Running with the bulls

YOU NEED to plan when buying stocks on the Stock Exchange, as success goes to those who best know their needs! Particularly for small investors coming onto the market for the first time, it is essential to plan for a programme of investments over five years at minimum, if they are to build up portfolios that meet the individual’s needs, preferences and objectives.

Building a portfolio:

• Your personal and financial situation needs to be considered — age, health, dependents, income, savings programme, sources of income, obligations and taxes.
• What are your investment objectives? These vary according to age.
• What’s your willingness and ability to assume risk? All securities have some potential for loss. Some take longer than others to develop the way you’d like. In general, however, stock performances on average are good. Some are downright excellent. But patience and courage are required, as the many who have succeeded can attest.

Plans are best worked out with the broker of your choice who will help, advise, and guide. The broker will tell you that ordinary or common stocks represent ownership in a company, and give the stockholder a vote in the selection of management and a proportionate but unspecified claim on profits. These profits may be distributed to stockholders as dividends paid out of earnings. There’s also preferred stock which attracts fixed dividends paid before earnings are distributed to ordinary stockholders. Preferred stocks are safe and can either be cumulative or non-cumulative. Most modern preferred stock is cumulative, meaning that the stock retains the right to receive all back dividends which have not been paid. Preferred dividends are payable only on order of the board of directors. Failure to pay a preferred dividend does not constitute a breach of contract. Directors may stop paying preferred stock dividends when the earnings of the company are insufficient or even when they prefer to retain funds in the company for expansion.

The only pressure on the directors to pay is the fact that dividends on the common stock cannot be paid until after the payment of preferred dividends. Sometimes your broker may recommend a bond. What’s that? James’ brother? Bonds are certificates issued by a government or company for money borrowed and on which the borrower promises to pay back on maturity the principal amount borrowed. During or over the life of the bond, the lender (bond-holder) receives from the borrower a specified rate of interest which is usually quarterly or semi-annually.
Bonds, like stocks, are traded by the broker on the Floor of the exchange through an auction system, where efforts are made to match buyers with sellers. In a nutshell, the Trinidad and Tobago Stock Exchange on the corner of Wrightson Road and Ajax Street in Port-of-Spain is the nation’s centralised market place for buying and selling securities. That’s because in addition to increasing the investment options available to individuals, it also provides a mechanism through which companies can raise capital for expansion purposes by selling and issuing stocks and bonds.

To complete the loop, new investors should be familiar with how the Stock Exchange is organised. The affairs of the Exchange are managed by a Board of Directors comprised of four stockbrokers, four listed companies’ directors, and three independent directors. Welcome to the world of capitalism in Trinidad and Tobago.  (To be continued)