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Why invest in stocks in this market?

There are hundreds of investing books along with millions of investment information product websites listing do-it-yourself information, focused investment products, and some very, even extraordinary investments managers.

These do not address the specific localised investment industry here.

This Bermuda Investment Primer segment focuses in a general overview on Bermuda resident investors and investments that are available and relevant to the Bermuda offshore jurisdiction.

A more detailed version of Chapter 1 Cash, and Chapter 2 Stocks will be made available after Saturday's publication at www.marthamyron.com.

Some readers will stop right here with thoughts of “I don't have anything to invest, and it doesn't mean much to me.”

If you are working (even if you are unemployed currently) almost everyone has a pension that is managed and invested in global securities markets.

From a basic perspective, the second thought is, “why should I invest when I can be just as comfortable with fixed deposits, real estate, and my pension saved for later?”

What investing can mean to you is hidden in plain sight in the last five words of the preceding sentence.

Investing in stocks (and other securities in your pension for instance), is the act of handing over your hard earned cash to a financial salesperson, a financial institution, or an investment fund manager in exchange for a piece of paper that says you own shares of one or a number of publicly traded companies.

You do this, in confidence that way down the road, your investment will be worth much more than when you started.

Do not assume that once you invest, everything proceeds as planned. You need to pay attention to what you own and how it is invested that means a learning curve for you.

There are numerous reasons to invest, and it starts with understanding the investments that you do have by breaking them down to their basic components: cash, stocks, bonds, and real property.

Investing in stocks in capital markets can provide the following:

n Outpace relentless Bermuda inflation pressure on every day living costs. Full discussion on inflation and your purchasing power to follow in another article.

n Achieve long-term appreciation gains generally higher than bank deposits.

n Participation in financial success of globally diversified companies by becoming an owner, not just a customer. You would be amazed at how you have contributed to the financial success of these companies, just by buying their products, every day, every month, every year.

n Diversification away from concentration risk in one country, one real estate market, and one soft dollar currency .

What is the difference between owning bank deposits and stocks?

n Deposits are held in banks (on their balance sheets) in your name, subject to certain holding requirements, interest rates and time frames.

n Interest rate paid to you is controlled by bank and their assessment of market interest rates.

n Your interest rate of return is determined by pure math compounding on your cash, i.e. five year fixed deposit [AT] 2% annually is for example, year 1 $102, year 2 $104.04, year 3 $106.12, and so on. Straight maths, what you calculate is what you receive no surprises. Your cash is not converted into anything else.

The interest each year is added to the principal amount of the fixed deposit, but it remains just that, cash.

n Deposits have lock-up periods to achieve higher rates, and penalties, often, if you cash your deposit earlier than the projected time frame.

n Deposits in Bermudian financial institution deposits are only minimally protected ($25,000BMD) by bank deposit insurance.

Investments in stocks, on the other hand:

n Can generate unlimited upside potential gains when owning shares of successful companies (and complete loss of your investment in a failed operation).

n Long-term appreciation of equity capital is not mathematically figured like fixed deposits. Appreciation is driven and dependent upon performance, capital market value of the company, and success (or failure) perceptions of investors.

n Generally, you have direct ownership of these intangible assets accomplished by purchasing shares of a publicly owned company on the open market. You can buy or sell the shares when you wish.

n Historically, investments in stocks have returned higher returns than the rate of inflation.

n Publicly traded stocks (and their companies) financial information is readily (for the most part) available on the Internet. Full disclosure is mandatory.

n Performance (rate of appreciation return) is not guaranteed. Some investments may decrease in value, while others will significantly increase in value, i.e. Berkshire Hathaway 40 year performance appreciation in excess of 250,000% since inception.

Thus, fixed deposits are considered linear they earn a rate of return in a straight line, while stock market investments fluctuate over time, generally in an upward trend.

Note that neither deposits or stocks are guaranteed as to rate of return or safety, except for the $25,000 protection on deposits.

What is a stock? How does a stock evolve into a capital market investment (or a mutual fund of many stocks in your pension)? Where does a business start? Very, very small!

Next Bermuda Investment Primer article: Mom and Pop incorporate Papaya™ Pizza Bermuda, but the shareholders have a falling out. The business is wildly successful, but so are the debts. Pop decides to retire.

Martha Myron, JP CPA CFP(US) TEP is Bermudian international Certified Financial Planner™ practitioner in private wealth management.

She specialises in independent fee-only cross border investment, tax, estate, and strategic retirement planning services for Bermuda residents with United States and multinational connections, and US citizens living and working abroad.

For more information contact mmyron[AT]patterson-partners.com or 296 3528 at Patterson Partners Ltd.

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Published November 26, 2011 at 1:00 am (Updated November 26, 2011 at 7:11 am)

Why invest in stocks in this market?

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