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Interesting questions
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Interesting comments
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Try asking
your financial advisor, or share broker, the following questions, and
see how they respond: |
Here are some
corresponding comments and replies to the questions on the left: |
| 1 |
Guarantee
investment increase in value?
You might recommend that I purchase
some shares in a company, or units in a managed fund.
Can you guarantee that the value of the investment will not fall by
more than 10% while I hold it? |
A
brave person might try to guarantee that shares or managed fund units
will not fall in value;
but most would not guarantee this (see Capital Guarantee notes below). |
| 2 |
Capital
Guarantee?
Do you offer a capital guarantee on the investment? That is, regardless
of the actual performance of the underlying investment, my invested
capital will not fall in value. If so, what is the
extra cost to me? |
Some
companies do offer a "Capital Guarantee".
BUT this costs money and they often have fine-print terms and
conditions which are not very favourable. |
| 3 |
Share
price fall?
Let's say that my shares are falling in value.
And let's say that they might continue to fall
(like Telstra did from $9 in 2000 to $2.60 in 2010).
Would you ever suggest that I sell my shares
to avoid a bigger capital loss? |
If
a company's share price is falling, and confirmed to be in a "down
trend", then it is likely to continue falling (basic technical
analysis
theory). Some stocks can
fall by up to 90% over several weeks or months, and then wind up
resulting in a
loss of funds. Why would we hold a stock that might fall to zero value?
It is very useful to have, and to implement, a Stop Loss. See more
information on Exit strategies and Stop
Loss concepts. |
| 4 |
Catch
a falling knife?
When a company's share price falls, are you likely to recommend to me
that it is cheap, so I should buy some? And if I am already holding
them, perhaps I should buy more? |
When someone
says to you that the shares are cheap, and you should buy some, what
they are not telling you is that the share price might get even
cheaper. And in fact it might continue to get cheaper and cheaper and
cheaper. There might be a sound underlying reason why the stock is
being sold off. Don't forget that this is what the institutional
investors do to retail investors - sell over-priced stock to
unsuspecting investors while they can get away with it. |
| 5 |
Share
price valuation?
You have told me that company "xyz" is worth "X" amount. How did you
arrive at that valuation? And why is your valuation correct when other
brokers and advisors have a different valuation?
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It is
important to remember how an analyst or broker arrives at a share price
valuation. They take a lot of known factual information about the
company and it's past performance, and the company's operating
conditions and environment. Then they apply some assumptions for global
economic conditions, local economic conditions, competitors' likely
performance, the customers' likely purchasing habits, the weather, and
a whole lot of other things. All of this information is fed into a
spreadsheet model, and out pops an answer for the current value of the
company's shares, and a value in 6 or 12 months time. That is, the
resulting price valuation is their "opinion", based on the
assumptions in their model.
See more information about intrinsic
value and value investing.
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| 6 |
Buy
/ Hold / Sell recommendations
Your broking company has allocated a buy recommendation to a specific
company that I follow. But I notice that another broker has allocated a
sell recommendation. One of you must know something that the other
doesn't know (but that would be inside information, wouldn't it?).
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Firstly, is
their recommendation based on their price target in one month's time?
or 6 months? or 12 months? or longer? The usefulness of their
recommendation will depend on your own investing horizon, and investing
time frame.
Secondly, see the comments above regarding share price valuation to
understand that their recommendation is only an opinion, and many
people are entitled to arrive at different opinions.
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| 7 |
Down
trends?
Why
should I buy shares that are falling in value? Shares such as Telstra
fell in the years 2000 to 2010 when a weekly price chart showed a
downtrend
in place. During the GFC, Babcock and Brown, and ABC Learning Centres
(just to name two) fell in value, then stopped trading, and
liquidated. |
If
you follow classical technical
analysis
principles, then a share price
which is falling is likely to continue falling, so you might be
treading on thin ice by buying them. Many traders will wait until the
downtrend is confirmed to have finished, and an uptrend is inevitable. This is one of the basic tenets of Dow Theory. |
| 8 |
Is the investment liquid?
Okay,
you have recommended that I buy some shares in company "xyz". If I want
to sell in a hurry, will I be able to do that? That is, are the shares
liquid? |
Of the 2,000+ shares on the Australian
market, less than 500 of them are deemed to be "liquid". That is, if
you want to sell them in a hurry, you might find there are no buyers
who want to buy them, so you will be left with a share parcel that no
one wants to buy at your asking price. You could then reduce your
asking price and offer them at a discount. But even then you might have
trouble selling them. Especially if there is a stampede of sellers
wanting to do likewise. See more information about Stock liquidity.
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