Q&A with CMMB Securities

Q. I’m a regular saver and have a little put aside for retirement. But at age 52, I’m getting anxious that if something happens to me, my family will be in deep water. What can I do to make my money work harder?

Chandu, Freeport

A: You probably have at least eight more years, maybe more, before retirement. Therefore your objective, as you quite rightly said, is to build your wealth so at retirement, when you do not have a salary coming in, you would be able to live comfortably and give your children a start in life. The only way to increase your wealth, especially in this low interest rate environment, is to invest in the Trinidad & Tobago Stock Exchange. The returns on this market have been quite attractive, somewhere near an average of 19% per year for the past ten years. Now, while the market performs well over the long term, there could be volatile swings in prices in the short term. Therefore, the money that you put into the stock market must be locked in for a long period of time i.e. over five years. This is important because if you liquidate an investment in the stock market before that, there is a probability that the prices of shares could be down at the time thus incurring losses on sale. So make sure the part of your savings that you invest are not needed in the short-term. Talk to your stockbroker and get advice as to which shares appear likely to be on an upward path.

Q. Your column has often given advice on investing in the stock market, but are there any circumstances that would make it a bad idea to invest in the market?

Sherina, Point Fortin

A: The stock market does not go up perpetually. In the same way an economy goes through periods of boom and slump, the stock market in any country may also go up or down from time to time. In fact, research has shown that the stock market is a leading indicator of the economic cycles in a country. For example, when the US economy is going into a slowdown, the US stock market starts to fall some time before that. Similarly, if the US economy is poised to experience an upturn, the US stock market starts to rise a few months before that.
Therefore, over the past two years in the Unites States, when the economy was down, stocks were also bearish (falling) and an investor would have derived negative returns. However, certain sectors of the US market are now going up due to the release of positive economic numbers such as housing starts, which is restoring some confidence in the market. But other news such as durable goods orders and the level of the budget deficit has been worse than expected and so the market did experience some declines on release of those numbers.
So the market is still very volatile in the US and if you are an investor who is not in a position to take on too much risk, now may not a good time to go into the US market. In Trinidad & Tobago, the economy has been growing despite the worldwide slowdown due to the high oil prices and investments in the LNG sector. Hence our stock market has been rising consistently in tandem with this economic growth. Therefore, conservative investors would want to focus on the local market for the time being. However, a survey of US economists shows that the US market would pick up by the end of December this year. If this prediction materialises, then one would want to get into the US stock market around August to September to ride the recovery. Market timing is important in investing in the stock market. Talk to a qualified financial advisor as to when is the right time for you.

Q. What is the meaning of a stock split?

Jerry, Maraval

A: A stock split, as the name implies, is when a share is split in a certain ratio. For example, a 2 for 1 stock split means that for each unit of a share before the split there are now two units after the split. In this example, every stockholder owns twice the number of shares in the firm after the split, but each unit of stock is worth proportionately less, i.e. half of the original price. However, since the number of units held is twice that held originally, the dollar value of each shareholder’s holding remains unchanged. So just after the split the value of shareholder wealth remains the same although the number of shares in issue has doubled. The benefit of doing this from the company’s point of view is to increase the market of possible shareholders. As the price of a share falls it immediately becomes affordable to a wider group of people. It may ultimately result in a wider distribution of holdings. This may then eventually increase the frequency of trading and the price efficiency of the share (how quickly the price of the share reacts to information about the company). However, experience has shown that a stock price rises on the announcement of a stock split. This is because of the interpretation investors have about the meaning of a stock split. It is argued that firms will only split their stock if they believe their stock price will keep rising, or feel that they can increase their dividends in future periods on a larger number of shares. In fact, on the local stock exchange there have been cases where shares have been split and the price after the split eventually increased back up to the pre-split prices thus generating significant returns for investors. Talk to your broker to get advice on which shares look likely to split.

Questions can be sent to : Po Box 1830, Wrightson Road, Port-of-Spain.
E-mail: cmmbsecurities@mycmmb.com