Home Gambling Investing in stocks is not a game

Investing in stocks is not a game


Who invests and who bets?

Investing in any asset class is a trade-off between risk and return. It is established in portfolio management that there are four major asset classes: cash and cash equivalents, stocks, fixed income securities and real estate. Besides what is known as systematic or undiversifiable risk, which is inherent in the entire market or market segment, each asset class has its own risk. Risk appetite largely determines whether one is an investor, a speculator or a gambler.

An investor can be an individual or a corporation who invests money in a business with the expectation of a good return in the form of capital gains, interest, dividends, bonuses, other retirement, etc., on a constant basis. A savvy investor works closely with a professional advisor to minimize risk and maximize return. A speculator invests in risky assets for a huge profit. But he does it with calculated risk.

However, a player bets money on a very risky investment or bets a huge sum of money in the hope of an extraordinary profit. A gambler is ready to lose all of his money or property in expectation of an unrealistic return. Investments that fall under gambling include casinos, lotteries, horse trading, card games and bing

Some people, either through lack of knowledge or deliberate mischief, classify stock investing as gambling. This is an error. Many investors have gotten their fingers burned for a number of reasons, including not seeking advice from a stockbroker. Others buy stocks with no investment objective, lack of knowledge of investment time horizon, opaque knowledge of company operations, corporate governance structure and competitive advantage ., inability to understand one’s risk profile, investing short-term funds in long-term assets, called mismatch in corporate finance, investment based on herd instinct, just because many people buy the actions and misplaced get-rich-quick ambition, among others.

Unavoidable questions before buying stocks

There are questions an investor cannot ignore before investing in stocks, but those who invest in casinos and other forms of Ponzi schemes rely solely on unrealistic forecasts, designed to attract investors. unsuspecting and over-ambitious.

Why would an investor want to be a shareholder of a blue chip listed company without information about its size, fundamentals, such as price to earnings ratio, debt to equity ratio and book to book value ratio, performance of the company’s stock compared to its peers, ownership model, any mutual fund portfolio, history of dividends, revenue growth, history of volatility and the extent to which external shocks such as political unrest, economic dislocation , unfavorable government policy, the emergence of a pandemic, the energy crisis and a host of others can have a negative impact on the company’s turnover and bottom line?

Stock brokers as investment doctors

This is where securities professionals commonly known as stockbrokers become gatekeepers. These professionals monitor all sectors of the economy. They do a lot of analysis before recommending to buy, sell or hold to an investor. Stockbrokers are not God.

A sudden event may negate their analysis, but they encourage their clients to diversify their holdings to hedge against unforeseen risks. Stock investment processes and procedures show that it is not about gambling. It is an investment with calculated risks and there are mitigants. Anyone who loses their life savings to a stock investment must have violated due process in investing or been duped by a scammer.

Avoid Fake Investment Advisors

Licensed stockbrokers and the companies they work for are heavily regulated by the Nigerian Securities and Exchange Commission (SEC) and may be sanctioned by professional bodies, such as the Chartered Institute of Stockbrokers (CIS) and the Association of Securities Dealing Houses of Nigeria (ASHON).

A list of natural and legal persons who are members in good standing can be confirmed by these institutions. Investors should contact stockbrokers at every stage of their investment decision. Those who understand the market make money throughout the year. Whether bearish or bullish, this is a market for all seasons.

Are there risk-free investments?

In corporate finance, the federal government bond is ranked as the safest and therefore risk-free. This is based on the fact that it is “backed by the full faith and credit of the government”. The perception is that bonds have no risk of default. The income from the bond is exempt from state and local taxes. The link is called golden edge.

However, the risk-free attribute of the bond is distorted by the risks associated with it. The bond is not isolated from inflation risk, currency risk, interest rate risk, reinvestment risk, liquidity risk and even default risk. After all, Argentina, Ecuador, Lebanon, Ukraine and Venezuela had defaulted on their sovereign debt at one time or another.

Stock prices can drop significantly in a volatile market. Volatility can be caused by bad corporate news, such as weak earnings announcements, controversial government policy, or any other external event beyond a company’s control. However, falling stocks are also a buy signal for companies with strong fundamentals. Stock markets operate on self-correction, based on certain variables, so after a while the stock price will bounce back to its fair market value.

However, those who understand the psychology of the market need to take advantage of occasional price fluctuations. Shareholders are exposed to credit risk when a company goes bankrupt, which leads to asset stripping. The law provides that shareholders can only be considered after dealing with the company’s creditors. There is no investment without risk. But gambling is the mother of all risky investments. Players often lose everything.

*** Sola Oni is the Managing Director of Sofunix Investment and Communications