In this context, it is generally advisable to consult the financial manager to understand the type of investment appropriate for each person, and to determine the size and the limits of the risk, especially since many beginners in the financial world – can -even being some dealers already for a while – misunderstand clearly the dilemma of highs and lows through which they can determine the size of gain or loss.
A simple arithmetic exercise that could explain the picture is shared by Certified Financial Planner Ted Jenkin:
Suppose someone invests $10 in a stock and then its value drops to $8 (a 20% loss). The action then rebounded by 20%. Does that mean the person went back to the base point and kept the $100 with it (20% down, then 20% up)? The answer is no. This latest 20% rally sends the stock back to $9.60, not $10. It would take a 25% increase to fully recover the initial $2 loss (assuming the 20% increase is the increase from the new stock price after the loss, i.e. say over $80).
Many need more concentration to understand this simple arithmetic exercise and realize this dilemma, and thus base their investment decisions on this understanding.
Here, this exercise can be applied to an already realistic model linked to the S&P 500 index. At the start of the Corona pandemic, the index (which includes the stocks of the 500 largest American financial companies, including banks and financial institutions) fell 43 percent, from 3386.15 points on February 19, 2020 to 2237.40.Point on March 23, 2020.
The index regained its value on August 18 of that year, when it closed at 3,389.78 points, making a 52% gain from the low point in March (i.e. to make up for the 43% loss, he needed a 52% increase).
Basic rules for managing profit and loss
In context, Hanan Ramses, a financial market expert in Cairo, identifies in her interview with “Economy Sky News Arabia” a number of key rules for understanding the nature of investing and dealing with the dilemma of ups and downs. bottom of the financial markets. markets, as follows:
When making an investment decision, one must first measure the extent of risk tolerance. If a person does not have this ability, the best channel for him is bank deposits and avoidance risks. If he has the capacity to take risks, he can enter the financial markets. It is advisable to initially invest the financial “surplus” available (without risking the initial capital) bearing in mind that the market is subject to fluctuations and therefore the scenarios of gain and loss must be understood .
In his talk, Ramses answers a number of questions regarding profit and loss accounts and market ups and downs.
First: “What determines gain and loss?”
The person’s belief about the importance of gain and loss (setting certain limits) is what governs this issue. For example, if the stock has risen by 10 or 15%, there are those who are happy with that amount according to their beliefs of the limit of gain and start reaping profits, while on the other side there is those who are eager to climb higher. The need to realize that stocks cannot rise indefinitely, it is natural to reach a point with which offers increase, and therefore the price decreases.
Second: “What happens if the price goes down? How can losses be absorbed?”
As long as the investor has not sold, he “has not yet lost” and the losses remain accounting losses (as well as for capital gains, they remain accounting gains until the sale is made ). In the event of a fall in the price, it is possible, if there is sufficient liquidity, to buy other shares, after which the shares will be exited on the basis of averages calculated to compensate for the loss. If there is no liquidity available to buy new shares and an average exit is determined, the loss ratio must be met as well as the win ratio. It is also possible, in the absence of liquidity, to convert the shares into a “long-term investment” if the companies are stable, pay dividend coupons and have a plan to increase business and profitability. expansion by opening up new markets, and therefore these stocks are “strategic stocks” 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 careful monitoring of the markets, to know what is happening in terms of developments at all levels, and in light of the financial markets affected by various news and events.
investment culture
For his part, the Egyptian economist, Dr. El-Sayed Khader, points, in statements exclusive to the “Sky News Arabia Economy” site, to the factor linked to the “culture of investment”, noting that the culture of Investor plays a major role in raising awareness of the dilemma of ups and downs in financial markets and in indirect investing.
He points out that investment culture is missing from some, and in ways that affect markets, explaining that the prevalence of investment culture contributes significantly – whether at the level of ordinary individuals or large investors. – to broaden the investment base, and it is therefore very important to make the working methods better known in the capital market.
In this context, Khader offers a set of tips, as follows:
Don’t risk big investments at first until you understand the market and how to manage profits and losses. Be sure to diversify the investment portfolio, to include stocks in different sectors, without concentrating all investments in one sector (don’t put eggs in one basket). This idea of diversification preserves investments, in the sense that in the event of a loss in a certain sector, another sector compensates for the losses suffered by the individual in the other sector. Focus on companies with an appropriate level of stability to begin with. Establish future forecasts for the sectors in light of current developments, in order to take advantage of opportunities that any of the sectors may experience in light of these developments.
The economist discusses the role of the companies concerned in investment advice and trading companies, emphasizing at the same time the need for the individual to have a buying culture through a vision of the future and based on the information.
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