Investing in the stock market is not only for the wealthy , you can invest in shares directly on the JSE. What is important, however, is to understand the basic principles of investing in equities.
It’s important to understand what it is that you are investing in. That doesn’t necessarily mean that you need to understand the intricate details or the inner workings of the company that you are interested in investing in. At least have an understanding of how the company makes profits and the industry in which it operates. What a company’s past performance looks like and what could significantly impact its future growth. This goes a long way in managing one’s own expectations.
Decide whether you would like to put together your own portfolio of companies to invest in, or whether you would prefer to start with a single trade invested in a predefined list of shares.
Carin Meyer, CEO of FNB Share Investing, says “A predefine list of shares basically means the shares have been preselected for the investor, which can bought through a single trade by investing in a Exchange Traded Fund. The investor can also decide where they would like to put their money by building their own portfolio of shares through deciding which companies to invest in. With FNB’s share investing platform, anyone can invest in the top 100 listed companies on the JSE by combining the RMB Top 40 ETF and the RMB Mid Cap ETF from R300 a month.”
The transaction cost and trade size
The cost associated with investing is still a reality. Consider the following example: Anna’s strategy is to grow her wealth by setting aside R500 each month to invest in shares. If Anna invests in a single company every month at let’s say a cost of R50 per trade, it means that over a 12 month period Anna will invest only 90% of her capital as 10% will go towards fees. That means that the investment will have to grow by 10% for her to simply break even.
However, if Anna saves R500 per month and place a single trade of R1 500 every 3 months she will reduce the fees and invest 97% of her capital and spend only 3% on fees. The less capital you invest in the market the smaller the returns are. This illustrates two very important points; firstly, that investing too small amounts can be costly and chip away at your wealth; and secondly to ensure that the costs of the service provider is in line with what you can afford dependent on your typical trade size.
Be realistic even before you start
The reality is that the market goes down from time to time, make peace with it. It is not always an upward trend over the short term. In the longer term the market always grows but be realistic in terms of the percentage growth as well as the time span of such growth. To expect 30% growth in 6 months is unrealistic. Prepare yourself from the start that when there is downward movement you are able to recognise that it is only temporary and you will not be tempted to make hasty decisions that are detrimental to achieving your goals. When the market declines, the fact that you continue to invest in shares at the lower price, means that you will benefit when the market recovers.
Why have only one basket?
Diversify. It is never a good idea to have all your funds invested into a single company or even multiple companies in the same sector of the market. The different sectors in the market react differently to market conditions and spreading ones investments across companies and sectors, spreads the risk.
“If your asset portfolio does not include shares, you need to start this as soon as possible. It is never too late to start investing in shares. However, it’s important to be in it for the long haul; investing in shares requires a long-term outlook so as to take advantage of upswings in the market and steadily build a strong portfolio”, concludes Meyer.