Q&A with CMMB Securities

Q. I read that the Securities and Exchange Commission in the US is trying to track down and weed out the practice of short-term trading in mutual fund shares by industry insiders. Is that an issue we need to be concerned about in Trinidad and Tobago?

Julian, Cunupia

A: Short-term trading is the practice whereby traders attempt to profit from information coming to hand after the normal close of trading for the day, by buying shares after the official cut-off for sale the next day. This practice laces long-term investors of mutual funds at a disadvantage, since the profits made by these short-term trades come straight out of long-term investors’ accounts. The US Securities and Exchange Commission is going all out to stop this practice by heavily penalising brokers found to be facilitating such trades. Although no such practices have been highlighted in Trinidad and Tobago, no mutual fund legislation exists at present to prevent this. So, as an investor, it is always wise to have a clear understanding of the rules surrounding the trading of shares in your particular mutual fund and closely monitor your returns.

Q. I recently became self-employed and am building a client base. I have to offer some customers 30 days credit so at the end of the month I’m in a bad way. Other than increasing my bank overdraft, is there a way to maintain cash flow while waiting for payments to come in?

Sudesh, Tunapuna

A: There is a way of increasing your cash flow without using your overdraft. A process known as factoring or discounting of your company’s receivables can accomplish this. The way this works is simple. You go to your bank and essentially sell your receivables to them. Depending on the debtor involved, the bank may advance between 70% and 80% of the value of the receivable at a rate of financing which is much lower than that of an overdraft.
This would be based on the debtor agreeing to pay, demonstrated by their signing to authenticate the invoice as well as indicating satisfaction with delivery of goods and services. The receivable which you sold must be assigned to the bank and your debtor must also be apprised and agree to this via a tripartite agreement.

The debtor must also agree to pay the bank directly instead of your company since the beneficial title to the cash flow now passes to the bank. This is a method that is being used with increasing frequency as companies try to reduce the interest cost of overdraft financing. The time that debtors take to pay is being funded by your company and hence reduces its profitability. Therefore finding a more cost effective mechanism to give your customers this flexibility would help you to maintain good credit terms for them, while not bearing a high cost burden.

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CMMB and/or its employees or directors may, where applicable, make markets and effect transactions, or have positions in securities or companies mentioned herein. Neither the information nor any opinion expressed, shall be construed to be, or constitute an offer or a solicitation to buy or sell.”