Will you just buy stocks in the Dar Es Salaam stock exchange or you must consider some issues before you purchase shares? Will you just buy stocks in the Dar Es Salaam stock exchange or you must consider some issues before you purchase shares?
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In my last article, I discussed vital tips on “why the stock market and individual stock goes down and up” have a look at it before you consider reading this short article. Read it here, 

https://www.empower.co.tz/movement/have-you-ever-wondered-why-the-stocks-market-goes-up-and-down-620d17f392dac 

 In this post, I am going to tell you the approaches you can use as an investor to reduce or eliminate the risk of losing money when an individual stocks decline.

 (Source, google image 17/02/2022)

First of all, avoid buying many stocks from one company. Buy many stocks as you can from different companies. This technique is known as a stocks portfolio. A stocks portfolio in a simple language means a group of stocks you selected to buy. Let’s say, you have Tzsh 100000/= and you want to purchase stocks from the Dar Es Salaam stock exchange, Instead of buying only Stocks from NMB for Tzsh 1000000/=, you select various stocks such as Jatu, NMB, CRDB, Twiga cement for the same amount. This approach is known as a stocks portfolio. This ⬇️ is an example of how your portfolio will look like.

( source, google image 17/02/2022 )

So, now you have your portfolio of stocks. Is it enough to minimise or eliminate your portfolio risks? And what is a portfolio risks ?

( source, google image 17/02/2022) 

Portfolio risks means a risk of losing some of your money when stocks price of an individual company declines. A price can decrease for various reasons which I discussed from my previous article. Read it here ( website). A technique used by investors such as Warren buffet and fund managers to eliminate or minimise portfolio risks is called Portfolio diversification.

( source, google image 17/02/2022)

Portfolio diversification is not a science rocket and very likely you can do it by yourself. What exactly is it? Portfolio diversification is an act of selecting your stocks based on the different sectors. For example, NMB and Jatu are two stocks from different sectors, NMB is from banking and Jatu is from agriculture sector. A purpose is to select stocks that react different according to economy’s condition. Regarding to our example of JATU and NMB, when the banking sector is doing well in a country NMB will perform well while when agriculture sector is doin bad Jatu will also likely to do bad, then if Jatu stocks will decline, then NMB stocks will go up. This means you are losing from JATU but you are recovering your losses from price appreciation of NMB. This is what portfolio diversification is all about. This concept is applicable worldwide. It’s also known as “Asset Allocation”. Below is an example of portfolio diversification from Warren buffet 

(source, the motley fool 17/02/2020)

In the Dar Es Salaam stocks exchange an investor can diversify a portfolio by two approaches. Firstly, by mixing your asset portfolio with “bonds and stocks”. Secondly, by mixing your stocks portfolio depending on various companies sector.

An ideal portfolio would be:

1-NMB stocks ( banking sector)

2-Twiga cement stocks ( Construction sector

3-Jatu plc stocks ( Agriculture sector)

4- Bonds ( either government or corporate bonds).

5- Mutual funds ( UTT ).

6- DSE index.

Why is so important to have such a diversification?

1- Diversification helps you to reduce risk since they react different depending on economy’s conditions,

2- Diversification helps you achieve your short and long term investment goals faster since your portfolio is uniquely designed for you and to meet your investment needs.

To build an almost perfect portfolio, you would need to investigate the financial performance and sector performance of your selected companies you want to buy their stocks.

Conclusions:

I think investing in Dar Es salaam stock exchange is easy compared to advanced markets such as the New York stock exchange because it has only 29 listed companies so far, this makes it easy to track the performance of all companies and determine which ones are doing well and bad. Even the approach of diversification becomes much easier, it's just you have to differentiate them according to their sectors. 29 companies shouldn't be many if you are determined to do that. 


Disclaimer: This post is not an investment advice. It’s only intended for you getting knowledge.

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M.k Butinini
Written by

M.k Butinini

Multiple knowledge in the financial market and investment opportunities.

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