Basic investing considerations | Sunday Observer
Getting started in shares - Part 3

Basic investing considerations

21 February, 2021

(Part 2 appeared last week)

When engaging in the stock market a potential investor needs to spend some time to understand their motive for investment, what is expected out of it and the extent of risk associated with it, prior to embarking on an investment of this nature. 

Understand your investment needs and financial ability 

A successful investment is one which would grow your capital and result in earning a substantial return. Share investment is an attractive investment vehicle, which would be fruitful if an investor is willing to invest their time and money for a long period. As share investments in particular works best when they are held long-term. 

Know what options are available to you

After you have established your objectives you can then consider a range of stocks and construct a suitable portfolio. It is always advised to be more prudent and also get advice from a qualified investment professional who is well versed on the subject matter, in order to fully understand what you are investing in.

It is always advised to seek professional advice if you fail to fully understand the features of an instrument, the investment-worthiness of the company or if any other doubt or confusion.

What is your risk appetite?

Are you an investor that is seeking to invest in a security that is considered to be less risky? Or are you prepared to accept higher risks for the prospect of higher returns? 

Investing in shares is riskier than other forms of investments but offer a greater chance of a higher return. You should also note that there are shares which over a period of time have been identified to pay a stable dividend and are perceived to be less risky in comparison.  

Portfolio diversification

A strategy used to mitigate the risk factor when investing in the stock market. The famous investment adage ‘don’t put all your eggs in one basket’ is the best way to explain the term diversification. If equities are the only form of investment it would be a smart move to diversify between multiple companies which would reduce the risk factor. In this way, losses made on some investments can be absorbed by gains made in others.

Choose the right approach 

Investors who take a long-term approach to the market, reap the most rewards. For those investors who have a short-term investment, timing is important as they have to closely keep track of short-term movements in prices in order to find advantageous trading opportunities.

By either visiting the CSE website or by installing the CSE mobile app you will be able to see the performance of the overall market as represented by the ASPI or the index of 20 selected companies (S&P SL20). The CSE also conducts a number of investing related workshops around the country tailored to capture the interest of new investors. 

Do your homework

When investing in shares one should be prepared to do some homework on the companies, they wish to invest in and acquire the basic skills of analysing a company’s annual reports, accounts and other statements in order to understand how the company that you invested in is performing and how its share prices may move accordingly.

Consult your investment advisor or stockbroker to get the latest market information about shares you intend to buy or sell.

Making decisions based on rumours, particularly if you yourself cannot explain the choice in a rational manner is certainly not advisable.

Also constantly check the CSE website on which all corporate disclosures are disseminated which would enable you to make a calculated decision.

Courtesy: The Colombo Stock Exchange