Deal or No Deal

The thought of shopping evokes different reactions from people, some people’s expressions light up at the thought of going shopping while other people are unable to hide their grimaces. Whether you are shopping out of necessity or just for therapy, most of us are searching for the best value for money as well as maximizing our convenience. 

Let us examine financial shopping. Is it similar to regular shopping? It certainly is! When you are shopping for bonds or equities or real estate, you should be striving to get the best value for money while maximizing convenience. But when you are comparison shopping how do you translate that to financial assets? 

Shopping for bonds 

There are a few things that you can check when you are shopping for bonds. Firstly, like anything else, you start by checking the price, then compare the yield at that price to the yield on other bonds with similar risk profiles. Interestingly enough, you should also look at the price history of the bond. Maybe it is trading at a lower price than usual and may present a buying opportunity. In summary, we are looking at how expensive the bond is, we are checking the overall return on the bond (by checking the yield), and we are comparing that to other bonds with a similar risk level and we also compare it to itself by checking the bond’s price history. 

Shopping for stocks 

When we examine the prices of various stocks in the market, we observe wide disparities, but this cannot be used by itself to compare stocks. Saying that one stock is cheap at J$2.00 and another is expensive at $75.00 is highly misleading. To compare apples and apples, we must compare the price of the stock to the earnings of the company, therefore analysts love to talk about the P/E ratio (price to earnings ratio). A stock with a high P/E ratio is more expensive than another stock with a lower P/E ratio. However, it is not foolproof because some stocks trade at a higher P/E because the market expects that they have a higher growth potential. However, checking the P/E ratios is a good place to start when you are comparison shopping for stocks. 

Shopping for Real Estate 

Shopping for real estate also requires comparisons. Similar to stocks, you can’t only look at the price, it has to be viewed in the context of the location. Then you would check the other features of the specific piece of real estate, for example, the size, the layout, the potential, and other qualities that appeal to you. At the end of the day, you would not want to know that you bought a property for J$50m, only to find out that the one next door that is very similar, just went for J$40m for example.

Conclusion 

Don’t throw your principles out the door that you use when you go shopping for your everyday items. The principles do not change when investing in assets. Whether you are buying bonds, stocks, real estate, or any other assets, it is important to check comparative prices, the historical prices and to examine whether you are getting a deal or no deal! Happy Shopping!!!

Yanique Leiba-Ebanks, CFA, FRM 

Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm