Think long-term on Equity

Pumping your money in the stock market should be a medium- to long-term undertaking for the best results.

Share prices fluctuate due to various factors and it is usually not common to make substantial returns in the short-term.

There are generally two kinds of people in the stock market, investors and speculators.

Investors take time to understand the companies they are buying into and are usually in it for the long haul.

Speculators on the other hand seldom conduct research on the companies they are buying into and are usually in it for “quick gains.”

Element of risk

Evidence over time has increasingly confirmed that investors generally fare better than speculators.

The underlying principle of investing in shares is the fact that no one can tell with accuracy how a company’s fortune will pan out into the future, which introduces the element of risk.

The best way of reducing risk is to invest in many well-managed, profitable companies with good growth prospects and have at least a three to five year investment horizon.

This does not mean that you might not make good returns in the short-term, but is meant to manage your expectations and protect you from unexpected changes in share prices that might result in losses.

Reference point

You also need to have a reference point with which to compare the performance of your investment.

For example, Equity Bank shares were trading at a price of Sh50.50 on October 1, 2014 and at the time of writing this article the price was Sh53.50 per share, which translates to a return of 5.9 per cent.

The question is, was the return above or below par compared to the performance of shares of other companies in general?

The reference point, also called a benchmark, is the Nairobi Securities Exchange (NSE) index which enables you to compare the performance of the company you invested in relation to the health of the overall market in general.

During the same period, the NSE 20 share index had a return of 2.6 per cent while the all share index had a return of 5.3 per cent.

This tells that whereas your investment in Equity Bank shares did not yield substantial returns over the short duration, you still fared better than the market, on average.    

Due diligence

The only mistake you might be making is taking a very short-term approach to investing in the stock market.

As long as the fundamentals of the company that you have invested in have not changed adversely, being patient will reward you through regular (cash) dividend payments, a steady appreciation of the share price, and occasionally, bonus shares.

Remember that in the stock market, doing your homework about the company you wish to invest in and being patient eventually pays off.

It is also recommended that before investing, you should have a target return based on a personal financial goal.

This will guide you on when to sell when the share price is on an upward trend or buy more shares when prices are falling.

Avoid timing

However, try and avoid timing the market (waiting for the highest price when selling and the lowest price when buying), it is difficult to execute and sustain and the outcome is very similar to gambling.

Finally, you should also consider investing in unit trust funds that invest in shares, also known as equity funds and balanced funds.

The advantage with these is that they are managed on your behalf by professionals which saves you the time and resources of researching and tracking companies at the bourse.

Miriam Wavinya, research analyst, Zimele Research. Write to: [email protected]