July 23, 2008

Investing business funds on the stock market

by Brian Turner

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I’ve always had a certain amount of liquidity in the bank, and originally I had planned to keep this as reserves for a rainy day.

However, my growing interest in stocks and shares, and then my business bank calling to suggest increasing my bank account interest rate – which never happened – pushed me into thinking that I should make my unused money work harder.

I’ve been following the financial market news for a few years now, and really felt that the banking stocks were not simply seriously undervalued, but also reaching the low point in a trough, and would be a prime opportunity to invest in the stock market with.

I’ve already learned a couple of sharp lessons in the investing process:

1. Choosing a Stockbroker

Don’t get a normal stockbroker – get an online trading account, such as at SelfTrade or TD Waterhouse, so you can make your trading decisions in your own time. It allows you full control of everything and allows you to trade when you want to.

2. Don’t invest blind

Don’t trade on a stock market until you’ve at least seen the trend in action – there’s a lot of volatility at present, and over the past week the first 15-30 minutes on the NYSE can wipe out your gains if you invest on the wrong part of the trend.

3. Diversification

Spread everything out as much as possible – don’t put large amounts of money in a small number of stocks – put your large amount of money in a larger number of stocks. This not only allows for risk diversification, it also allows you to invest in all the stocks you want to.

4. Research, Research, Research

Research your arse off, for weeks, if not months, before you do so – and only invest on the grounds that you feel you have done enough research to understand the prevailing investing conditions, and why those conditions exist – and why you justify a change to your advantage. Remember, share prices are driven by herd mentality.

5. Share Dividends

Don’t forget that share dividends can form an important part of your strategy. Returns from UK stocks can be especially strong for this. For example, I invested in some lower-risk companies even though I do not think they will grow at anywhere near the rate of other higher risk companies, on the grounds that the share dividend should be an important part of the growth income.

6. Fees

Watch out for fees – every transaction has a price, so factor this into your projections. This is another way in which online trading can offer additional advantages – generally lower commissions.

7. Strategy

Determine your game plan, ensure it is sound, and then keep to it – beware of spurious decision making, as you will generally lose less money from being cautious. Short-term losses are the norm, but if you’re investing for the long-term, it’s just a paper loss. Don’t freak at ups and downs early on. Set and forget is probably the best approach for long-term investing.

8. Look to the future

Make yourself aware of any prevailing conditions which may significantly affect the stocks you are watching.

For example, I knew last Tuesday’s economic indicators would likely be negative, and following so soon after the collapse of a major US bank and with fears for the US mortgage sector heightened, I know financial stocks were unlikely to perform well.

I determined Wednesday onwards would be better because the first banks started to report their quarterly earnings from then, which I figured would show damage caused by subprime lending would be muted, and even in a state of repair – offering investors hope and potentially turning the herd.

My investment experience

I saw my greatest potential opportunity come up last Wednesday – and I missed it because I was trying to stay as cautious as possible, and then when I made my decision to trade that Wednesday, my stock broker informed me their trading office had already closed. The inability to trade that day cost me at least £4,000 straight away.

So I invested on Thursday, but put my US stocks straight in blind – the stock broker took 10 minutes to place the orders, caught me on a nasty spike, and that 10 minute delay cost me about another £4,000 in lost value.

Again, the need for internet trading is sold to me, so I’m also opening an account with SelfTrade so I can eventually move all my investing there.

I cautiously – over-cautiously – placed my funds into selected shares over the week – and while I have certainly missed what appears to be the best point for investing in UK and US banking stocks, I’ve at least established that I’m on the early part of what should be a strong uptrend.

My return after 5 days is already over 15% – certainly more than I’d ever earn in a bank account – but I’m aiming to ambitiously try and grow it around 150% over 2-3 years.

If that happens, I’ll consider entering the Buy To Let market before the next property boom begins to develop.

Funny thing is, if I mention shares and investing to people around, even in business, they act with revulsion because of the strong perceived “risk” element.

However, I’ve made a point before that running a business has as much to do with managing risk as anything else – the key is to try and understand that risk, and manage it according to your strengths.

That’s why I couldn’t simply advise people to rush into investing on the stock market without proper research – I only took this risk because I felt I understood it, and applied a strategy I felt could cope with any reasonable worst case scenario yet would still leave me with my money intact.

Overall, I think that if you expect to have significant amount of cash in the bank with no foreseeable need for it within a couple of years, then there are options open to making it work harder.

The stock market was simply my chosen method in this regard, but I know otherwise have used SIPPs to invest in their own commercial property.

Just ensure you talk to your accountant, and make sure you don’t accidentally invite any tax liabilities in following whichever method you follow.

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