Small Players in the Stock Market

Retail investors who are small players often get caught in the swings of the stock market. He makes investment decision in a particular stock based on information from several sources:

1. information from his stock brokers/remisiers

2. stock analysis from newspapers, investment magazines, websites

3. information from friends and colleagues

4. general stock market movements

5. economics of own country and the world

6. business related policy decisions of the government

7. political situations of the countries

8. own research of stocks (e.g. reviewing financial statements)

But how many small investors are savvy enough to analyse whether a stock is worth buying or when it is due to be sold? Some may just go with the flow of the current market trend of a particular stock. Some may just go by gut feel.

We often hear investment gurus advocating value investing, go for the fundamentals of the company. This is well and good, but how can ordinary investors know the potential of the company in generating future value? They are busy with their current jobs which do not allow them time to spend on thorough analysis of a particular stock.

Even with the ability to understand the published financial statements and the potential of growth of a particular industry, there can be company mismanagement or even “clever” accounting which does not surface until much later. There is little comfort for the investors even when the management is dealt with by the law. The share value plummeted to just a few cents from a few dollars when they first purchased the stock.

To illustrate heartaches faced by retail investors, take the case of Informatics Holdings Limited. (Note: No judgement is made here in this particular illustration.)

Informatics Holdings Ltd. is an investment holding company that franchises computer and commercial training centers and facilitates examinations. The core business segments are Global Higher Education, Global Professional Skills Development and e-Learning (PurpleTrain.com).  

I bought the share on 20 Sep 2002 at the price of $1.33 a piece.

Its year end is 31 March of each year. The net income was steadily rising from 2000 at $12.5 million, 2001 at $17.3 million, 2002 at $21.5 million when I bought the share. Informatics is an established brand with global reach. Singapore is also encouraging the setting up of an education hub with foreign students coming to our shore. So what can go wrong with the investment?

Now the share is trading at 6.5 cents. The questionable practice of revenue recognition had shaken the market and caused a collapse of its share value. From 2004 to 2006, the net losses were $42.5M, $70.3M, $22.8M respectively.

Small investors cannot afford to lose huge investments. I will advise caution in investing and to be ready to cut loss and not to be sentimental with a particular stock.

Written on 1/26/2007 9:57 AM

Copyright © 2007, the author known as LKT in Singapore.

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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