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Investing In The Global Equity Markets

An article by Shahid Naseem Akhtar


What are equity markets?

The equity markets provide the means for business owners to raise capital. They do this by selling a portion of their businesses to other interested parties. For anyone that has never invested in anything other than a bank deposit, equity investment promises to provide the thrill and excitement of a roller-coaster ride. The reason for this is that with equities, the value of the investments and any income accruing from them, may go down as well as up.

Concept of risk
It is important to realise that all forms of investments carry a risk; sometimes, the full scope and nature of this risk is only visible to a trained eye. This is especially true with equity investments. As an overseas equity investor, you will encounter not only investment risk (associated specifically with the chosen investment e.g., the company whose shares you own goes bust), but also currency risk (unfavourable exchange rate movements that can serve to wipe out investment gains). Generally speaking, the greater the risk, the greater the potential gain.

Investment strategy
Before embarking on any new investment programme, you must have an investment strategy. This is set based on your personal circumstances (e.g., age, marital status, family size), financial situation (e.g., income, savings, outstanding obligations), and the degree of risk you are prepared to undertake. If you are unable to formulate such a strategy yourself due to a lack of relevant knowledge, you should contact the "Investment Department" of any of the Kingdom-based banks; they can assist in this regard.Your investment strategy should also be revised periodically to take into account the change in your personal / financial circumstances.

How and what to invest in?
How you proceed from here depends on whether you have the time, knowledge, and the inclination to select and manage your own investment portfolio. For the purposes of this exercise, potential investors may be grouped as follows:

Novices
This group comprises individuals who have little or no knowledge of the equity markets. Persons in this group should approach the "Investment Department" of their local bank. The latter will be able to help them define their investment strategy and also to identify suitable investment opportunities. These may be one of the funds they manage themselves or they may be offerings from other companies.Local bookstores carrying an extensive range of books and magazines on this topic. Some of the magazines worth reading include "Personal Finance", "What Investment", and "Investors Chronicle". If you develop an interest in the subject and assuming you make an effort to learn "the ropes", you should be able to manage your own investments in due course.

Have some knowledge, but unfamiliar with local conditions
If you are keen on the do-it-yourself approach but are new to the investment scene in the Kingdom, you should also contact your local bank. All the local banks provide not only a management service, but also a brokerage service. With the latter, a bank will simply execute your orders when instructed. If asked, they will also provide investment advice even if you are only using their brokerage service.If you use the management services of a bank or an investment company, they will actively or passively manage your investments based on your investment strategy and they will provide you assest valuations at least twice a year. With this type of service, they will also review your investment strategy from time-to-time and on an as-needed basis.

Are knowledgeable and are acquainted with local conditions
The more sophisticated investor can utilise the services not only of the local banks, but also banks and investment / fund management companies based around the world. The investment magazines, refered to in this article, provide contact information for these companies. If you choose to manage their own portfolios, here are some useful tips that will serve you well:

a.jpg (651 bytes) Don’t trade - aim to buy a stock for the medium term (two to five years).

a.jpg (651 bytes) Unless you conciously wish to increase your risk (and hence your potential gain), spread your investments over many sectors and actual stocks - but beware of disporportionate trading costs involved in low-value transactions.

a.jpg (651 bytes) Research the company before you buy it’s stock – don’t buy on impulse.

a.jpg (651 bytes) Don’t become emotionally attached to your shares – if they are not meeting their objectives, get rid of them.

a.jpg (651 bytes) If the price of one of your shares changes dramatically over a short period of time, re-evaluate it’s inclusion in your portfolio.

a.jpg (651 bytes) It’s generally not a good idea to buy a stock immediately after it has been tipped, as its price is marked higher before you can buy.

Liquidity
In general, equity markets are fairly liquid. This means that it is easy to sell your shares. Typically you will receive the sales proceeds in about a week after the sale, although this period will vary based on many factors e.g., where (country / market) shares were issued, was a certificate issued, where (country / market) the shares are being sold.

How to find a good intermediary?
Unfortunately, this is a hit and miss affair. Your friends, colleagues, and associates should prove to be a good source of information concerning persons / companies that you can use as intermediaries. The magazines, mentioned above, should also prove to be a source of good information. Before you choose your intermediary, shop around, examine his track record, and then take the plunge.

And finally
Most investors of the current generation have only really experienced "Bull Markets". These are periods where the share prices are consistently climbing. This is great because you invariably make profits, but you should be aware that a "Bear Market" (where prices are consistently falling) may be round the corner. Therefore, always act prudently.

Good luck in your endeavours and may the force be with you.