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Editors Pick

Money management guides for stock market trading

Stock investing is not just an art, it is a science and those that understand the science of the stock market are prone to succeed.

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Stock investing is not just an art, it is a science and those that understand the science of the stock market are prone to succeed. Stock trading activities should not be engaged in haphazardly rather it should follow a process.

To be successful, stock market trading should encompass three major processes; price forecasting, timing and money management.

  • Price forecasting is a process by which the investor finds out or gets an indication of which way the market is expected to trend. This is a critical first step in trading because it helps the trader or investor decide on when to enter the market and when to exit.
  • Timing, on the other hand, helps the investor to determine specific entry and exit points. It is possible to forecast the direction or trend of the market correctly but if your timing is incorrect, you still can end up losing money in a trade. So, to be successful in stock market investing, you should not only know or predict the direction of the market correctly, you should be able to jump in or out at the right time.
  • Money management as it relates to stock investing deals with such things as deciding on the allocation of funds, portfolio makeup, how much money to invest or risk in one listed company stock, the type of stops and whether to trade conservatively or aggressively.

Basically, the three ingredients of successful stock market investing noted above are so intertwined that price forecasting tell the trader what to do in terms of buy or sell, while timing helps him or her decide on when to do it with money management capping it up with how much to commit to the trade. With those processes, you know the what, the when and the how.

Sweet and methodical as the process sounds, this blog article will dwell on money management guidelines:

  1. Don’t invest more than 50% of your funds in the stock market. Just like asset allocation plays a vital role in portfolio performance, fund allocation plays similar vital role in helping you manage the money you are staking in the market. The other 50% should be placed in Treasury Bills to act as a reserve should the market turn against you in the future. So, if you plan to invest N100, 000 into the Nigerian stock market, use only N50,000 for stock trading and leave the other N50,000 in CBN Treasury Bills.
  2. You should not commit more than 15% of your funds to one trade. It is a well-known fact that diversification is very virtuous in stock investing, so by committing not more than 15% of your capital into one trade or position, you are ensuring that you will only lose about 15% of your investment should anything bad happen to that one position. Risk management can’t get better.
  3. Do not risk more than 5% of your total equity in any trade. By committing to not loosing more than 5% of the unrealized gain you have already accumulated on a particular position, you will be guided as to the appropriate time to exit a position or how and when to place a stop loss order, if you have to.
  4. Do not buy on margin and if you have to, limit it to 20% of your committed funds. Currently, the Nigerian market does not allow margin trading, but this may be permitted in the future. For those trading in market that allow margin trading, the purpose of this guideline is to protect against getting too heavily involved in debt which may be catastrophic should the market turn the other way and the margin calls come calling.
  5. Make use of protective stops to guide against loses. While protective stops help protect profits and limit loses, such order should be placed in line with the market volatility. The more volatile the market is, the looser the stop should be.

With better money management, investors will be in a position shield themselves from calamities of market melt downs and financial crisis.

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

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    Currencies

    DEVALUATION: CBN updates website to official rate of N360/$1

    The central bank of Nigeria has devalued its official exchange rate from N307/$1 to N360/$1.

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    CBN website states oil price is still $61, Naira under pressure as Nigeria records poor export earnings, 4 key sectors the CBN plans to pump money into

    Just as Nairametrics reported, the Central Bank of Nigeria has devalued its official exchange rate from N307/$1 to N360/$1. The apex bank has now reflected this change on its website signaling a confirmation. The bank is yet to issue a press release to this effect.

    The CBN has now officially devalued by 15% moving from N307/$1 to N360/$1. Depreciation at the “market-determined” I&E window is 5% having moved from N360/$1 to N380/$1

    Devaluation: Nairametrics reported yesterday that the Central Bank of Nigeria (CBN) sold dollars to banks at N380/$1 in a move signifying a devaluation of the currency. Banks trading at the Investor and Exporter (I&E) window bought dollars at N360/$1 from the CBN on Friday, March 20, 2020. The I&E window is the official market where forex is traded between banks, the CBN, foreign investors, and businesses. The central bank typically buys or sells in the market as part of its intervention program.

    The CBN has updated its website with the official exchange rate.

    Nairametrics also got hold of a letter from the CBN to banks informing them of the new exchange rate for dollars flowing from the International Money Transfer Operators (IMTOs). According to the CBN, IMTOs will sell to banks at N376/$1 while banks will sell to the CBN at N377/$1. The CBN will sell to BDC’s at N378/$1 while the BDC’s will sell to end-users at “no more than” N380/$1.

    Single Exchange Rate: A report yesterday also suggested that the CBN also planned to move to a single exchange rate policy for determining the price of the dollar. A senior central bank official who does not want to be identified, said, ‘Today we allowed the rate at the importer and exporters (I&E) window to adjust in response to market developments.’

    The central bank has now made an apparent u-turn after it had initially that the “market fundamentals do not support naira devaluation at this time” detailing reasons why it did not need to devalue.

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    Falling oil price: Oil prices fell to under $20 on Friday before climbing back up to settle at $23 per barrel. Nigeria’s Bonny light trades at $26 while the benchmark Brent crude trades at $29 per barrel. In response to the crash in oil price, Nigeria’s announced a cut to its 2020 budget by N1.5 trillion as it faced the reality of a potential drop in its revenues. Nairametrics also has information that state governments are getting jittery about their ability to sustain salary payments as a reduction in their federal allocation “FAAC” is anticipated.

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    Career tips

    Investment options for salary earners

    Investment options for the salary earners
    #Investing #Entrepreneurs #Investment #Salary #Wages

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    Investment options for salary earners - bank loan

    Recently, one of the readers of my articles asked to know what investment options are open to salary earners. A salaried individual is like everyone else except that he or she has a fixed monthly income. This implies that their investments and expenses have to be managed strictly according to their fixed monthly income.

    Since salary is assumed to be the only source of income for the salaried, it is advisable that such an individual fortify himself financially before investing so that adverse investment performance will not have untold effect on him and his family. Therefore, if you are a salaried prospective investor, you need to:

    READ: Where to invest N500,000 right now

    Get life insurance

    Most families in Nigeria are single income families so much such that if anything bad happens to the income earner, the family gets shattered, at least financially. Again, given the risks inherent in capital market investments, it is only prudent to have a life insurance as a first step in one’s investment journey. It is very baffling to see many investors very deep into the market, yet they do not have life insurance.

    [Read Also: Understanding the risks in bond investing]

    Life insurance is and should be a basic part of any financial plan. Life insurance is a protection for loved ones against financial hardship arising from the death of a breadwinner. This is even more important today than ever before with high cost of funeral expenses, college education and medical bills. So, the first investment option for a salaried individual is to get a life insurance.

    Prepare for financial emergencies

    Life is full of surprises, emergencies do happen, jobs are lost without notices, and even good investment opportunities emerge sometimes suddenly. There is, therefore, the need for a cash reserve to help weather the financial storms and emergencies when they come calling.

    READ: SEC issues pre-notice on cancellation of certificates of 157 inactive CMOs

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    Cash reserves do not only provide for emergencies, they also help to ensure that investments are not liquidated prematurely or at inopportune times to cover unexpected expenses. There are no hard and fast rules on what the exact amount of the required cash reserve should be, but most financial experts and planners will advise that an amount that equals about six months of living expenses be set aside.

    So, as a salaried person, your next investment should be to have a cash reserve. A cash reserve should not necessarily be in a savings account or under the mattress; it could be in an interest-bearing money market account, money market mutual funds with low to zero luck-up period or another form of very liquid investment that is readily convertible to cash without loss of value.

    [Read Also: Understanding the risks in bond investing]

    Know your risk appetite

    As a salaried and fixed income individual, your risk appetite is most likely going to be low as well as your risk tolerance, although your extended family profile could change all that. You need to know or understand your risk tolerance before you engage in any capital market investment.

    Your risk tolerance will and should drive the type of investments you go into. Your risk tolerance depends on your psychological makeup, your current insurance coverage, presence or absence of cash reserve, family situation, and your age among others.

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    READ: Here’s what will happen to Nigeria’s insurance sector in the short to medium term

    Talking about family situation, it is reasonable to think that a married individual whose children are still in school will be more risk averse than an unmarried person. On the other hand, older people have shorter investment time horizon within which to make up for any losses. the reason for this is because the older you get the less time you have to work to recoup on losses.

    In that case the risk tolerance of an older man will be less than those for younger folks. Again, the more cash reserve and insurance coverage you have, the more your propensity to take risk. Now having known your risk tolerance based on the underlying factors, you can then define your investment objectives

    [Read Also: Important tips on how to profit in a bearish market]

    Set your Investment objectives/goals

    Having met those essentials above, you are now ready for a serious investment plan or program. A good investment plan starts with investment objectives. Investment objectives are the force that determines what you invest in. Investment objectives range from capital preservation, to capital appreciation and constant income generation.

    Capital preservation as an investment objective implies that you, the investor, aim at minimising the risk of loss by maintaining the purchasing power of your investment. So, if you are risk averse or you will need money from your investment soon for children’s education or for building a house or you are nearing retirement, this should be your objective.

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    READ: CBN debits banks N216.1 billion for CRR compliance

    Investors whose aims are to see their investment portfolios increase in real terms over a period of time are better suited for capital appreciation as an objective. This is better for investors that are more risk tolerant and those with more potential to recoup on losses along the way.

    If you are already retired or nearing retirement, and therefore depend on your retirement plan supplemented by investment income, you need an investment that generates income rather than capital gains. In that case, your investment objective should be current income generation. It is always good to have investment goals stated in terms of risk and returns.

    [Read Also: I-Invest generates over N2 billion transaction in less than 6 months]

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    Decide on asset allocation

    Armed with the knowledge of your risk appetite and investment objective, you are now ready to decide on what to invest in, and how much to invest in any asset class. This takes you to asset allocation decisions. Asset allocation involves dividing an investment portfolio among different asset classes based on an investor’s financial requirements, investment objectives and risk tolerance.

    A right mix of asset classes in a portfolio provides an investor with the highest probability of meeting his/her investment objectives. Asset allocation is the most important investment decision an investor can make in a portfolio because it demonstrates an investor’s understanding of his or her risk preferences and return expectations.

    READ: How to build a profitable Mutual Fund Portfolio

    It is good to strive for a diversified portfolio. Unfortunately, the Nigerian market does not provide a lot of asset classes for optimal diversification, but diversification can be achieved across sectors or industries within the few asset classes in the Nigerian stock market.

    Decide on how to invest

    There are different ways to invest in the capital market. You can invest directly by making the stock selections by yourself, thanks to the online stock trading platforms that abound the world over. This implies that you have what it takes to conduct the required research and analysis of the companies whose shares or stocks you wish to buy.

    [Read Also: How I Would Invest My Mother’s Retirement Funds]

    It also implies that you have what it takes to know when to sell or add to existing positions. Another method is to have someone “do the heavy lifting” for you. In this case, that someone, often times called fund manager or portfolio manager, does the research and analysis and selects shares that suit your investment preferences, investment objectives, risk tolerance and appetite as well as your investment time horizon.

    This route is most suitable for investors that lack the knowledge and time for the required research and analysis. If you decide to go this route, mutual funds are the best bet for you.

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