Oran Hall | Tips for novice stock market investors
Published:Sunday | March 1, 2020 | 12:28 AM
ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER
QUESTION: I am very interested in the market. I have been for a while. For a novice, how much in your opinion would be a practical amount as a beginner in the local stock market, and what's the difference between a dealer and a stockbroker? Is it also possible to direct me to a competent broker? – Stewart
FINANCIAL ADVISER: How much you choose to invest in the market is a decision which only you can make. You should ensure, though, that you do not use the funds that you need for your recurrent expenses or to cover short-term commitments. Neither should you use funds that you cannot afford to lose a portion of.
A stockbroker is a company or person authorised to buy and sell securities on the stock exchange on behalf of others, such as individuals, pension funds and companies, and for themselves. Stockbroking companies must be members of the stock exchange, and individuals who are stockbrokers must be employees of a member firm or company.
Stockbroking companies which are members of the Jamaica Stock Exchange, JSE, are called member-dealers. The licence granted them by the stock exchange allows them to partake in the full suite of opportunities presented on the stock exchange, including the ability to buy and sell listed securities on behalf of their clients or on their own behalf and bringing companies and listings to market.
They must also be licensed by the Financial Services Commission, FSC, to carry on the business of dealing in securities, which includes buying and selling securities as agents for their clients, as principals for their own accounts, and placing and underwriting securities. The FSC also licences individuals as dealers, and companies applying for a dealer’s license must have at least one director who has a dealer’s licence or investment adviser’s licence.
Member-dealers of the stock exchange are also called broker-dealers and, apart from dealing in securities, provide investment advice to their clients, conduct and publish investment research and raise capital for companies.
I am not in a position to recommend which brokerage company to transact business with but suggest that you investigate the financial strength of several of them before you decide. It should not be difficult to get access to this, particularly if the company is one listed on the Jamaica Stock Exchange. Make an appointment to speak with representatives of some of these companies so you can be guided in making a decision.
Selecting a broker
To get the best service from your broker, state clearly what your objectives are and ask how the broker will go about helping you to realise them. Learn as much as you can about the brokerage house and broker as well, including speaking to your friends or acquaintances who have previously dealt with them. The web pages of the brokerage companies are full of information on the services they offer. Learn as much as you can from them and maintain a keen interest in your account by keeping in touch with your broker and the brokerage house.
The JSE has a list of all stockbrokerages on its website – jamstockex.com/investor-centre/jse-brokers/ – but you may also check the Yellow Pages under 'Investment Advisory and Securities Service', and 'Stock and Bond Brokers'. You will see companies under these headings that are not stockbrokerages. Some describe themselves as fund managers and others as portfolio managers, asset managers or wealth managers. Although these companies do not themselves put through transactions on the JSE, not being stockbrokers, as investment dealers licensed by the FSC, they are able to buy and sell listed securities for their clients through the member-dealers of the stock exchange.
The stock exchange monitors the financial status of all broker-members and can intervene and run or wind up their affairs in situations where the interests of their clients are at risk but, if a brokerage company fails, their clients are protected under civil law.
Additionally, the Compensation Fund, administered by the board of the Jamaica Stock Exchange, provides compensation to clients of member-dealers who have suffered pecuniary loss due to fraudulent misuse of securities, or documents of title to securities, or of other property by member-dealers or any of their directors or employees. The fund does not, however, provide protection against losses resulting from fluctuations in stock prices.
You do not need a large sum of money to buy ordinary shares on the JSE; you can buy 100 units of any company, but its cost is dependent on the unit price.
To be able to invest in the market, you need to open an account with a stockbroker – an investment dealer authorised to trade on the stock exchange – and one with the Jamaica Central Securities Depository with the help of your broker.
Oran A. Hall, principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.