Q&A with CMMB Securities

Q. What is the system of trading on the local stock exchange?
Sharon, Freeport

A. The system of trading adopted on the local stock exchange is one of open outcry. That is, brokers have to literally raise their hands simultaneously to indicate their interest in buying or selling shares. When trading is to start in a particular company the market official rings a bell. He then asks the question “calls?”.  Brokers from the different brokerage companies who have orders from their clients to buy or sell would then raise their hands together to indicate their interest. If a broker has an order, but for some reason raised his hand slightly after the others then he is not included in the call. Those who are accepted indicate their interest by writing on slips of paper privately which are then all collected by the market official.  He then announces the amounts and the prices at which each broker would like to trade by writing the bids and offers on the board for everyone to see. A bid is an expressed interest in buying an amount at a particular price while an offer represents an interest in selling an amount at a particular price. A bargain is struck by matching the highest bid with the lowest offer. If the bids and offers come in at the same price, but the demand exceeds supply then the supply is apportioned, the broker that bid the most getting the largest share.

In some cases, a broker or brokers may withdraw in a case where one broker has all the supply and is also bidding for a large part of it. The closing quotation in most cases is determined by the last bargain struck between two competing brokers. However, the closing quotation can also change from the opening quotation even if there are no bargains. There are two cases where this can happen. Firstly, if an unsatisfied bid is left on the board at a price higher than the opening quotation the closing quotation goes up to that bid price. Secondly if there are no bargains, but an offer is left on the board at a price lower than the opening quotation then the closing quotation goes to that lower offer price. The volume left on the bid or offer side of the board may indicate where the price of a share is going. If there are persistent bids, which are not being satisfied it may be a sign that a price increase is not far off. Conversely, if there are persistent offers which are not being satisfied then the price may decrease, all things remaining constant. It is possible for anyone to go and view a trading session from the public gallery at the Trinidad and Tobago Stock Exchange.

Q. I know there is always a risk involved when you invest money, but is there a way to make sure that the original sum doesn’t get blown away?
Natacha, St James

A: There are two major categories of investment instruments.  Firstly there are fixed income instruments like savings accounts, certificates of deposits and money market accounts where a built in feature of the investment is to keep the principal protected. However, this is not to say that your principal is “guaranteed.” Like an insurance policy the risk coverage is dependent on the ability of the insurance company to pay. So even if you prefer fixed income instruments, your principal is only as safe as the strength of the institution in which you are placing your funds. As we saw with finance houses during the ‘80s while clients invested in fixed income instruments, which supposed to have kept capital intact, these financial institutions went bankrupt due to imprudent management and people lost a lot.

The other type of investment is referred to as equities. Examples are local and foreign stocks. Embedded in these instruments is what is referred to as downside exposure, where there is a possibility that your principal could be eroded. However, for the higher risk involved the investor is given a much higher return than can be expected on a fixed income instrument. Therefore, if you are not prepared to expose yourself to high-risk, then fixed income instruments is the choice for you. Even if the financial institution offering an equity-based product is strong, one can still lose part of the capital since this is an express feature of equity based products. Investigate the features of these instruments or talk to a qualified financial planner to get advice.