Investment in equity and investor psyche

Equity investment is an important asset class. Knowing how to invest in stocks is crucial to building a portfolio. It is worth reminding ourselves that investment in equity is not a sure winner.

When the stock market had a rally like the one since September, the volume of trade spiked on the Singapore Exchange. The recent initial public offerings (IPOs) were also keenly supported by many retail investors. Shares were doing well.

In an up market, risk appetite of investors increases on the hope to cash in on the rally. I was told that an acquaintance bought 60,000 shares on a single trade based on advice of her remisier. She had hazy idea about the business or the financial position of that company. She was just trying her luck and was willing to risk that amount of trade.

Not too long ago, the Straits Time Index (STI) was at its lowest (1,456 points) on 9 March 2009 during the global financial crisis of 2008/09. If we look further at another spectacular crisis, the Asian Financial crisis in 1997/98, the STI was at 1,048 points on 16 June 1998. Equity investors could easily lose half its value on their portfolio. If investors timed the entry and exit of the stock market wrongly, the collapse of stock market can cause untold damage.

The psyche of most investors has been to buy on rally but sell on slump. When shares are going up, it is easy to buy shares and see their prices increase. When shares are moving downward, they sell and cut losses and get out of the market. That seems logical but no one can predict the future as to the stock movement. You could be buying above valuation in an up-market or you could be selling at below valuation in a down-market. It takes a shrewd investor to understand value of the equity stock and then buy and sell at own-perceived right price that may run counter to the prevailing sentiment of the mass market. That is, they buy at a down-market (and wait out for the share to rise) and sell at an up-market (to realise the gain).

The lessons we can learn here is that:
1. one must understand the equity stock by own research
2. one should invest in stocks when one has own money to invest

Without understanding the company behind the stock, one cannot ascertain whether the company is worth the price quoted on the stock exchange. With money set aside for investing in stocks, one can hold out the downturn without panic and then offloading at a loss. With borrowed money, it becomes a different story.

Copyright © 2010, limkimtong for Living Investment

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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1 Response to Investment in equity and investor psyche

  1. David Cobb says:

    I agree with the post above and I will find more information from google.

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