Q&A with CMMB Securities

Q. What’s the best way to educate myself about the stock market? I don’t want to become a broker, just want to make sure that I don’t get the wool pulled over my eyes.
 
Thomas, Gasparillo

A: The stock market is a simple thing to understand. The price of a share is determined by supply and demand. The higher the profitability and dividend payout of a share, the greater is the demand for that share. Companies on the local stock exchange must publish results every quarter in the newspapers. It would be a good idea to talk to your broker and get the dates at which each company publishes results. You can then monitor what is happening to the financials of the companies listed on the exchange. If the company’s results increase from one quarter to another, the price of the share most probably would increase as large pension funds begin to buy the share to benefit from the prospective dividend payout. The larger the percentage rise in a company’s profitability, the greater would be the percentage rise in its share price, all things remaining constant.

One indicator you can look at is the trailing price to earnings ratios which can give you an idea of an undervalued stock. If the last 12 months of earnings continue to increase and the price is constant, then this multiple would be lower, which may be a signal of an undervalued stock. You can also look at the price/earnings multiple in relation to other companies in the same industry or the market as a whole to identify which stocks are trading below the particular industry or the market. Brokerage houses also make price projections based on different valuation methodologies. You can get the information about the P/Es and price projections of the various companies on the exchange from the research departments of stock brokerage firms. Try and get these from two or more brokers to get a consensus of P/Es or price projection. You can also obtain some introductory textbooks such as Stock Investing for Dummies published by Wileys, or you can do some research on the Internet. At least in this way you can ask the brokerage house further questions on how it determined the price projections of the stock.

Q: I’m in my 30s and trying to save up enough for a house deposit, but property prices are rising so fast I don’t think I can ever catch up unless I go after a house way out in the bush. Any suggestions on how to get a quick boost on my savings so I can get that deposit together?

Amanda, Port-of-Spain

A: Buying a home is actually a good investment. But as you quite rightly pointed out, house prices tend to move up quickly in a growing economy where there are space constraints. However, there are no real solutions for quickly boosting your savings level without increasing the level of risk you would have to take on. This is because, generally speaking, investments associated with higher levels of return are usually much more risky than investments that would generate relatively lower returns. Therefore one would have to conclude that you should look at investment opportunities, which would provide more moderate levels of return, as you cannot risk losing a substantial investment, namely the deposit on a house or property. Another consideration would have to be the time horizon associated with investing your savings. Whether you are planning to buy a house five years from now as opposed to six months from now, would play a vital role in deciding how to allocate your funds.

Investments that have longer maturities, for instance a term deposit, generally offer higher returns than short-term investments, for example a money market fund. So, the time horizon of your investment will affect the type of investment you choose. On the whole, there are no “quick fixes” to boosting your deposit. You can at least invest in instruments such as an income and growth mutual fund, a money market fund or term deposits among others. However, the returns from these investments may not be on the scale you are looking for. Also, your return may be eaten away if house prices continue to increase. One alternative to consider is taking a loan to pay a deposit on your house since borrowing rates are currently low and house prices continue to rise. This alternative will allow you to lock in the purchase of your house as earlier as possible to protect against price increases.