Purchasing Stocks: Tips to Help You Make the Right Decision

Steve Muriithi.jpg

Article by: Steve Muriithi

Publication date:

When it comes to purchasing stocks, your choice will, largely, be informed by your personal financial goals and investment strategy. What do you want your investment portfolio to achieve? Do you want to buy and sell within a certain time frame? Are you in for the dividend payouts or are you investing to supplement your retirement? Are you a risk-taker or are you risk-averse?  It’s advisable to have a diversified portfolio to minimize market shocks; so once you've determined the answers to these questions, identify the companies that capture your interests. Here are some factors that you may want to consider to help you make a decision that is right for you.

Firm’s fundamentals: Before investing in a firm, understand what it is involved in, what are its product and or services? Seek out as much information as you can about it. There is plenty of information you can get from the internet these days. Do a Google search and gather available news reports, visit the firm's website. You can also ask your stockbroker for this information.

Also read: How to Start Investing in the Kenyan Stock Market: A Beginners Guide

Capital appreciation: If you are investing for the purpose of selling at a profit, then your target would be under-valued stocks in the market.  Ideally, if a stock is trading at its 52 week low, that’s a sign that it’s a good buy. This, however, does not mean that it can’t go further down. The price could head in either direction. It is, however, advisable to purchase when the price is low and sell when it shoots up. Investors with a high-risk appetite will select this investment route. Information on the stock price movement on a 52 week period is available on the daily newspapers.

Dividend payouts: This type of investor will be looking at solid firms that pay regular dividends. It’s ideal for investors who do not want to constantly be keeping a close eye on the firm in the course of the investment period. Regular dividend payments provide investors with a sense of security. The question you need to ask yourself is if you will be re-investing your dividends to achieve the benefits of compound investing.

Capital preservation:  An investor who wants to have their cash held in stable firms will opt to invest in firms that do well in good and bad seasons. This is ideal for those who have a low appetite for risk. Stability will be your guiding yardstick. One way to identify stable firms is by observing how they perform when the market conditions are stable and when the general market is struggling, otherwise known as a bear run. If the firm only takes a dip when there is general turbulence in the market it would be a good pick. But if the firm performs poorly both when the market is stable and in turbulent times, that’s a red flag. For instance, due to the uncertainty brought about by the Covid-19 situation, the Kenyan stock market has gone down and so have many others globally.

Industry analysis. Be aware of the trends affecting the industry in which your investee firm operates in. You can get these by keeping abreast of the daily news or be guided by the weekly reports generated by the stockbrokers. Is the firm a market leader? How is it performing relative to its peers in the industry? How do new government regulations affect its ability to perform well? Are these new requirements in its favour? What is the industry outlook?

Investment period. How long do you want to hold on for this stock? For those interested in capital appreciation, their timelines will be different from those investing in the long run, say for example augmenting their retirement income. When do you want to access your capital investment plus the profit? Do you want to bequeath the subsequent generation with your portfolio?

By combining your investment strategy, clear trading plan, recommendations from your stockbroker and research that you will have done, you will be on your way to making your first stock purchases or strengthening your existing portfolio.