Are you Gambling with Stocks?
Question: People say that when you invest in the stock market, you should be putting in money that you are willing to lose. Does this mean that stock market investing is equivalent to gambling? – asked at “Ask a friend, ask Efren” free service available at www.personalfinance.ph and Facebook.
Answer: Investing in the stock market is not gambling. However, if you are buying and selling stocks without really knowing what you are getting yourself into, then you are gambling with stocks.
Use the following easy to remember, non-comprehensive guide to determine if you are gambling with stocks.
1. GRO—Are you taking care of your GRO?
Before your mind runs away with so many ideas, GRO stands for goals and risk objectives.
Instead of asking if a stock is a good investment, ask yourself if the expected return and risk in investing in a particular stock is in keeping with your own GRO.
2. SET—You need to have the Size of funds, Expertise and Time to fully manage your money to invest in the stock market.
Size affords you the in-depth research that you will need to pore over before you invest.
Expertise allows you to understand not only the in-depth research but also appreciate the art of trading in stocks. And since serious investing is much like running a business, you should have the time to fully manage your investments.
3. BYII—As the Securities and Exchange Commission (SEC) advises, Before You Invest, Investigate.
To supplement your fundamental analysis on companies whose stocks are listed on the stock exchange, you can do inexpensive online research through the SEC’s iView page.
4. Alphabeta—Now, more than ever, is the time to look at risk as well as returns.
Beta is a measure of volatility of a stock’s historical and expected returns versus those of a benchmark like the Philippine Stock Exchange composite index or PSEi.
Beta can be obtained for free for Philippine stocks from your friendly stock broker or from www.reuters.com.
Alpha is a bit more complicated in that it uses a stock’s historical or expected beta, a risk-free rate, and data on historical or expected stock returns to arrive at the excess return of a stock over what it should have returned or what it should be returning.
Alpha can be used for a single stock or a portfolio of stocks.
Bottom line is that stock investing is serious business and not gambling.
You need to do much more than listen to tips to conduct do-it-yourself investing.
And if one or more of the criteria on being all SET is missing, you would be better off having your money managed by the experts through pooled funds or investment management accounts.
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Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines and can be reached at 0917-5050709 and efren@personalfinance.ph.
To know more about personal finance, visit our website at www.personalfinance.ph for the free tools. And if you want to learn more about becoming a Personal Finance Adviser, visit www.personalfinance.ph/fptraining.html. Attend the 59th RFP program this January 2017. For more details, inquire at info@rfp.ph or text <name><e-mail><RFP> to 0917-9689774.
Source: http://business.inquirer.net/220020/are-you-gambling-with-stocks
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