52 weeks of share trading
the Winners and Losers
The Finance and Investment Column
Stabroek News
July 2, 2004
This column provides informative commentary on financial matters and is written by Patrick van Beek, Managing Proprietor of Caribbean Actuarial & Financial Services.
In last week's column I showed that unless your savings are growing then you are at risk of inflation eroding the purchasing power of your money. To avoid this you can invest your money and aim to garner a return in excess of inflation. The simplest investment most people make is to put their cash in a bank and earn interest.
This has the advantage that your capital is secure (assuming the institution with which you are invested does not fail) and you can usually withdraw at a moment's notice. You may be able to get a higher interest rate by fixing the term of your deposit eg for 3 months or a year. However there may be penalties if you want to withdraw your funds before the term of a fixed deposit expires.
The classic example of an alternative to investing in cash is to buy shares in a company. Shares are literally just that, a share in the ownership of the company eg if the ownership is divided into 100 shares of equal value then if you own one share you own 1% of the company. Shares are initially issued by companies when they want to raise capital. Once shares are issued they can be bought and sold on the stock exchange. Note it is not the company who is selling the shares on the exchange but rather existing shareholders sell their shares to those who want to buy them. This week marks the anniversary of the opening of the stock exchange in Guyana operated by the Guyana Association of Securities Companies and Intermediaries Inc. Since a year ago if you wanted to buy or sell shares in the companies traded on the exchange then you could have done so by approaching a registered broker who would process the order for you.
Indeed, given the fledgling nature of the exchange and the developing economy it is encouraging to see that there has been so much trading taking place - 9.4 million shares have changed hands for a total consideration of G$92.9 million. Even more significant is that 29% of trades were for amounts less than G$10,000- a clear sign that it is not just big players who are getting involved with buying and selling shares.
I'll now take a look at what $100,000 invested in the various shares which trade on the exchange would have returned over the past 12 months and compare them with two yardsticks, inflation and cash.
Inflation has been 3.7% year-on-year to the latest published figures available (to April 2004). Assuming this rate continues to the end of June this means on average prices are 3.7% higher than a year ago. So in order to be able to buy the same as you could then you would need to have earned 3.7% or have grown your $100,000 to $103,700. This is the acid test to which to compare the returns on other investments.
A year ago the average small savings rate was 3.96%. By the end of October this had fallen to just 3.46%. Interest on deposit accounts is subject to 20% withholding tax, so after tax these figures fall to 3.17% and 2.77% respectively. Assuming this rate continues until the end of June, after tax, an investment of $100,000 at the average small savings rate would have grown to $102,797 - some $903 short of that needed to avoid erosion in real terms.
Shares usually provide a return to their shareholders in two ways. First, the company can pay out some or all of its profits as dividends which represent an income to the shareholder. Dividends are free of withholding tax to residents which give shares a tax advantage over deposits. Second, the shares may be worth more or less when they are sold than when they were purchased, so the capital value may increase or decrease. All but one of the companies that have actually seen trades taking place on the exchange paid a dividend in the last year, but some have seen significant capital returns while others have seen the capital value drop. The following analysis allows for dealing costs on the purchase of shares which are assumed purchased at the first price at which they traded, and takes the current value to be the last price at which the shares traded after dealing costs which would be incurred to sell at that price. Dividends are not assumed to be reinvested.
It is interesting to note that after dealing costs, only two stocks have a capital value now worth more than they were a year ago. With the exception of Demtoco it is the dividends which have made up the majority of the return in this 12-month period.
Those who bought Demtoco, DDL, Sterling, GBTI or Citizens will have beaten the inflation watershed. Holders of cash are slightly down. Buyers of Property Holdings, Stockfeeds, Banks DIH or NBIC have not fared so well, with returns in some cases well below that on cash. This should serve to highlight one of the biggest risks of owning shares - the capital value can fall as well as go up and the shares are only worth what you sell them for in the market, so you may not get back what you put in. It is this risk which brings the potential for greatest reward and if you pick a winner (as Demtoco certainly has been) then the returns could be significant.