By Chanda K. Chishimba
Zambians should view the Lusaka Stock Exchange (LUSE) as an investment vehicle that can lead to a better and more financially rewarding future. If invested well, your money would work excellent wonders for you in the future. LUSE affords investors an opportunity to determine the direction of economic activity while going about with their personal lives. Investing in major companies on the LUSE provides one with the opportunity to earn a profit legally. Here are some tips on investing in the stock market.
Avoid investing all your money in one stock. The risk involved in not diversifying is that, if the company goes bankrupt or its revenue is consistently below market expectation, your investment is lost without recourse. The best investment strategy is to research all companies listed on the exchange and look for the following; industry, debt ratio, price per share, revenue per annum, number of employees, and management experience. It is very important to know how the company funds its operations. Is it a highly leveraged company? Does it have enough operating capital? What amount of debt versus income does the company have?
Set realistic investment goals and objectives. You need to determine whether you are a short-term or long-term investor. This helps in choosing an investment strategy that is in line with your goals. If you want to make a quick small profit, or you want to use the funds under 1 year, then you are a short-term investor. Be wary though, there are risks involved. If you are in the market for a long time, then you are a long-term investor. In this category, you can hopefully recoup any short-term losses you may incur. Remember, the stock market is like a pendulum. For great success in the market, “buy low, sell high”.
Understand the mix in your portfolio. For example, you cannot invest in 10 stocks in the same industry. If that industry goes bust, then there goes your hard-earned investment. Make sure to diversify among industries. Now this does not mean you invest in all industries. What it means is that you master an understanding of the inherent systemic issues in each industry. Some industries will boom in an economic upturn and some will not. This is very normal. Other industries, called defensive stocks, will boom in an economic downturn. Industries such as Health, Pharmaceuticals, and Defense will be your best bet in a declining economy. Look at average income for the industry and decide if that industry will be a good mix for your portfolio.
Determine how much money you can invest without sacrificing your current need for income. Set up a budget that ensures that you are adequately covered for current financial demands, as well as, how much you can save from your monthly pay. Although budgeting has been a thorn in the foot for most households, remember, this is your future as well as that of your family. Strict budgeting starts with reviewing your income versus expenses. Are some expenses necessary? Is it necessary to always eat out than to eat at home? Do you really need that extra pair of shoes? Once you cut down these unnecessary expenses, you relieve your income of extra stress. This extra income is what you can invest in the market.
Make sure to invest in stocks that pay a dividend. For the moment, do not view the dividend payment as income to be carelessly spent on non-essentials. Reinvest, or buy more stock in that company with the dividend. By doing so, you are increasing your share in the company, and any subsequent dividend payments increase your equity. A dividend is simply a distribution of profit by management. Notice though, that the price of the stock reduces by the amount of the dividend. So essentially, this is not even a profit for you the investor. This is the more reason why you need to reinvest, buy more shares, so in the future when the price of the stock is higher, and you own more shares through dividend reinvestment, you can sell the stock and realize a genuine profit.
Before you buy your friend a beer, learn to pay yourself first. This means prudently using your income by setting aside a small amount to invest. Do not think that the stock market is only for the wealthy. A small investment in the market today, goes a long way in the future. It is the financial management decisions you make today that determine your situation in the future. Investing in the market takes a lot of discipline.
Always find time to review your portfolio. Ignoring this advice is your sure way to losing everything you have invested. A portfolio review, once very 90 days, gives you, the investor, an opportunity to see which of your stocks are better performing and which ones are not. If it were your strategy to rebalance your portfolio, this would be the best time. However, remember that each time you rebalance, you are paying broker fees that eat into your profits. So, only rebalance when it is very necessary.
Know the competence of your broker. Determine if your broker is investing your money with your interest at heart. Some brokers will advise you to rebalance your portfolio every other day, saying this is in your best interest. You have the right to question such decisions. As stated earlier, each time you rebalance, you are paying a broker fee. Essentially, you are enriching your broker through your own ignorance. When you engage a broker, make sure they understand your strategy, goals, and objectives.
Take advantage of the Kwacha Cost Averaging when you invest in the stock market. Because what you pay for a stock per share is a cost to you, you can ensure that you average out this cost for better chances of lowering your cost exposure. Here is how it works; if you invest K500, 000 in a K50, 000 stock, the number of shares is 10. However, if you spread out the initial investment (K500, 000), and buy stocks at different times (when the stock price is lower), your average cost would be something like K45, 000, for 11 shares. When the price of the stock goes to K50, 000, your portfolio value would be K550, 000. Therefore, you would have already made a profit on your investment.
Remember, you do not have to invest in the stock market if you cannot afford to. However, whenever you can, make it a practice to invest as this gives you an opportunity to gain from the expertise of management in these companies, their growth, and expansion. The stock market provides you with a probable opportunity to gain a profit legally. Remember too, that, investing in the market requires patience. If you are not the patient type, then the casino is your only bet.
But do not allow Afritel, or is it Bharti Airtel, to de-list from the Exchange and disadvantage small shareholders as this will be counter-productive.
Nice article! I wish Zambian media can have more of this kind of constructive news that boosts the spirit of people to become more creative – rather than the usual political insults and degrading each other that is just leading to a lot of anger in this country. LT do more of these kind of pieces. You can even visit some Zambian scientists and let us know what they are doing. I get the impression as if this country has no science at all. I cant remember when I heard about ground breaking research by a Zambian scientist in Zambia somewhere in our land…We need national motivation!!
This is what is called Responsible Journalism. We need such progressive news. We also need more articles from various industry specialists on alternative policies which GRZ can consider.
How i wish opposition parties could hold weekly briefings where they scrutise government performance and offer alternative policies or indeed commend and encourage government where it is doing fine and not just concentrating on POLITICKING!!
KEEP IT UP LT.
PLEASE ENCOURAGE SUCH PROFESIONAL ARTICLES..
It will be sad if LUSE allows Zain to de-list from the stock exchange. Infact it will be very discouraging.
The article above says: LUSE: A Path to Financial Security. What security is there when ordinary zambians using their retrenchment packages or hard earned cash to buy shares in Zain only to be told that Zain in no longer on the stock market. This is bushit.
this is a great article. we certainly need more of such. there is need for more awareness about investments in the LUSE. on common media. i am happy with LUSE website. it gives simple and important steps for amateurs like me trade. young zambian that are serious about the future will be taking advantages of what is happening at LUSE
Good article, basic and to the point. May i hasten to add that for those would be investors, assuming the liquidity on LUSE is good, the first question one should as themselves before they invest in stocks is how much they are willing to loose and not how much they envisage to profit from the trade. If one knows how much they are willing to stake, then they would have prepared themselves for the downside. What is currently happening on Bangaladesh stock market is a classical example of clueless investors ocassioning a bubble which has now burst in their face.
What has happened Celtel isuue leaves much to be desired. While it may be legal for Airtel to delist, its not a secreat that thieir offer was damn undervalued, otherwise they wouldnt have gone ahead to buy off everyone else.
Good article, on a progressive issue. A refreshing break from the usual politics, insults, counter-insults and pettiness. What I would like to see is more companies listing their shares on the LuSE, particularly those that are cash rich enough to pay a reasonable dividend from time to time e.g. the banks. This would create more interest amongst the investing public. The stock market is good and usually outperforms most other investments over the long term – except of course when a tsunami of the likes of 1929 or 2008 strikes.
I agree with Munthu at 1 and Plakash at 4 – the likes of Airtel should not be allowed to weaken what is still a fledgling Zambian capital market.
Lovely and educative article. Can someone knowledgeable enough suggest the best way to buy the said shares by someone living in the dispora?
Very good article, educative and informative as well, anyone with smarts should listen to this man. However, we need another article to warn LUSE and the GRZ about funny investors such as Bharti Airtel, if they do not have the interest of the consumer, which is social responsibility, why shoudl we support such a company? I was so much impressed when Zain Zambia decided to list on the stock market, you should have seen Zambians queuing up to fill out forms and buy shares costing K800 only to come and lose. The market value for Zain shares was 1200, but I do not know how it came to K720? I know there is a win and lose in these things but come on people, lets not be taken for a ride by ba Mwisa bane, and brokers should advise local investors properly.