Investment strategy is a must

Q: In an evolving stock market like ours, where information is hard to get and investors' knowledge is often poor, how do retail investors educate themselves?

A: In an evolving market you may find many retail investors buying stocks based on speculation. It could be buying in the morning and selling in the afternoon with the decisions based mostly on hearsay, rumour and short-term performance.

In a developing market such as the UAE, where the sentiment can change very fast and accurate information can be hard to find, making a success out of being "the little guy" is a challenge for the retail investor. Before you start assessing which stocks are right for you, you need to decide upon a framework for investment.

A golden rule is that you should never invest money is you cannot afford to lose it. So first take a long and hard look at your finances, particularly your outstanding debts and liabilities. Create an emergency fund that can sit in a bank, which can be accessed if you're faced with unexpected problems. You can then look to educate yourself about the market.

Dubai International Financial Exchange (DIFX) runs a range of courses through the DIFX Academy, which include specialist programmes for investors and the general public. These courses provide a good framework for understanding the rules and regulations of the market, as well as more specialist areas such as company valuation and corporate ratings.

It's important that you understand the overall trading landscape, before you start looking directly at companies. Then, you can look to begin educating yourself about specific companies and their stock performance. The first step is to ensure that you have some knowledge of the company you're investing in. Successful investors tend to be the ones who proactively seek out specific stocks in which to invest, rather than responding to rumour or suggestion.

In particular, you should avoid investing in stocks at the suggestion of unsolicited phone calls or emails, which are typically "pump-and-dump" schemes aimed at artificially inflating the price. You should also avoid relying on hearsay and even advice from well-meaning friends and colleagues, since investing in a company without understanding its business is a good way to lose money.

Instead, look to educate yourself about historic performance and future potential. You can source information directly from the companies themselves as a first step. Annual reports and company announcements provide some insight into their business direction.

There are also a number of good business information websites within the Middle East, such as Zawya and AME Info, which can provide you with up-to-date data on performance and announcements.

Where possible, you should focus on the stock chart for the company you're considering investing in, and try to understand its "moving average". Moving average is a measure of the stock price average over a period of time. You can set up different time frames on the stock chart, which should provide you with a good indication as to the direction that the stock is moving in.

When you begin investing, it is also possible to get support and advice from your brokerage firm. Traditional, or full-service, brokers typically offer research sources for clients, enabling people to make an informed decision. However, there are also firms - often referred to as 'discount brokers' - which don't offer investment advice and simply execute orders once you've decided to buy or sell an investment.

- The writer is sales director at Nexus, a leading regional financial adviser. The opinions expressed above are the writer's and don't necessarily represent the views of Gulf News.
Please send your questions to advice@gulfnews.com.