Dubai: Although investing in stocks is a common way for beginners to gain investment experience, it is often perceived as a more complicated investment option. But professional investors refute this myth.
Gauging the market’s highs and lows, assessing the market risk and figuring the right time to invest in stocks seems like a complex process. Yet, it has been proven to be one of the most lucrative investments.
Gulf News talked to investment experts to know how one can navigate through the world of stocks with ease.
But at the very least, investment professionals advised novice investors to know basic metrics such as book value, dividend yield, price-earnings ratio (P/E) and so on.
What to research beforehand?
• ‘Book value’ is the value of a company’s assets recorded in the books.
• ‘Dividend yield’ is dividend divided by share price – typically a yield of 4 to 6 per cent is considered good.
• ‘P/E ratio’ is share price divided by the earnings per share - a higher PE suggests high expectations for future growth, but a low PE suggests company is more likely to outperform earnings forecasts.
After knowing the basic terms, other important to-dos include researching how the stock has fared compared to its peers in the industry, seeking to understand how the company has been reporting its results, understand analyst perspectives on the stock, while also researching the company’s leadership.
"The more information you have on a sector or stocks – better the chances you have at succeeding when it comes to investing in markets," said Issam Kassabieh, Chief Financial Officer at Urent, having analysed UAE-listed stocks’ performance on the stock markets.
While you are learning, it’s always good to start out by using virtual money in a stock simulator.
Most likely, you'll find that the market is much more complex than a few ratios can express, but learning those and testing them on a demo account can help lead you to the next level of study.
Some of the popular platforms include ‘TD Ameritrade’, ‘Wall Street Survivor’ and ‘MarketWatch’.
Have clear goals
One of the first steps to investing wisely in the stock markets is to clearly define your investment goals. Age, income and attitudes about risk all need to be taken into consideration when determining which investments may be right for you.
"Shares might be a little bit riskier than, let’s say, bonds,” said Anita Yadav, a seasoned markets expert with experience in diverse financial markets. “Investing in real estate maybe safe but it’s illiquid versus bonds and shares.”
Nisarg Trivedi said that if you are saving for a particular event, be it buying a house or education, then you can afford to take a little bit more risk as your portfolio can ride through the cycles.
“If you are young and can afford to take risk then you should focus your portfolio towards shares, but if you are a little bit older and want safer options your portfolio should be more skewed towards bonds,” said Nisarg Trivedi, a Middle East director at Schroders Investment.
Step back and reflect on your short- and long-term goals, such as funding college for children, business expansion, travel plans or retirement needs. Next, you need to understand your tolerance for risk, which differ with each investor.
Your tolerance for risk is a difficult personal decision, but this is something that a financial advisor should help us determine.
Younger people with a longer time horizon seen as more risk-tolerant, and therefore more likely to invest in stocks and stock funds than fixed income.
But regardless of age, those with a higher net worth and more so-called liquid capital to spend can afford to have greater risk tolerance than those who are more cash-strapped.
As for new investors, they often have two questions when starting out: How much money does one need to start investing in stocks, and, how much money should be invested?
But before that, a novice investor needs to decide what represents best how you want to invest, and how hands-on you’d like to be in picking and choosing the stocks you invest in.
You are either the do-it-yourself (DIY) type and interested in choosing stocks and stock funds or, you already know the stock-buying game and just need a brokerage or someone to manage the process.
“To invest in stocks, you need an investment account,” Trivedi added. “For the hands-on types, this usually means a brokerage account. For those who would like a little help, opening an account through a robo-advisor is a sensible option.”
Opening a brokerage account
A brokerage account is an investment account you open with a brokerage firm, using it to buy investments.
The broker holds your account and acts as an intermediary between you and the investments you want to purchase or sell. If you want to purchase and manage your own investments, a brokerage account at an online broker is for you.
Once you’ve opened the investment account, you’ll need to initiate a deposit or funds transfer, which is mostly given in a step-by-step easily understandable form in most websites. Once the transfer is complete and your brokerage account is funded, you can begin investing.
However a key risk to keep in mind is that you might be asked if you want a cash account or a margin account. A margin account allows you to borrow money from the broker in order to make trades, but you’ll pay interest and it’s risky. Generally, it’s best to stick with a cash account at first.
When choosing an online stock broker, experts say fees, platform features and security are some key considerations.
Profitable investing requires you use a brokerage service that aligns with your investing goals, educational needs and learning style. In an ideal brokerage, you should check whether or not the platform allows you to trade the securities you’re interested in, to how easy it is to get support from an actual human when you need it.
As part of your safety checklist, you need to check whether the brokerage a member of the Securities Investor Protection Corporation (SIPC) and a member of the Financial Industry Regulatory Authority (FINRA).
There will typically be some kind of notation or disclaimer at the bottom of the home page. But if not, you can quickly look up the brokerage on these websites:
- SIPC website - https://www.sipc.org/list-of-members/;
- FINRA's BrokerCheck website - https://brokercheck.finra.org/
A robo-advisor is a service that offers low-cost investment management and virtually provided by all of the major brokerage firms, investing your money based on your specific goals.
Popular types of investing
For most people, stock market investing means choosing among two investment types, stock mutual funds or exchange-traded funds (ETFs), or individual stocks:
• Simply put, a stock fund is a type of mutual fund that invests primarily in individual stocks of companies trading on a public exchange – typically allocating at least 80 per cent of the portfolio assets to stocks. The upside of stock mutual funds is that they are inherently diversified (having different types of stocks in the same portfolio), which lessens your risk.
• A mutual fund is a basket of various investments, such as stocks, bonds, and cash. Each of these types has a different risk level associated with it. Index funds and ETFs are a kind of mutual fund that track an index (benchmark of multiple stocks). An ETF is a fund traded on stock exchanges, much like stocks, and holds assets such as stocks and others.
Diversify, diversify, diversify
If you’re after a specific company, you can buy a single share or a few shares as a way to dip your toe into the stock-trading waters, the experts advised. Building a diversified portfolio out of many individual stocks is possible, but it takes a significant investment.
In my opinion, in times of economic growth invest more of your portfolio in 70 per cent shares and 30 per cent bonds. In times of an economic downturn, invest in no more than 70 per cent bonds and 30 per cent of your portfolio in shares
Now coming to how much money you should invest. The amount you need to buy an individual stock depends on how expensive the shares are.
“If you want have a small budget, an ETF may be your best bet. Mutual funds often have a higher minimum startup investment requirement than ETFs, which trade like a stock and means you purchase them for the share price value,” Trivedi said.
What to steer clear of?
There are many reasons why some investors prefer not to invest in the stock market. Being risk averse, limited or no knowledge and expertise, a bad experience or being just a beginner are some of the reasons to remain out of it.
Although markets can be unpredictable, in the long-run, they can provide comparatively higher returns than other low-risk assets or securities, the investors explained. This is why it is a necessity in the overall investment portfolio, with the proportion being different for different investors.
The biggest mistake that investors starting out make is to invest all their money in one particular share and over expose themselves to one market
Charges in fine print – look out for fees
One thing, however, that is easily overlooked and important to understand is the fees you’re paying. A number of investors cited hidden fees as a proven hazard for a newbie investor.
A diverse portfolio tend to offer lower fees than actively managed mutual funds — in the past few years some have eliminated management fees entirely. Paying high fees risks eroding a significant percentage of your earnings.
Over time, investment fees can consume thousands of dollars in potential earnings.
Investment charges are broadly categorized into two. One is ‘fund management’ charges and the other is one is the ‘incidental fees’ or minor expenditures associated with the investment.
Transparency and taxation
“These (charges) are revealed transparently by asset managers, as they are under significant scrutiny by regulators,” Trivedi said.
If there are any other fees the investors should be made aware about it or told about it in advance, and if there is something that they come across maybe it’s time to switch investment managers
When we are talking about listed securities and if you are using a manager and able to invest in a fund, then one also needs to be aware of performance fees and quite often ‘setup’ and ‘exit’ fees as well, Yadav said.
Another element to be aware of is post-tax returns versus pre-tax returns as a lot of us just focus on the gross return, while not understanding that at the end investments are tax payable and taxes are kind of a fee as well
She added that there may also be FX (foreign exchange) charges, depending on whether you are investing in a product of a different currency, possibly triggering a substantial conversion risk.
What does the UAE offer?
Most investment products offer global baskets in the major markets. Kassabieh explained what stocks retail investors can look at locally.
• "Defensive sector stocks are extremely important to hold because they act as a safety net at troubled times and can balance a portfolio once the market is retreating," Kassabieh said. "Also, they tend to pay annual dividends, which reduce initial cost and eventually act as a gain on investment."
• In the UAE, the banking sector along with the telecom sector are considered defensive sectors and Kassabieh said they could be “very healthy” picks to have in one’s portfolio. However, he added that telecom stocks lack variety, as there are only two listed telecom stocks Emirates Telecommunications Corporation (Etisalat) and Emirates Integrated Telecommunications Company – commercially rebranded as du.
• "Aside from the defensive stocks, it is recommended to have high-growth sector stock such as pharmaceutical, healthcare and education stocks – although only a few are listed – as these stocks tend to grow rapidly at their early stages and when successful can turn into defensive high yield stocks," Kassabieh said.
• The UAE Securities and Commodities Authority and the UAE Markets themselves – Dubai Financial Market (DFM) and Abu Dhabi Securities Exchange (ADX) – have a list of licensed and active brokers on their websites.
• While there are iShares MSCI UAE ETF and WisdomTree Middle East Dividend Fund that are two ETFs with heavy UAE weighting, REITs are also a proven option for local investors.
• In the UAE, currently listed REITs include Emirates REIT and ENBD REIT, both Sharia compliant, listed on Nasdaq Dubai and have been active in the UAE market since they were listed.
• Although REITs have been a popular choice since their listing and had decent trading volumes over the past years - despite the market being in decline - they recently however have been seeing lower levels of trading.
• This is the reason why the ENBD REIT is looking to delist from Nasdaq Dubai and Emirates REIT has formally complained of its share price trading at unusually low levels.
• The number of listed REITs in the UAE is undoubtedly set to grow after the DFM last year published rules on listing and trading REITs as a precursor to launching its REITs platform in the very near future. Masdar, a unit of Mubadala Investment Co, in January launched a sustainable real estate investment trust, with a valuation of up to Dh1 billion.