How to buy shares
JOHANNESBURG Most of us have big dreams of one day owning a home in an exclusive neighbourhood, driving fancy cars, dressing in the latest designer wear, while also being able to travel overseas on holiday. Perhaps also owning a holiday home in Cape Town and being able to send our kids to great schools. The sad part about this lifestyle is that people generally think that you either have to live on a lot of debt, rely on receiving a huge inheritance from your grandmother or have a super cushy job like being the CEO of Shoprite and receive crazy bonuses every year to afford it. Some even believe you need to marry rich! Fortunately that is not entirely true. One can live like this one day by learning to work smart with one s money now and making financially savvy decisions to build one s wealth. One of them is by investing in shares. Why? Because in the long term, your investment is likely to increase faster than any other traditional investments. But take note that it can also decrease just as fast. Risky, I know. But it is the nature of the game.
In my column last week I explained what a share is and this week I will explain how you can buy shares and the elements surrounding your purchase.
Ever heard of the phrase Money never sleeps, money never gets tired ? We can apply it to the stock market as it operates 24/7. But what exactly is a stock market? It is a place where buyers and sellers meet to trade financial instruments like shares, currencies and commodities like steel and gold to name a few. All this is done mostly on the internet. Shares are valued using supply and demand, meaning the more people want shares in a certain company, the more those shares will cost and vice versa. The other method is by working out the value of the company and how it is doing. Meaning that the more a company is worth and the better it does, the more its shares will cost. It can be hard to predict all these amounts as they can fluctuate. Several elements can influence the value of a share. Things like economic times as when the economy is doing well shares cost more as there is more money to go around, political uncertainty (ask Egypt and Libya ) and a lack of confidence from consumers. Share prices can even be influenced by the kind of CEO the company employs. For instance, if a CEO that has no experience in the industry and a bad track record (where is Khaya Ngqula by the way?) is employed, then the share price will drop.
So how do you buy shares?
Before you buy shares, do some research about where you want your money to go. Google different companies and speak to people with the necessary knowledge. Read the finance section of newspapers on a regular basis (Hint: Moneyweb handles The Citizen s finance section) and attend seminars that deal with finances. Set an investment growth target that is above 6% as this beats our government s inflation target of between 3% and 6%.For instance, if you invest R1 000 over a year, make sure that your investment will grow to be above R1060, which is calculated in this way:
R1000 x 6/100 = R60.
(Luckily JSE listed shares generally make much more than this. Because I honestly would not see the point in investing R1 000 over a year and only gaining a measly R60!)
Determine how much risk you are willing to take. This is also called your risk attitude. Some people are conservative towards risk and need a high return as compensation for investing, others are moderate and therefore do not require a high return. Then you get those who are aggressive, meaning they only require a low return in order to be convinced to take on risk. After this, look up shares that match your attitude.
Then call the JSE or log on to its website to open a brokerage account with a stockbroker. This account allows you to invest in JSE listed shares. With regards to going about your investment, there are two options: you can use a stockbroker or go the DIY route. The latter can be a bit tricky if you are inexperienced but it is cheaper as stockbrokers do charge a fee. Stockbrokers are licensed members of the stock exchange who trade on your behalf and give you stock related advice. The stockbroker will need your name, contact number, ID number, Sars tax number, banking details, a copy of your ID, licence or passport, a copy of your utility bill to see your proof of address and a copy of your Sars documents as proof that you have an income tax number. Different stockbrokers charge differently so it would be wise to compare prices before you settle with one. The JSE website has a list of stockbrokers who are licensed along with their contact details and address. If you opt to work with a stockbroker, just make sure that the fee is much lower than your investment.
Take note that investing in exchange-traded funds (ETFs) (see definition in my column last week ), does not require you to use a stockbroker or a brokeage account. You can contact companies that deal with ETFs directly to buy or sell. To buy ETFs, you need a lump sum of R1 000 or you can pay it in monthly instalments of R300.
To decrease risk, it is always wise to ensure that the shares in your share portfolio, which is a list of all your shares, have a negative correlation. This means that you invest in different types of shares and companies so that when one group is not doing well, you can always depend on the others to do better. Like for instance having shares in financial institutions like Capitec and a retailer like Mr Price. This is called diversifying your portfolio.
The advantages of owning shares are that some companies pay you a return on your investment when they do well. These are called dividends. Your investment also grows over time, and shares give you voting rights over some decisions that the company undertakes. The more shares you own, the more decisions you can make.
As a shareholder you also have the right to some privileged company information, the right to attend annual general meetings or send someone in your place. You will also receive the company s financial statements which tell you how the company performed that year.
The different classes of shares you can invest into are ordinary shares, B- ordinary shares, N- ordinary shares, preference shares, ETFs and bonds. All the ordinary shares are more risky than the preference shares and will therefore earn you a higher dividend as they are also not fixed, unlike preference shares. One of the positive aspects of owning preference shares is that in the event that the company goes under, those who own preference shares will be paid first before everyone else who owns a different class of shares. ETFs are convenient in that investing in them will save you broker charges and your basket of shares will be diversified therefore minimising risk. Government bonds, which I also mentioned in my column last week , are a safer option as the amount is also fixed. And since they are backed by the government, your chances of losing your investment are fairly low as the government is less likely to go under anytime soon.