Investing in the Stock Market
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Late last year, there was a very interesting development regarding one of the quoted companies at the Rwanda Stock Exchange which many investors may have missed to appreciate. However, some keen investors may have taken advantage to make money.
As one quoted company was announcing its strategic plan at a general meeting of investors, the price of its share was trading at Frw295, a smart investor then opted to take profits while factoring in future prospects by asking for Frw300 per share.
The share has since traded at Frw300. The same share was trading at Frw228 early in the year. This means that last year alone, the share price had appreciated by 31.58% besides other benefits including dividend income.
Selective investing in stock markets all over the world is a sure way of guaranteeing real rate of return on investments over time. Not only do selective investments in stock markets return better yields compared to other asset classes but the returns have a tendency of outperforming inflation in the long term.
While majority of investors will prefer conservative investments like Government Bonds and Bills, few appreciate that the Rwanda Stock Exchange offers investors very good value for their investments. The stock market allows investors both individuals or retail and institutional investors to part-own listed companies and share in their growth and profits.
However, investing in stock markets require certain attributes and professional advice. When you decide to invest in the stock market, you should start with your end goal in mind in order to ensure that you are not distracted by short-term volatility, such as economic cycles or management changes.
You should know the business in which the company engaged in, the period within which you want to be in that investment, the expected returns and when to exit the investment. This enables an investor to identify specific goals and focuses on achieving them.
Unfortunately most investors at the Rwanda Stock Exchange buy and hold their investments for ever, leading to not only low liquidity in the market but also less value in stock investing as they do not know when to take profits or exit the stock or even the market. Stock markets and specific stocks will always have circles.
Experience has however shown that bear periods are always followed by bullish runs. Although there is never a perfect market timing, it is obvious that you can easily lose your investments if you perpetually hold onto your stocks. Again the unrealized price gains can be lost at any time.
On the other hand with good professional advice investors can selectively pick some suitable stocks at the stock exchange and switch investments between various stocks and asset classes as appropriate and make significant returns.
There are number of considerations in investing at the Rwanda Stock Exchange. First, is whether a company is primarily listed at the Exchange or cross listed from another exchange. This is important as several other factors outside the borders of Rwanda will affect the performance of the cross listed company.
Currently, four of the eight companies listed at the Rwanda Stock Exchange are cross listed from another stock exchange. This means that the performance of those shares are not limited to the activities in Rwanda alone. Further, financial performance of those companies are presented and reported in home currencies thus exposing the investors to foreign exchange risks.
Clearly, nobody has an idea what the exchange rate will be in the future, so even if you projected how much you would earn in Rwandan Francs in returns, you wouldn’t know how the currency of the mother company of the cross listed company would be in future. On the other side, the exchange rates may work for an investor even when the underlying investments do not perform in cases where the Rwandan Franc weakens against the currency of the cross listed company.
The next important consideration is how and when to invest in the stock market. Unit - cost averaging involves investing regularly and building up exposure over time, minimizing the impact of price volatility.
Cost averaging gives you a disciplined and methodical approach to achieving stock market exposure, without the worry of getting the timing “right”. Once you have decided to invest in the stock market, you should simply invest regularly and consistently, and follow broadly the same approach when disinvesting.
Successful investing is often about discipline and patience, and having the control not to panic or change your investment strategy based on market volatility and can help you stay “true” to your investment objectives and achieve financial freedom.
The views expressed in this article are of the author and do not necessarily represent those of The New Times Publications.