In this context, it is usually advised to consult the financial manager to understand the appropriate type of investment for each person, and to determine the size and limits of risk, especially since many beginners in the financial world – perhaps even some dealers already for a while – clearly misunderstand the dilemma of ups and downs through which they can Determine the size of the gain or loss.
A simple arithmetic exercise that might explain the picture is one shared by certified financial planner Ted Jenkin:
- Suppose someone invests $10 in a stock, then its value drops to $8 (a 20 percent loss). The stock then rebounds by 20 percent.
- Does this mean that the person has returned to the base point and preserved the $100 with that (20 percent drop, then 20 percent rise)?
- The answer is no. This latest 20 percent rally sends the stock back to $9.60, not $10.
- It would take a 25 percent increase to fully recover the initial $2 loss (assuming that the 20 percent increase is the increase over the new stock price after the loss, i.e. over $80).
Many need more focus to understand this simple arithmetic exercise and realize this dilemma, and thus base their investment decisions on that understanding.
Here, this exercise can be applied to an already realistic model linked to the S&P 500 index. In the early days of the Corona pandemic, the index (which includes shares of the 500 largest American financial companies including banks and financial institutions) fell by 43 percent, from 3386.15 points on February 19, 2020 to 2237.40. Dot on March 23, 2020.
The index regained its value by August 18 of that year, when it closed at 3,389.78 points, achieving a 52 percent gain from the low point in March (ie, to make up for the 43 percent loss, it needed a 52 percent rise).
Basic rules for dealing with profit and loss
In the context, Hanan Ramses, an expert in financial markets in Cairo, identifies, in her interview with “Economy Sky News Arabia”, a number of main rules for understanding the nature of investment and dealing with the dilemma of ups and downs in financial markets, as follows:
- When making an investment decision, the extent of risk tolerance must first be measured. If a person does not have this ability, then the best channel for him is bank deposits and avoidance of risks. If he has the ability to take risks, he can enter the financial markets.
- It is advisable to initially invest the available financial “surplus” (not risking the initial capital) keeping in mind that the market is subject to fluctuations and accordingly gain and loss scenarios need to be understood.
In her speech, Ramses answers a number of questions regarding profit and loss accounts, and the ups and downs of markets.
First: “What determines gain and loss?”
- The person’s conviction of the size of the gain and loss (setting certain limits) is what governs this matter. For example, if the shares rose by 10 or 15 percent, there are those who are satisfied with this amount according to their convictions of the limits of gain, and start reaping profits, while on the other side there are those who look forward to climb higher.
- The need to realize that stocks cannot go up indefinitely, it is natural to reach a point with which offers increase, and thus the price decreases.
Second: “What happens if the price goes down? How can losses be absorbed?”
- As long as the investor did not sell, he “has not lost yet” and the losses remain book losses (as well as for gains, they remain book gains as long as the sale is not completed).
- In the event of a decrease in the price, it is possible, if there is sufficient liquidity, to buy other shares, after which the shares will be exited based on calculated averages to compensate for the loss.
- If there is no liquidity available to purchase new shares and an average exit is determined, the loss ratio must be respected as well as the gain ratio.
- It is also possible, in the absence of liquidity, to convert the shares into a “long-term investment” if the companies are stable, give dividend coupons, and have a plan to increase activity and expansion by opening new markets, and thus these shares are “strategic shares” in the investor’s portfolio.
The financial market expert advises in all cases (ups and downs) to consult the private investment manager, as well as a careful follow-up of the markets, to find out what is going on in terms of developments at all levels, and in light of the financial markets being affected by various news and developments.
investment culture
For his part, the Egyptian economist, Dr. El-Sayed Khader, points out, in exclusive statements to the “Sky News Arabia Economy” website, the factor related to the “investment culture”, noting that the investor’s culture plays a major role in realizing the dilemma of ups and downs in the financial markets and with regard to indirect investments. .
He points out that the investor culture is absent from some, which affects the markets, explaining that the prevalence of the investment culture contributes significantly – whether at the level of ordinary individuals or large investors – in expanding the investment base, and therefore it is of great importance to expand awareness of working methods in the capital market.
In this context, Khader offers a set of advice, as follows:
- Do not risk large investments in the beginning, until you understand the market and ways of dealing with profit and loss.
- Take care to diversify the investment portfolio, to include shares in different sectors, without concentrating all investments in one sector (do not put eggs in one basket).
- This idea of diversification allows for the preservation of investments, in the sense that in the event that a certain sector loses, another sector compensates for the losses suffered by the individual in the other sector.
- Focus on companies with an appropriate level of stability at the start.
- Drawing future forecasts for the sectors in light of the current developments, to take advantage of the opportunities that any of the sectors may witness in light of these developments.
The economist refers to the role of the concerned companies in providing investment advice and trading companies, stressing at the same time the need for the individual to have a culture of buying through a future vision and based on information.
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