Sunday, July 18, 2010
Earning the extra buck: How to Invest in Kuwait Stock Exchange II
Part II: The Ropes
A key to investing in the stock market is not to be fooled by percentages. I have invested in a company whose share price increased by 125%. But I only invested a small amount, hence the grand percentage is negated by the small amount. Always look at the whole picture and never judge solely based on single statistics.
Also, know that past results are no indication of future performance. First Dubai shares were trading at 1.250KD per share as of two years ago, hoping to cash in when the market was at its lowest point, I bought shares at 108fils. It has since sunk to 29fils.
There are 9 sectors in the Kuwait stock exchange: Banking, Investment, Insurance, Real Estate, Industrial, Services, Food, Non-Kuwaiti. Market dynamics dictate that performance is not unilateral, when one sector drops, another rises. So, another pearl of wisdom is to have a diversified portfolio, invest in each of the 9 sectors.
There are two markets, Primary & Secondary. Primary markets are the IPOs (Initial Public Offering) and that is when a company first decides to go public, they sell shares at par value, roughly 100fils + commission. IPOs are reserved for Kuwaitis only most of the time. You are buying directly from the company.
The secondary market is like the second hand market, you purchase the shares from other investors.
So, you either get the stocks first hand, or second hand.
There are two types of purchases in KSE: Roundlot and Oddlot.
Take the above table. These are the rules for the roundlot market.
Suppose a company’s shares are trading at 54fils, in order to invest in that company, you have to buy a minimum of 40,000 shares (KD2,160). The maximum gain for the day is 5fils, so at the end of the day, the highest amount it can reach is 59fils, lowest 49fils. Trading stops when either extreme is reached (meaning your losses, and gains, are regulated). For all prices between 51-100fils per share, a minimum of 40,000 shares is required to trade on the roundlot market.
Now, this part is difficult to grasp at first, suppose the share price dropped to 49fils. You have 40,000 shares and wish to sell them. Now however, you have fallen to a lower bracket, your stock is no longer in the 51-100fils bracket, but 0.5-50fils. You cannot sell the 40,000 shares on the roundlot market, as the unit is now 80,000, all trades must be in blocks of 80,000. What to do?
This is where the oddlot market comes into play, oddlot means block of shares that is not fixed. You can sell the whole 40,000, or parts of it, on the oddlot market, as it has no restrictions in terms of quantity.
The oddlot market is the perfect place to start as a junior investor. You decide what amount you wish to invest, and go for it. The only problem is, you can never get what you want in terms of quantity, you take what is offered, but you can set your own price.
I have yet to participate in the roundlot market, as it is too rich for my blood. Oddlots are like getting in on the ground floor.
at 9:07 am