Financial Adviser | Understanding unit trust and stock trading

QUESTION: I'm interested in doing a unit trust or a stock trade. I'm so blank as to where to go with the investment. Can you please give me some advice as to where I could get started and give the names of institutions that may offer the trade for the investment? What are the pros and cons of these investments? Is it profitable to invest in local of foreign currency?

- Teesha

FINANCIAL ADVISER: There are six unit trusts in Jamaica. They are linked to well-known financial institutions. These unit trusts offer a variety of diversified funds catering to the needs and objectives of investors. Units in the unit trusts may be purchased from the unit trusts themselves or from other financial institutions linked to them.

The unit trust management companies are Barita Unit Trust, JMMB Fund Managers, NCB Capital Markets, Sagicor Investments (Sigma Funds), Scotia Asset Management, and VM Wealth Management.

To purchase ordinary stocks, or shares, you need to make contact with one of the twelve stock broking companies which are broker members of the Jamaica Stock Exchange. One place to source the list of these brokers is www.jamstockex.com/investor-centre/jse-brokers/

You may also make contact with one of the fund managers, portfolio managers or wealth managers to make purchases of stock. These are not broker members of the stock exchange, but as licensed securities dealers, they are able to source the stock for you, but through a broker member of the stock exchange.

Although both the unit trusts and stock brokerages are staffed by persons who are able to guide you in selecting the stocks or unit trust funds which are most suitable for you, it is important for you to realise why you are making the investment so that the selection can align to what you want to achieve. Things can go awfully wrong if you make the wrong selection.

I would also suggest that you learn as much as you can about these investment instruments before taking action. You should avoid venturing into the investment world blindly, for although it can be rewarding, it can also be catastrophic.

There are good reasons why you should invest in unit trusts. The following list is not exhaustive. Unit trusts are managed by professional investment managers, thereby making it unnecessary for the investor to spend time selecting investment instruments, deciding when to buy and sell, and monitoring the performance of individual investments.

The investment funds are diversified, thereby reducing risk and offering better prospects for consistent returns. Investors may further diversify their investments by buying units in more than one fund.

Unit trusts allow small investors to participate in the financial markets as most do not require investors to invest much money. Further, as unit trusts pool the financial resources of many investors to make investments, small investors are able to participate in the ownership of financial assets they would not normally be able to invest in directly with their own funds.

It is generally quite easy to sell units as the unit trusts buy them back from investors without consideration for the state of the financial markets. Being so liquid, they can be useful where funds are needed for emergencies.

This advantage can also work against investors as it may cause them to focus on short-term gains and thus risk losing the benefits associated with holding investments for the long term.

Although charges are not as high as they used to be, unit trusts are generally costly: they incur transaction charges when they buy and sell investment instruments just as other investors do, they charge management fees, which are charged against the funds, and may also take a spread.

When unit trusts take a spread, they quote two prices - a bid price and an offer price. The former is the price they buy units for from investors, and the latter is the price they sell units for. In such cases, investors need to ensure that they do not sell for less than they pay for the units.

Although investors do not participate in the day-to-day management of the funds, it is necessary for them to devote time to evaluate their circumstances and the available unit trust options to determine the most suitable ones for them.

Investors benefit from the gains they make when they trade ordinary stock. They also tend to receive cash distributions - called dividends - from profits. These are not generally very significant and are generally paid once or twice per year.

On the other hand, investors may incur losses when they invest in stocks and may have serious challenges selling when the demand is weak for a particular stock due to general market conditions or to the general unattractiveness of the stock itself. Further, given how the stock market operates, investors do not always succeed in purchasing the stocks they order.

It can be profitable to invest in both local currency and foreign currency, but there is also the risk of incurring losses. One significant advantage of investing in foreign currency is the protection it offers against the depreciation in the value of the local currency.

You have taken the first step. Follow this up with research and seek further advice from reputable professionals.

- Oran A. Hall, the principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. finviser.jm@gmail.com