Financial Literacy for Stock Market Investors
While statements like “Usalama wako u mikononi mwako” (your security is in your hands) often told to us by politicians are debatable, there is no controversy about this version: your financial security is in your hands. Should your investments (or lack of) fail to help you meet the goals for which they are intended, you live with the consequences, no matter whose investment advice you took/used. And almost every expert you will have used along the way has a little clause in their contract that protects them from any action by you unless they acted fraudulently or in total negligence to your instructions.
Your insurance against disaster in view of this is your financial literacy. Financial literacy, as opposed to expertise in finance and investments gives you the understanding and vocabulary with which to be able to interrogate the experts you pick. This way you are well satisfied with and are accountable from a point of sound knowledge for the investment decisions you commit to. Financial literacy will not require that you are able to prepare statements or compute ratios and understand how they are derived, but it does require you to understand what they represent and why it is important. It requires you to understand trends and their implications. You need to put in the effort that makes you understand what is now referred to as a Statement of Comprehensive Income as well a Statement of Financial Position (formerly known as a Profit and Loss statement and Balance Sheet respectively).
Irrespective of all the other qualitative information that is presented by listed companies, mainly by way of the Chairman’s and CEO’s statements in the annual Financial Reports, investment is about money. The performance of companies is therefore presented in the form of figures that investors must understand, without necessarily being experts in finance.
To be good as a stock market investor, devise a way of getting yourself to be financially literate. There are courses that you can attend that are designed specifically with this goal. They come styled as financial management for non-finance experts or managers. Enough books have also been written that would tutor one on the subject. Your personal financial planner can tailor something for you and take you through the necessary sessions so as to leave you comfortable with the relevant numbers. Whichever the approach you take, be happy for it to cost you something. If you commit to the learning and application of the lessons, it will pay back in multiples.
In brief, in order to start getting into the world of stock market investments with sufficient confidence, make sure you are familiar with terms like Earnings Per Share (EPS), Dividends, Assets, Liabilities, Price to Earnings (PE) Ratio, PE Growth and a couple more. It is also important to be able to read through and understand the quality of the earnings that are reported in an entities Statement of Comprehensive Income so as to be able to pick out trends, and eliminate one-offs when making your long-term investment decisions. Being able to read the Statement of Financial Position gives you a good feel of the financial health of a company. How much cash does it have to finance its operations? Is it healthily borrowed or leveraged as they would call it? What is the actual value of the share based on the book value of the company? Are you comfortable to pay the market price of the share given the intrinsic value of the share as indicated by this reality?
This is not a comprehensive list of all that would constitute financial literacy for you. But it does underscore the need for you to plan to gain the literacy upfront as you make a decision to get active in the stock market. It is a prerequisite to sensible research which we considered in the last article, and which we will often be referring to as we appraise various stocks in future articles.
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