Investment gurus will tell you there are two ways to make money. One is to work for it. The other is to get it working for you. Research shows that good shares on the stock exchange consistently deliver a higher return than almost any other investment in the long term. However, investing in stocks is not for sissies – because it does carry an element of risk, especially if you approach it like a night at the casino.
The returns do come with some risk. The sheer volume of options to choose from when investing in financial markets means that you have to know your stuff, There are over 400 companies listed on the Johannesburg Stock Exchange, then you have over 800 Unit Trusts, 50 Altex shares, and 53 Exchange Traded Funds . So where do you start?
Without going into a war and peace missive about what the stock market is, for the uninitiated, when you buy shares in a JSE listed company, or a unit trust you own a small piece of it. If the company’s performance is good and the shares become more valuable, you make money. If the company’s performance is poor and the shares drop in value, you could lose money, it’s pretty much that simple. There are in fact 2 ways to earn money on the JSE, the first is through the value of your shares increasing, the second is through dividends. A dividend is a payment made by the company you are invested in. When a corporation earns a profit or surplus, they can either re-invest it in the business (called retained earnings), or they can distribute it to shareholders as a dividend.
Most people own shares without even knowing it. When you put money into a retirement annuity, endowment policy or unit trust the insurance or investment house is investing a portion of your money on the stock exchange. They earn a fee for investing on your behalf. , When you invest directly in the stock exchange, and the shares increase in value, you get all the profit. Your cost is a small brokerage commission of around .4% or there can be a fixed fee per transaction. You can use a broker or trade online, online trading costs less than using a broker but the downside is that you don’t have access to advice.
The Stock Market is not a get-rich-quick scheme. You must take the time to learn about it, then allocate at least two hours each week (or each day if your really excited about it) to keep in touch with your investments and other opportunities.
Spend a few hours each week reading the financial press. Learn about the economy and hone in
on companies that look likely to benefit from economic trends. Learn how to look at the
fundamental information that’s available on each listed company. Get to understand just two or
three of the key things that will make a company’s share price grow (like earnings per share
growth) then focus on those things when deciding which shares to buy. Better still, have a look at
Standard Banks free online trading course for beginners.
Should you be investing? Yes, but there are some “buts”. When investing in the JSE you must have a medium to long term view and you need to be relatively secure financially, i.e. not using the JSE as a last ditch attempt at shoring up your retirement funds. The reason for this is that if you are overly emotional, you are more likely to take risks that may not pan out. Shares should form a part of your retirement strategy. In other words don’t invest all of your money in the JSE.A financial advisor will be able to help you get the right mix.