The global financial system is currently faced with the calamitous consequences of several years of audacious and even exuberant investment practices. The housing market boom that preceded the current financial meltdown smirked of ‘irrational exuberance’-in the words of the former Federal Reserve Chairman Alan Greenspan. Yet everyone — governments, regulators, rating agencies and ordinary investors — looked the other way, after all it translated to economic prosperity for nearly every player while it lasted.
Particularly from the west, there emerged bouquets of diverse innovative, craftily packaged financial products that have finally landed the world into a catastrophic muddle, and ensuring that there is no soft landing anywhere, not even in the traditionally double-digit-growing Chinese economy. Much of the wealth generated during these market manipulations is now being wiped out; indeed, much faster than they were accumulated. In 2008 alone, an estimated $30 trillion was lost in the global equity market to the financial crises. And after months of cautious optimism, it is now clear that the initial assumptions that developing countries might somehow be spared the crises were premature. In much of these developing economies, the spreading crises have significantly impacted capital markets, foreign exchange earnings, value of local currencies, foreign reserve positions and even fiscal stability.
This tragic economic fracture reiterates the truism that ‘the world never learns.’
The Shape of Capital Markets
After the financial services institutions and perhaps the commodities markets, the next biggest casualty in the ongoing crises is the capital market. The financial meltdown has taken a huge toll on virtually all markets in the world, dragging down indices to record low levels. The near collapse of nearly all capital markets in 2008 could be attributed to both the falling investors’ confidence and their inability to stake in new stocks or retain existing portfolios.
No doubt, these are not the best of times for most investors. Or is it? Actually, while some investors have decided to put investment decisions on hold for the time being, others who are less risk averse have decided to take advantage of the fall in prices to increase their investment portfolios. Which is better? Experts are in agreement that taking advantage of falling prices to raise one’s stake in the market is sound investment decision. Their view is that unless the investor in question is a full breed speculator, investment in stock market is supposed to be for medium to long term. And since the current bear run on the market is certain to be over (it has happened before. It will happen again), irrespective of the cause, those investing now are sure to smile, maybe sooner than conventional wisdom suggests.
Indeed, buying stocks at a time like this is seen as one of the best strategies for maximizing returns in stock investments. However, it will take patience and a big heart. But besides patience and a large appetite for risks, the investor also needs to have a good stock selection strategy.
Your stock purchase strategy
(1) You should begin by choosing stocks that will give you good returns in terms of dividends and bonuses. This implies that you go for stocks with good dividend history. Another strategy is to go for shares of companies enjoying pioneer status, i.e. companies that are as yet enjoying tax holidays. When companies enjoy tax holidays, their dividend policy tends to be robust since their profits are not taxed.
Dividend-paying stocks have many benefits. The money you earn as dividends can either be re-invested to increase your shareholding, or you may decide to use such funds to attend to personal needs. Another benefit such stock is cost reduction. Experts believe that with each dividend received, an investor’s cost basis is essentially reduced. Put differently, with each dividend you are paid, your risk of permanent capital loss is slowly being reduced. For this reason, investment experts believe that if you hold dividend paying stock for enough years, your dividends may eventually cover a significant portion of your cost basis. This is especially true for companies that either pay large dividends or those who regularly increase the size of their dividends pay-out over time.
The third advantage is that dividend-paying stocks give you regular return on your investment without you investing additional money. This means that dividend stocks can actually become a regular source of income for the investor. So, if you are looking for a long-term investment that will guarantee you income on a regular basis, then dividend paying stocks are your best options. You can even maximize your benefits from this category of stocks by factoring in companies with a good history and potential for script issues in addition to dividend pay-outs.
(2) Another approach to your stock purchase is to go for mutual funds. Mutual funds indirectly boost your investments by spreading your risks. This is because when you invest in unit trusts or mutual funds, unlike shares, you are putting your money into several companies at once. This way, you are spreading your risks across the fortunes of several companies. Some might lose money, but others might rise in value. Additionally, since a mutual fund contains not just the money of only one investor but that of several others, therefore this larger pool of funds often gets a better deal. Besides, the funds are managed by a Fund Manager whose job day-in day-out is to look for the best places to invest the funds to guarantee the best possible returns.
(3) The third strategy you can employ in your stock investments to increase your chances of good returns in the market while minimizing risks if to diversify your investments. Portfolio diversification refers to mixing up your investments across various stocks, sectors or industries. Experts believe that when done properly, investment diversification can cut total investment risks by about 70 per cent.
The first advantage of portfolio diversification is that it helps to minimize the potential of losing all your investment money if a stock, sector, or industry as a whole performs poorly. By the same token, portfolio diversification helps you maximize the potential of doing really well if a stock, sector, or entire industry perform fantastically well.
Author: Kenneth Agwu
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