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What The Stock Exchange Investors Need To Know?

The South Pacific Stock Exchange (SPSE) recently held workshops on investing in shares of companies listed on its exchange. The workshop provided an introduction to investing in shares and comparisons
20 Sep 2014 13:17
What The Stock Exchange Investors Need To Know?
Leader of HOPE, Tupou Draunidalo.

The South Pacific Stock Exchange (SPSE) recently held workshops on investing in shares of companies listed on its exchange.

The workshop provided an introduction to investing in shares and comparisons to risk and returns to bank term deposits.

This is indeed a welcome information session from the SPSE and kudos to them.

I am not surprised that SPSE is trying to spur investment activity because the trading activity on the SPSE is virtually non-existent.

I monitored the trading activity on the SPSE for five weeks and saw very little share trading reported in the newspapers.

One can speculate why there is little trading, and amongst the many reasons, one is lack of investor education, which the SPSE is addressing through its workshops.

I would like to take this timely opportunity and educate potential investors about a couple of important factors to consider when investing in companies.

Potential risk evaluation

Paramount to any share investment is the evaluation of potential risks associated with the company(ies) you are investing in.

For a small country like Fiji, many people seem to know the companies; their markets, products, services, and so on.

But do they know much about the quality of profits or assets a company has?  Do they know about the quality of corporate governance?  Do they know about the quality and objectivity of the external auditor?

Many potential investors in Fiji do not have masses of money under the mattress which they can gamble with.

Rich folks and corporations are an exception but they too could benefit from this short article.

Investing in the shares is akin to gambling as the risks can be high.  Some investors have hard earned life savings and putting them in shares will naturally give them the jitters.

So the question is not simply of risk and return but more about the nature of the risks and commensurate return.

Financial disclosure perception

One factor that can significantly affect investment decisions is the quality and disclosure of financial information provided by companies on the SPSE.

All companies on the SPSE are required to provide audited financial statements and these are available on the SPSE website in companies’ annual report.

There is a belief that an audited set of financial statements is a stamp of approval of a company’s financial statements.  However, this is a perception only.

An audit opinion is not intended to be a guarantee that the accounts are correct, it is an opinion that in all material respects and based on the evidence evaluated, the accounts are presented fairly.

The auditor provides an assurance but the quality of that assurance depends largely on the expertise and objectivity of the audit firm.

For a small country such as Fiji, the audit market is very small and audit firms operate under tight budgets and margins.

Competent auditors are difficult to find and maintain as many individuals are lured overseas.

Assuming the audit firm is independent then one can rely somewhat on the audited financial information.

Investors need to note that reliance on audited financial information to make investment decisions does not protect them against a future loss; they cannot sue the auditor unless certain conditions are met, which occurs in very rare instances.

Enforcement of disclosures

While Fiji has a reasonable institutional framework governing corporate disclosure, the degree of enforcement is rather weak.

I have had the opportunity to review some of the SPSE companies’ financial statements and annual reports.

While I was generally satisfied with the disclosures, there were many reporting issues that raised questions which I will not get into today but leave it for another article.

The issues I noted from 30,000 feet also raise questions about the accounting regulations in place and the quality of the external audit.

However, I would like to highlight that the corporate governance system of companies, meaning the board of directors and audit committees, lack independence and expertise in many instances.

Such governance is vital in protecting investors who do not own majority shares.  The SPSE workshop seems to be aimed at encouraging minority investors but offers little guidance on evaluating a company’s corporate governance.

At a minimum, the SPSE ought to on its web site discuss corporate governance and its importance, and how it can protect shareholders.

Stock exchanges around the world have regulations or best practices on corporate governance.

And rightly so as this is the first level of control and monitoring of management.

It is even more important in Fiji as investors here do not have a voice as they do in developed capital markets.  Shareholder activism is non-existent in Fiji.

Financial status evaluation

The final broad-brush issue I want to highlight is about evaluating a company’s financial status.  Many people simply look at the profit figure and dividends paid.

Relying on these two numbers can be deadly.  Simply focusing on profits and dividends is myopic and faulty.

The SPSE is encouraging medium to long term investment in shares where investors pour in small amounts of money.

Such investment horizons require complex yet fundamental analysis of financial performance.

There are a number of stock brokers in Fiji offering share purchase services that investors can turn to.

Potential investors are cautioned to carefully consider the extent of analysis provided by these brokers as the loss of an investment cannot be claimed from the brokers.

Many brokers around the world including Fiji will provide investment evaluations and these can be useful.

But there is a cost as the analysis is usually not free.  Moreover, from what I have seen globally, many brokers do not provide what I call contemporary financial analysis.

Their focus is on accrual financial analysis complemented by analytics of the share price, economy, and so on.

They often miss an important component of financial analysis, which relates to the life blood of the business – cash flow.

In a small economy like Fiji, cash flow analysis is vital!  It can provide insights that other types of analysis will not.

Overall conclusion

I will close by saying that investing in shares is a risk and return game; you win some and you lose some.

But you can arm yourself, meaning educate yourself, and venture into the world of share trading on the SPSE.

Share trading does offer the opportunity to expand your investment portfolio and accumulate wealth.

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Professor Divesh Sharma has more than 25 years of experience analysing companies’ financial performance.  He has written numerous articles on this topic and provided consulting to audit firms, corporations and financial institutions, and training seminars in Australia, New Zealand, Singapore, USA, and Fiji.  He can be reached at dsharma2@kennesaw.edu.  The opinion expressed here is that of Professor Sharma and do not represent the views of Kennesaw State University.

 




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