What to consider when investing in shares

The capital market is a crucial component of the economy, putting savings and investments in the hands of those in need of capital.

The capital which is then used to generate economic output ultimately supports development and creating wealth.

A humming capital market can elevate a country’s socioeconomic conditions, as it has done in many economies where financial infrastructure and its supporting institutions are fundamental to economic development agenda.

When correctly harnessed and channeled, capital markets can prove to be transformative: not just for the economy, but for society too -- by unlocking opportunity and giving citizens a greater stake in their nation’s success (in the democratization of finance and wealth), capital markets can strengthen both individual prospects and the bonds of community, when many people are engaged in financing their economic development and are economically empowered.

For this to happen, there must be financing tools and products that may be used to mobilize savings for productive investments.

The economy needs a sizable investor base, made of by both individual households and institutions, not only by the quantity of their participation but also by the quality of their investment strategy and decisions based on the understanding and appreciation the fundamental workings of the capital markets.

In the last week’s article I shared some of the factors, approaches and activities for one to undertake during the process of saving and investing in financial instruments that are issued by participants in the capital markets.

I said, anyone who is keen on investing in the capital markets should have a clearly informed personal investment plan, followed by an evaluation of his or her risk tolerance level for various asset class (or securities within the asset class).

While on this, it is important for one to understand and appreciate a principle of investment that says: the higher the risk, the higher the return. I discourage the speculative mentality and “quick money” motives – it is not good for an investor, especially on value-based investments.

The element I emphasize on is for one to determine where he/she want to end up financially. In the thinking process towards achieving the outcome to such a determination, questions such as at what age one wants to retire, how much money s/he need in order to retire comfortably, how much time one have between retiring, how much money he/she need to work with and how much risks are comfortable and willing to take on – needs to be responded into in a careful manner.

Once you know the answers to these questions you will have a good idea of how much you need to invest to reach your goal.

Remember the wise saying which says: “if you do not care where you end up, any road will get you there”.

So, do not choose to take any road – because any road will not help you to get where you want, you need to be specific, for example, if you are 45 years old and you intend to retire at age 60 and your net income (after deducting your expenses and liability obligations, and without consideration for inflation and time value of value) is Tsh. 1 million a month.

This means that for you to achieve the Financial Freedom during your retirement, your Financial Freedom Fund Target should be to generate about Sh180 million by the year 2033. With careful planning, financial literacy, good investment selection and financial discipline – this can be achieved.

If you do not have necessary competences and skills for financial planning, or you are not as savvy and disciplined, how can you go about this? You need to start by a bit of researching on the idea, which should be followed by opening an investment account at the stock exchange via a stock brokerage firm.

As it with the bank accounts, which you use for your savings and investment purposes relating to financial products and services provided by banks, for investing in shares and bonds which are listed on the stock market, requires you to open an investment account. In our local environment, there are two primary routes you can take when it comes to investing in the stock market, you may have to use the services of the stock broker who will make investment recommendations based on your needs, desires and risk appetite; or the other option is for use to invest via a unit trust/mutual funds, i.e. the Unit Trust of Tanzania, which provides both diversification and professional management, coupled with researches and analysis.

Once you have opened an investment account, either with the stock broker or a mutual fund, develop the discipline to invest a certain amount, like the Sh1 million as above, on a constant/regular basis – this approach will give you the benefit of averaging, the average cost per unit share will be lower relatively. Along the lines of discipline on investing, you may need to note that stock have a tendency to go up and down, for you to create wealth in the stock market, do not be emotionally attached to a certain stock. Develop the discipline to always setting a stop-loss price – this being the amount you are willing to lose, but not beyond, and once reached get rid of the stock.

We talked about the need for diversification in order to manage your investment risk, I would like to end up by re-emphasizing on it, remember that the bedrock of all the investment advice in large part of human history has been: “don’t put all your eggs in one basket”. There is not better long-term risk management strategy than the diversification of investments.