LIKE other sectors of Bangladesh economy, share market is also hardly diversified in terms of types of securities it offers: 17 mutual funds, eight debentures, and 275 stocks! Thus, to me, making money on Dhaka Stock Exchange (DSE) is much easier than on New York Stock Exchange (NYSE) with simple techniques. One might think it would have been impossible for an investor to lose money during a period marked by exceptional gain. But some investors did and stood as "demonstrators" in front of DSE as the hapless ones bought shares only when they felt comfort in doing so and then proceeded to sell when the headlines made them uneasy. Those investors forget the basic rule of investing: Buy undervalued shares and sell overvalued one.
Before you start investing in share markets in Bangladesh, focus yourself on three points. First; How long your investment horizon is; the longer your investment horizon, the more money you will make because stocks, in the long run, goes up. The investment Guru and also world's wealthiest man (as of February 11, 2008) Warren Buffett in one of his article, "Buy American. I am." on the daily New York Times (NYT) on October 16th, 2008 says, "….fears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now." Our investors hardly have such a long investment horizon as Mr. Buffett though his optimism is true for our stock markets too. But, all of us want to be rich overnight. Earning money is not that easy unless you are in politics!
Second, ask yourself: How much return do you want? Sell out your position whenever you exceed your target profit margin rather than getting greedy. Third, also understand that there is a trade off between risk and return: the more risk you take, the more money you will make. So, be sure about your own level of risk tolerance.
In addition, information plays most vital role in investment decision making. Thus, one needs to know the sources of information. Most information sources can be obtained on a company's financial statement which you can collect from the company's register office or from the Securities & Exchange Commission (SEC) library. In addition, you should be a keen reader of the financial pages of daily newspapers. Bangladesh already has few daily, weekly or fortnightly specialising on finance, e.g., the daily financial express. The Dhaka Stock Exchange (DSE) website or the respective company's website can also provide some information regarding your investment decision. AIMS of Bangladesh also have a weekly market review on its website focusing on stock markets in Bangladesh on their website. However, still the SEC has to play a big role to create a mechanism to provide information to investors.
Though one investment suggestion does not fit all since investment advice mainly depends on investor's goal and level of risk tolerance, here are three classic steps to invest successfully in a stock market: First, though it is difficult, purchases of shares in a company that appears able to sustain above average earnings growth for, at least, five years. Picking stocks with growing sales is the most important secret of investing in stock market.
Consistent growth not only increases the earnings of the firm but also boosts the multiple that market is willing to pay for those earnings which will skyrocket your capital gain. Thus, the purchaser of a stock whose earnings begin to grow rapidly has a potential of double benefit - both increased earnings and capital gain.
Second, never pay more for a stock than can reasonably be justified by a firm foundation of value. Though one can never guess the exact intrinsic value of a share, he can roughly evaluate when a stock seems to be relatively priced. The price/earning (P/E) ratio is a good place to start. Not only buy stock with low P/E ratio but also look for growth situations that the market has not already recognised by bidding the stock's multiple to a large premium. So, buy stocks whose P/Es are low relative to their growth prospects. If one can be even reasonably accurate in picking companies that do indeed enjoy above-average growth, he will also be rewarded with above average returns. However, different software is also available online to value a share price for free!
Third, don't trade too much. Research shows that frequent trading of shares costs an investor in terms of fees, commissions, etc., which decrease return of an investor substantially. Moreover, you have to pay tax on your realised gain whenever you sell off your shares (though we don't pay taxes!).
Buy shares in this declining market now. Warren Buffett shares his investment principle: "Be fearful when others are greedy, and be greedy when others are fearful". One hardly can predict the short-term movements of the stock market. What is likely is that, in the long run, the market will move higher, perhaps substantially so. So, buy shares of fundamentally sound companies now, hold it and make money. If you wait for the robins, spring will be over. Buy now. Pay less, sell high and start making money.
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