Investing In The Stock Market

Q: How can I buy and sell shares?
A:

Once you determine which shares you wish to buy or sell, you can visit  any of the seven stockbroking firms. If you wish to purchase shares but  are unsure about which one is best suited to your investment  objectives, the broker can advise you accordingly but the final  decision depends on you.

     

Before  a broker can buy or sell shares on your behalf, you must open an  account with the broker and an account with the Trinidad & Tobago  Central Depository (TTCD) by completing and signing a client agreement  in the presence of a witness. In opening an account, the broker may  require certain information such as your name, address, age, investment  objectives, National ID number etc.

     

The  generally accepted method of payment for trades executed is by cash or  cheque and should be made by the settlement date, which is currently  three business days after the date on which the transaction was  executed.

     

If  you wish to sell shares and have the share certificates in your  possession, you will have to deposit these shares into your TTCD  account before they can be sold. Once the registrar of the company  confirms that the shares are valid, the broker will then be able to  place an order to have the shares sold. This process usually takes  three (3) business days.

     

When placing an order to buy or sell shares the following types of orders can be used: 

 

  • Market Order: This order allows the broker to buy or sell shares at the best possible price in the market.     
  • Limit Order: This order restricts the purchase or sale of shares to the price specified by the investor.
        

After  the broker has purchased or sold shares on your behalf  you will  receive a contract note which is a legal document which specifies the  volume and value of shares bought or sold, the transaction price, the  Stock Exchange transaction charge and the commission payable to the  broker. In the case of a purchase, the contract note is your proof of  legal ownership until the settlement date.

     

It  is important, to remember that the Stock Exchange does not own any of  the shares that are traded nor does it buy or sell any of the shares  that are made available on the market. These shares are owned either by  organizations or members of the public.

     

Many  small investors who would like to buy shares don't do so simply because  they do not know how to go about it. Many people have the false idea  that investing in the stock market is only for wealthy individuals

   
Q: What shares can be bought and sold?
A:

Only the shares of companies registered with the Securities and  Exchange Commission and listed with the Stock Exchange, can be bought  or sold on the Exchange. This means that a company wishing to make its  stocks available for trading must meet the Listing Requirements of the  Exchange, which are a set of pre-determined standards.

     

Presently, there are thirty two (32) companies listed on the First Tier Market of  the Stock Exchange, two (2) companies on the Second Tier Market and  three (3) on the Mutual Fund Market. These companies are classified  into the following sectors, based on the nature their business  operations,

       
  • Banking
  • Conglomerates  
  • Property
  • Manufacturing I
  • Manufacturing II
  • Trading
  • Non-Banking Finance
  • Non-Sector Companies
     

Currently  there are 40 securities listed on the Exchange which differs from the  number of listed companies because some companies have both ordinary  and preferred shares listed.

   
Q: When can I buy or sell shares?
A: Trading takes place on all business days, excluding public holidays and  Carnival Monday and Tuesday from 9:30am - 12:00pm and is open for  viewing by the general public. On these days, the stockbrokers or  traders enter orders via the electronic trading system from  their respective offices to buy or sell stocks on behalf of their  clients.
   
Q: What are the benefits of buying shares?
A:

Investors in the local stock market have the opportunity to own shares  in some of the largest and most profitable companies in the country and  in the region. Shares provide investors with the opportunity to earn  extra income from dividends, which are paid out of the profits of a  company and an opportunity for wealth accumulation and appreciation.  Shares can also be used as collateral to obtain loans from financial  institutions.

   
Q: How are prices determined?
A:

The Exchange does not fix the price at which a stock may be bought or  sold. The price is determined by the demand and supply for the  security.

     

Between  8:00am and 9:30am on every trading day, there is a pre-open session  during which brokers enter orders into the trading system, but they are  not immediately matched. The pre open market state determines the  opening price for each security which may be different from the  previous day’s closing due to news about the company released  overnight, changing economic forecasts or because of a trading halt.  The trading system determines the total volume available on  both the buy and sell side of the market at each price level to arrive  at an opening price.

     

Once  the market opens at 9.30 a.m. trades are executed on a continuous basis which means that any security can trade at any time during the trading  session. All orders entered are queued by price and  then by time using the FIFO methodology. Trades are also executed using  these criteria.

     

The  closing price of a security listed on the Exchange is the Volume Weighted Average Price (VWAP). VWAP is calculated as the total value of the trades executed for a security divided by the total volume of shares traded.

    

An example of the VWAP Calculation is presented below:

VWAP Closing Price Calculation

Trades

VWAP Closing Price

First

Second

Third

 

5,000@ $15.00

1,000@$15.75

500@16.00

$15.19

($98,750/6,500)

 

If  a security does not trade in any designated trading session, the  closing price of that security will be the same as the closing price of  the previous day.

   
Q: How can I track the performance of the Stock Market?
A: The Daily Trading Summary is published in the daily newspapers and can  also be accessed on the website of the Stock Exchange. Interested  individuals can also subscribe to receive the trading summaries via  email at the end of every trading day.
   
Q: What do I do if I have lost or misplaced my physical certificate?
A: Go directly to the Company Registrar of the listed company. Usually you  will be required to sign a letter of indemnity and have information on  your lost certificates published in a daily newspaper for one day. Upon  completion of this exercise, a new certificate will be issued.
   
Q: What is the relationship between Stockbroker & Client?
A:

The relationship between stockbroker and client should be one of  confidence and goodwill. As frequently happens, the stockbroker will  have relatively varying amounts of his customers' cash and/or stocks.  At other times, the client may be in debt to his broker. Custom, law  and good business practice regard certain standards as fundamental to a  satisfactory relationship between client and stockbroker. It is  important to note that before dealing with any firm, an investor must  ensure that it is a member firm of the Exchange and has a duly  registered and licensed stockbroker.

     

As  a new investor, you may not know much about the financial strength,  business practices and technical competence of a stockbroking firm. The  Exchange however, maintains constant surveillance over member firms to  ensure compliance with operational procedures and capital rules.

     

While  the final decision about which companies to invest in is usually made  by the investor the broker should nevertheless offer sound investment  advice based on a careful assessment of the client’s financial  objectives and develop an investment portfolio based on the level of  risk that the client is willing to undertake. The stockbroker should do  proper research, and should not make any false statements or  misrepresentations regarding the value of a particular stock or its  operations. The customer must remember however, that stockbrokers can  make errors in judgment, and may not always interpret the market  correctly.

   
Q: Can I have more than one broker?
A: Yes
   
Q: If I have a formal complaint against my broker, what should I do?
A:

Submit the complaint in writing to the Chief Executive Officer of the Trinidad and Tobago Stock Exchange Limited.

   
Q: What type of information is required when making an investment decision?
A:

Shares or stocks should be selected through the process of investment  analysis and portfolio management, functions which can be performed by  your stockbroker. The process of investment analysis takes into consideration the operational and financial policies of a company, its operations in the context of the larger economy, its sources of growth and the quality of its management team. When this is completed, the stockbroker selects an investment portfolio or a mix of different stocks, which best fits your risk tolerance and investment objectives. 

 

Some of the tools used in investment analysis are:

a) Balance Sheet
b) Income Statement
c) Retained Earnings Statement
d) Statement of Changes in Financial Position
     

The  Balance Sheet shows what a company owns, what it owes and what it is  worth; in other words, its financial position as at a fixed date at the  close of a financial period.

     

The  Income Statement shows how profitable a company was over a financial  period by summarizing and/or detailing revenue and expenditure (income  and expenses).

     

The  Retained Earnings Statement is part of the Balance Sheet, though it is  not unusual to find it separate; it provides a record of the profits  that have been kept in the business year after year.

     

A  Statement of Changes in Financial Position tells you where the money  came from (the source) and how it was spent (the application, during a  financial period).

     

Some useful ratios are:
Earnings per Share (EPS)
This  is the revenue earned during a year divided by the number of  outstanding ordinary shares. It should be noted that when a company has  preferred stock, the dividend due to preferred shareholders is deducted  first. For example, assume a company has Net Income of $1,500,000 and  outstanding share capital of 1,000,000 shares. The earnings per share  is calculated as follows:

     

Net Income= $1,500,000
Dividends on Preferred stock= $480,000
Applicable to Ordinary stock= $1,020,000
EPS = $1,020,000    
           1,000,000
        = $1.02

     

Price Earnings Ratio (P/E)
This  is the share price of an ordinary share divided by the earnings per  share. The P/E is sometimes referred to as the "multiple", because it  shows how much investors are willing to pay per dollar of earnings. P/E  ratios are useful when compared to the P/E ratios of other companies in  the same industry, the overall market or the company’s historical P/E  ratio. The P/E ratio is calculated as follows:

     

Share price per ordinary share = $10.00
Earnings per share = $2.00
Price Earnings Ratio (P/E) = $10.00
                                         $2.00
                                     = $5.00

     

Dividend Yield 
This  is the annual dividend payments divided by the share price and is  usually expressed as a percentage. The dividend yield is calculated as  follows:

     

Annual Dividends = $0.50
Share price = $5.00
Dividend Yield = $0.50
                       $5.00    
                     = 0.10 or 10%