Investing on the stock market is often viewed as an activity for multi-millionaires, but in reality, anyone can invest if they know how.
Speaking at a media day at the JSE, director of data sales at the exchange, Ana Forssman, told attendees that, counter to conventional thinking, investing in the stock market wasn’t reserved for people with large sums of money – but anyone could start investing with as little as R300.
Forssman underlined South Africa’s lack of saving culture, and pointed to investing on the stock markets as a viable avenue to grow one’s finances over time – and through investing, boost companies to help create jobs.
How shares work
Shares are a “slice of a company’s pie”, according to Forssman. Also referred to as stocks or equity, shares are simply a piece of a listed company which you own.
When a company performs well – and depending on the type of share you own – shareholders are entitled to a piece of that company’s profits (called a dividend), and also a to have a say in the company’s operations.
Share prices are affected by various conditions, including supply and demand; a company’s profitibility; as well as sentiment – the general “feeling” or outlook investors have towards the company, sector or market in which the company operates.
Sentiment is impacted by social, political and economic events such as civil unrest, fuel prices, or wide-scale economic crises such as the Euro crisis.
Making your choice
Deciding which company to invest in isn’t a quick, on the fly decision, and requires research into the market you want to invest in.
Forssman recommends going on investment courses, speaking to stockbrokers, reading the financial reports of the companies you’re interested in as well as reading analyst reports.
Forssman emphasised that potential investors needs to understand the companies they’re targetting – looking at their growth strategy, and considering their sustainability over time. It’s also important to understand a company’s dividend conditions and other investor-related aspects.
Forssman provided the following tips for first-time investors:
- Decide how much you want to invest;
- Target what you want in terms of returns;
- Choose an investment that meets your needs;
- Determing how long you want to wait;
- Invest with money you can afford to lose.
“Investing is a risk,” said Forssman, “Never borrow to invest, because you run the risk of heading into serious debt problems.”
The types of shares
Shares come in various forms – and there are different ways to invest in them.
Ordinary shares or common shares are, as the name implies, the most commonly-available stock in a company. These shares entitle holders to a dividend from the company, as well as voting rights on certain operations.
Preference shares are non-voting versions of stock, which entitles holders to certain privileages not found in common shares. When dividends are paid, preference share holders get paid first – and in the event of a company shutting down, preferred share holders have claim to liquidation proceeds.
Both ordinary and preferred shares also come in various forms with different requirements and benefits.
Investors that can’t afford to invest into companies directly can look at putting money into exchange traded funds (ETFs), which are a “basket” of shares or stocks that can be bought into at a more affordable rate.
ETFs are appealing to public investors due to their lower prices and greater diversification across a pool of stocks – Eg. New Gold, Top 40, Div+.
Risk and reward
While investing in the stock market is always a risk, there are options available that are safe – or “safer”, Forssman said.
Commodoties tend to be risky investments – with shares in platinum, in particular, showing fluctutation based on recent socio-political events.
Safer investments would be in the form of pure cash (in savings or fixed deposits) or government bonds.
However, Forssman pointed out that, at current interest rates which are under inflation, cash actually devalues in savings accounts – and at R1-million a pop, government bonds are out of a typical public investor’s reach.
The safer option for inexperienced public investors, according to Forssman, would be in ETFs.
Where to invest
The best way for every-day people to start investing would be through online share trading.
All the banks in South Africa have an online share trading platform for banking customers to use, and is such the most accessible means for inexperienced investors to kick off their portfolios.
Other online trading platforms, such as ETFSA and iTransact, provide access to ETF baskets – giving a layman’s overview of stock portfolios with corresponding risk ratings.
A more real-world route for investing would be through stockbrokers.
Stockbrokers assist inexperienced investors in selecting and managing their investments. They can either be discretionary – making investment decisions without your say, but in-line with your agreed aim – or non-discretionary.
Stockbrokers charge a fee, and as such, Forssman recommends investors balance their planned investment limits against said fees.
When it comes to investing, you need to exhibit self-discipline, don’t get emotionally rooted, “and have patience – it’s a long-term thing,” said Forssman.