

1.1 Tanzania economy, macroeconomic policy, social and demographic trends

1.1.1 Broad expenditure trends of the communities in the economy

1.1.1.1 Industry/sector trends i.e. completion, government industry policy

1.1.1.1.1 Narrow market trends i.e. industry sub-sector

1.1.1.1.1.1 Company specific analysis

In undertaking a top-down analysis it is also useful to consider alternative scenarios – for example, incorporating different assumptions about economic conditions, macroeconomic outlook factors and what these different scenarios might mean for the performance of a particular company.

One point to remember is that, in most cases, share market prices are largely a reflection of investor expectations of future company earnings. In other words, the prevailing share price for a company already factors in what investors are thinking about future economic conditions and company performance against this background. However, in some cases, investor expectations are not stable; they constantly shift as new information becomes available. As investor expectations change so will the share price. Let us break this down:

International economic and political climate

Trends in the international economy can have direct and indirect effects on the Tanzania economy and companies operating within the economy. For companies with overseas operations or trade links with other countries, the impact of overseas developments can be very direct. In many cases, even companies with only domestic operations can still be affected by global developments. Tanzania’s economic prospects are often affected by global influences through a wide range of economic and financial linkages. However, what is important is not to over-react to short-term events, while they may have an immediate impact on markets, the medium to long-term trends in major overseas economies are much more worthy of attention.

Keeping track of the global economy and predicting how the global economy will develop are obviously very difficult tasks, particularly as circumstances can change very quickly. However, with the current advance in technology, there is a lot of useful information available to assist you getting the information you require; research departments in banks and stockbrokers, investment and financial advisers, etc may provide regular publications that incorporate information on international economic developments; internet can be a useful information sources.

The Local economy

Tanzanian (local) economic conditions will often be an important influence on corporate performance. Some of the broad economic factors that may impact on a company include the rate of GDP growth, inflation, the rate of employment growth, interest rates dynamics, the exchange rate, government economic and administrative policies, etc.

The key information and data to monitor are the following economic statistics: (i) Gross domestic product (GDP) growth; (ii) employment and unemployment rate and how it impacts disposable income and spending; (iii) inflation; (iv) the exchange rate; and (vi) interest rates. It is also necessary to monitor a range of other factors relating to specific sectors. These factors will vary per sector i.e. taxation rates applicable, competition, easy or difficult of entry and exit, regulations specific to the sector, etc.

While this might seem daunting, you don’t have to be an economist to analyse this data. In fact, it may help not to be one. You are merely looking to identify an overall trend and make a judgement on its impact on market sentiment – you’re not analysing what happened last year or prescribing solutions for economic problems. Some of these information are posted in the Bank of Tanzania, Tanzania Bureau of Statistics and the Dar es Salaam Stock exchange websites. It is important to think about how you should adapt your investment strategy to take advantage of changes in the local economy.

Having developed an understanding of factors that will impact on broad economic conditions, it is important to narrow the analysis and begin focusing on trends in different sectors of the economy. Different sectors of the economy do not grow evenly. The performance of individual sectors depends on a wide range of factors peculiar to that sector’s output. For example, trends in the residential construction sectors are affected by employment and household income (which affects the ability of people to buy houses), demographic factors, the level of rents, the level of mortgage interest rates, and the attitude of investors towards property.

Structural factors can also cause the performance of different sectors of the economy to diverge markedly over time. The communications sector for example has grown very strongly over the past decade influenced by structural shifts in technology and the need for financial services transaction tilted towards the mobile model. However – it is useful to note that strong growth in sectoral activity does not always equate to strong corporate earnings. Competition can be vigorous in strongly growing segments of the economy. In such a situation, it is important to use the Porter’s ‘five forces’ to sector analysis. This is one of the useful framework for analysing the outlook for a sector as it uses the five underlying factors in determining future sector profitability, these are:

1) Threat of new entrants – If there is an increased likelihood of firms entering the industry this will increase competition. Various factors such as high barriers to entry, brand equity, high switching costs and large economies of scale will decrease the threat of new entrants.
2) Threat of substitute products – The greater the existence of products outside of the common products boundaries increases the propensity of customers to switch to alternatives and hence the higher the competition.
3) Bargaining power of suppliers (buyers) – this is the ability of customers to put the company under pressure, which also affects the customer’s sensitivity to price changes. If buyers are able to bid down prices or demand higher quality products this increases competition among competitors.
4) Rivalry among the existing competitors – this is competition between companies that already exist in the marketplace. Increased rivalry among the existing players in the market increases competition.
5) Bargaining power of suppliers – suppliers of raw materials, components, labor, and services (such as expertise) to the company can be a source of power over the firm, when there are few substitutes. The fewer the number of suppliers, the greater their bargaining powers and the greater the competition.

Factors to consider when investing in listed shares

When thinking about the whole issue of personal finance, a lot may come into play — but in most cases the mind would seem to dwell on matters around spending money, saving some money, and investment some of the money; and therefore, what matters is getting the right mix among the three. Reconciling and getting the right mix between spending, saying and investing, I will be the first to admit, is one of the major challenge to many of us. After all most of us may be rightly justified by the fact we are dwelling in a global spot where life is relatively tough and disposable income does hardly to come-by; we struggle to make ends meet hence spending even in the basic needs to make us happy is by itself a necessary hindrance, so why bother strategising on matters of savings and investments while probably nothing could be left for that purpose? And so I know, I might be writing for a few who are luck:

Even for these few who are lucky, figuring out what to do with whatever the amount of money earned and could be saved or invested is not easy, and as is among the three (spending, saving and investing), investing is the hardest — be it investing for your life goals, investing for kids’ education, investing for your retirement, etc. In this article therefore, I will delve deeper into the issue of investing, and I will specifically focus on investing in listed shares. But before I get into that, let us do the preliminaries first — there are many forms of investment and many asset classes that an investor could choose from or engage in. One may decide to invest in real estate, in shares, bonds, negotiated bank deposits, etc. In the process of investing, either directly or indirectly (via fund managers who manages mutual funds/collective investment schemes), there are risks to manage along the way and that’s why there are other financial products being introduced in the markets in order to assist investors in managing their investment risks — products such as financial derivatives, exchanges traded funds and investing in indices, are for this particular purpose. I will admit, these risk management products are yet in our market. So, investors, at least for the time being, will have to use other mechanisms to manage their investment risks — I will come into this in a moment. However, in all these, what is important is that, at the end of the investment period, what matters most is how much return the investment generates, given the level of risk taken. To get a better understand about this, let’s look into some of the factors that one should consider when investing in shares:

The point to start with is to ask a question, what is my personal investment goal? — as a matter good common sense, before embarking on any investment decision, it is highly recommended that you fairly consult yourself as honestly as you can, meanwhile taking into consideration your financial situation — especially in cases where you do not have any financial plan. One of the things to seriously consider is in figuring out of your investment goals versus your level of risk tolerance — now I know sometimes it isn’t easy for one to consult oneself, in such cases it is advisable that you consider to access the advise of financial and investment professionals. Despite all this, it is important to always remember that there is no guarantee whatsoever that you will surely make profits in your investment process. However, if you get rights your facts about investing and with an intelligent investment plan, you can surely gain some financial security over the years and definitely can enjoy the benefits of managing your money in a smarter way.

Once you have a clear and well informed personal investment plan, then this should be carefully followed by the evaluation of your risk tolerance level: it is important to know that all investments involve some degree of risk. The degree of risk however, varies from one asset class (or securities with the asset class) to another. For example, shares are traditionally known to one of the investments that have the highest degree of risk compared to other asset classes such as bonds or bank deposits. But, it is important to also remember there is a principle of investment that says: the higher the risk, the higher the return. So, what is necessary here is for one to be able to establish the maximum level of investment that you are willing to lose in case the investment outcome goes against your expectations. In this process, it is important for you to also determine at which point in time you will need cash for other purposes, other than investing. The point of cash need requires a careful consideration mainly because investment in listed shares should normally be looked into a medium to long term horizon. Speculative motives and “quick money” mentality shouldn’t be entertained or pursued when investing in the markets. I know some people uses this as a money making strategy (i.e. buying during IPOs and selling on a day listing), but this is as good a strategy until it is not good for you.

In your risk tolerance plans, as some advisers would put it, you psychologically should be ready or be comfortable to loose up to a third of your investment especially when moments are tough — knowing that after-all, when all is being said and done, the reward of taking on risk is the potential for a greater investment return. If you are pursuing a goal that have a medium to long term horizon, you are likely to make more money by carefully investing in asset categories with greater risk, such as shares rather than restricting your investments to assets with less risk, like cash equivalents e.g. opening a savings account or a bank deposit. Furthermore, investing solely in cash equivalents may be appropriate for short term financial goals, even in this case one should be mindful of the inflation risk — the risk that inflation will outpace and erode investment returns over time.

Thirdly, diversification is an important element when investing in listed shares. It wise for an investors if (s)he ensures that (s)he is not overly exposed in a single company or single sector, instead an investor should spread the investment risk across a number of sectors, or companies within the same sector. In most cases, the returns of different sectors in rare cases will move up and down together at the same time. As an example, since the beginning of the year (2016), the banking sector’s performance, for various reasons, has not been at its best performance relative to the previous two decades where the sector enjoyed a compounded annual growth rate (CAGR) of 15 percent and above. We all know that the banking sector is currently battling with challenges related to: liquidity, growth of lending activities, performance of loans, increased competition, etc. This has in a way affected their share prices, for those listed banks. So, investors who are heavily exposed in this sector suffers some loses resulting in a potential reduction of profitability (hence lower dividend) as well as lower prices of their shares upon liquidation or upon valuations. On the contrary, by investing in more than one sector, or in more than a single entity’s shares, you will reduce the potential risk that you may lose a significant amount of money rather your portfolio’s overall returns will be less affected.

Furthermore, it is advisable that you refrain from investing all your money at the same time. In order to protect yourself from the risk of investing all your money at the same time (and in some cases that time might be “the wrong time”, it is recommended that one should follow a consistent pattern of adding new money into their investment over a period of time. By making regular investments with the same amount of money, there are cases where you will buy more of shares when prices are at low level and less of investment when its price is high — and such a balance may save you better in terms of return on investment.

The other important factor to consider is that as you try to be a keen investor in listed shares, it is fair that you consider rebalancing of your portfolio occasionally, this will help you to minimise or manage a potential situation where your portfolio may look like it has overemphasised on one or few share categories. To achieve the portfolio rebalancing, it is important that you pursue a policy that will normalise your returns to comfortable level, given the risk taken.

Other factors to consider when investing in shares include: (i) determining your investment horizon (such horizon can be categorised as short — when up to a year; medium term, 1-5 years or long term (5+ years); (ii) identifying the industry or sector that you are mostly comfortable with (i.e. you strongly believe in banking, then you could start off with what your research and analysis will indicate as fundamentally strong banks); (iii) dividend history — if your investment objectives is regular income then a company that pays dividends on regular basis should be your portion (if this is the case, you therefore may need to ask these questions: does the company pay regular dividends or not? how attractive is the dividend yield?, etc); (iv) growth history — if your investment horizon is medium to long term and your investment goal is either children’s education or retirement purpose, then it is important for you to consider overemphasise the choice of shares for companies that have a lot of potential to increase their capital value even if yielding less dividend income in the short term; i.e. companies that pays minimum dividends because they are re-investing or retaining their earnings for expansion and future growth.

I hope this helps. But always remember: there is no guarantee whatsoever that you will surely make profits in your investment process