The basic presumption is investors trading in stocks have only one goal: to build the asset column in their personal balance sheet.
Trading in stocks is a highly technical venture that requires financial literacy skills, astute management of personal finances and like every entrepreneurship venture, a bit of luck. By the end of this article you will not morph into some stock trading guru. However, with this guide, you will be able to comb through stock options and enumerate a list of attractive stocks. From this list, with further research, you may find bargain stock.
WHAT IS A BARGAIN STOCK?
In the simplest of terms, a bargain stock is an under valued stock. It is one which its future prospects suggest as good return on your investment when traded. At other times, a bargain stock is one which might earn less from price gains but yield an attractive return in dividends. Such stocks might at times return average returns as dividend stocks but offer inflation beating returns; such that if you assume a hold position, its returns will help in the attainment of personal finance planning goals.
STEP ONE OF TRADING IN STOCKS 101: THE REGIONAL APPROACH
In our article on the basics of stock trading, we discussed the importance of investors understanding the world that they live in. Moving on, these considerations that every investor should consider when embarking on stock trading illustrate the importance of practicing this initial step. The primacy of consuming news and data, whilst searching for patterns within them, can never be more emphasized when trading in stocks.
First, success in trading in stocks in a globalized economy like the 21st Century is invariably a transnational endeavor. Moreover, it’s limiting to domesticate your thinking. This is especially so because success trading in stocks can be also found beyond one’s country’s stock markets.
Granted, for a beginner trying to cut their teeth playing the stock markets, involvement in overseas trading may be too much of an ask. However, as we suggested in our article on the basics of stock trading, an investment banker or stock trader is an invaluable partner in this journey. Therefore, always retain the services of someone with knowledge in trading in stocks. That said, you shouldn’t let them do the thinking for you.
The Value Of A Diversified Portfolio By Trading In Stocks Across Several Markets
Scouring regional markets when trading is stocks offers a lifeline for diversification of your portfolio. Save for Black Swan events such as the Arab Springs of 2010, potential losses in one market can be leveraged by realized gains in another.
Moreover, the beautiful thing about money in a globalized economy is that it moves freely. Recent developments such as ratification of the African Continental Free Trade Area only bodes well for investors in African stock markets. Further, as a general rule, money moves to environments where it can grow best.
Therefore, with proper research, often the returns on investment is so attractive. The topography of trading in stocks in Africa is such that playing in several regional bourses can yield satisfactory returns for the savvy investor. Also consider that the global economy is an interesting place with all the realignments taking place in the aftermath of the 2009 economic meltdown. As a result of this re engineering, Africa and other frontier markets
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The Mixed Bag That Is Dabbing In Frontier Markets
The economic crisis brought into focus regions that just a few decades ago were at the fringes of world trade. Though risks could be higher in overseas stock trading, these emerging markets are doing their part to attract the much needed foreign direct investment.
A case in point was the much touted BRICS grouping that brought together Brazil, Russia, China and South Africa. These countries were once reputed to be waiting in line to ascend to the pinnacle of world trade. While this prediction return a mixed bad of fortunes over the period 2009 to 2010: Brazil posting negative growth of -3.6 by 2016; Russia and South Africa being largely flat with South Africa in positive territory whilst Russia barely had its head above water; and China largely contracting, frontier markets continued to post steady returns.
Take the example of the East African Community which brings together Kenya, Uganda, Tanzania, Rwanda, Burundi and possibly soon South Sudan; is Africa’s most economically integrated economic block. It’s a region with a population of 169 million plus; a GDP of $172 billion (2017); an educated workforce and is rich in natural resources including oil. Most of its economies have been expanding at +5% GDP growth over the last decade. Without doubt, over the period, there must have been cherry picks of counters (e.g Safaricom) that have returned handsomely for savvy investors trading in stocks.
STEP TWO OF TRADING IN STOCKS 101: THE SECTOR OR INDUSTRY APPROACH
Having identified the regions of the world that might offer the best returns for your money, the next step in trading in stocks is to identify the key growth sectors in the economies of the regions you have identified. For example, it might surprise you to know that small economies like Kenya are the leading the world in new age money. The success of companies such as Safaricom with world beating innovations in fintech and mobile money has served well their investors .
Another consideration is the type and scale of investments occuring in the economy. For example, in rapidly growing economies, infrastructure is always a sure bet. Therefore companies in this sector of the economy tend to do well in the short to medium term. Moreover, companies with large land holdings also benefit as the value of their land gets unlocked with opening up of areas.
All said, an investor who does his homework well could end up with a full basket of stocks on which to assume different positions and outlooks. However, the wisdom of your stock pick depends largely on the quality of your homework.
STEP THREE OF TRADING IN STOCKS 101: HOW TO PICK BARGAIN STOCKS IN THE STOCK EXCHANGE
Once the investor has narrowed down the region and sectors that promise healthy returns in their stock trading endeavors, pin pointing the actual bargain stocks is their next challenge. To navigate this hurdle, an intimate knowledge of certain stock metrics is needed. These stock indices include: The price to earnings (P/E) ratios; stock liquidity as indicated by the numbers traded over a period vis a vis the issued stocks; the Net Asset Value (NAV) of a stock and the Earnings Per Share (EPS).
These stock when interpreted together, paint a picture of the true value of a stock. Remember, price is what you pay while value is what you get. Thankfully, these measures are readily available online from the business sections of your local daily and stock data vendors.
As daunting as they sound, they are actually fairly easy mathematical measures that anyone competent in basic arithmetic can navigate. We shall discuss each of these stock indices in our next part of this series. We shall digest them so as to enable your use of them to good effect whilst trading in stocks.
Till next time, Happy Stock Trading
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