You’ve probably watched movies like The Wolf of Wall Street and The Big Short that depict the process of investing and trading in the stock market as a glamorous and highly rewarding experience. Who wouldn’t want to make millions in just a few weeks and then live the good life?
While you can make loads of money from investing in the stock market, in real life, it happens over a period of time and it’s definitely not a get-rich-quick scheme. Investing in the stock market may come across as plain complicated and inaccessible to ‘normal’ people that don’t have millions in the bank. But the good news is that it’s actually a lot simpler than it all seems.
According to Ridwaan Moolla of Absa Wealth, Investment Management & Insurance, it’s advisable to first open an Exchange Traded Fund (ETF) account, and most importantly have a good understanding of what you’re doing. It is your money after all and you should take care of it.
“When you’ve started investing in the form of an ETF account, you’ve basically started building what we call the investment risk pyramid. It means that you’ve given yourself some exposure to how the system works. After starting with low risk investments, you can work your way up to high risk investments.”
The beauty of it all is that there’s no compulsory minimum amount that you need to start your investment off with. Moolla says it’s important to take into consideration the amount of time it will take for your share to grow until it covers your original buying cost.
“Simply put, this means that if you buy a share for R100, but it’s going to cost you R10 to invest, then your cost as a percentage is 10%. It ultimately means that your share will have to grow by 10% before you cover the buying cost. But if you invest R250 on the other hand, your cost as a percentage will only be 5%. This should purely be used as a benchmark of which investments are worth it, and which aren’t. You should always try to keep costs as a percentage of your investment below 5%.”
With more than 600 companies listed on the Johannesburg Stock Exchange (JSE), how are you supposed to know which companies you should invest in? Great news is, that this is also not as difficult as it initially sounds.
According to Moolla, the easiest way is to personalise this process by identifying companies and products that you come into contact with on a daily, or even weekly basis. Where do you buy your groceries? If it’s for example Checkers, and you feel like you’ve built a relationship with them over the years, the next step is to go and do some research around their history in the stock market. Your research should be structured around answering and elaborating on the following questions:
- How stable is the economy?
- Which sectors are over or underperforming in the current economic climate?
- Which companies are performing best in that specific sector?
“The most important thing is to refrain from buying all of your shares in one sector because if it’s, for example, the food sector and it crashes for whichever reason, you’ll lose all of your money at once.”
Did you know that you can also get payouts from the companies that you’ve invested in once or even twice a year? These are called dividends. “In South Africa, companies look and see what profits they’re making about every six months. Remember, when you’re a shareholder of a company, you essentially own a piece of that company. So when a profit has been made, the company can reward shareholders for investing, by paying them a divided. The percentage page called Dividend Yield (DY) is calculated by taking the dividend declared and dividing by the shares price. It’s like earning a percent of ‘interest’ on your invest.
A good dividend is anywhere between 3% – 6%, while anything over that is considered highly lucrative.
This all sounds great but nothing in life can ever be moonshine and roses all the time. These are the pros and cons of investing in the stock market.
- It’s a brilliant place for long-term investing
- Over time, you get massive returns on your money
- It delivers the best returns per annum
- If you haven’t done your research and you don’t know what you’re doing, it’s probably not going to end well for you.
- Don’t follow “hot tips” that are given to you through contacts – most of the time these don’t work out.
- Everything in the stock market is about risk vs return so large well established companies might give you super capital growth but will grow steadily over time. High risk shares like penny shares can give huge growth but remember they can also go broke.
“Your worst case scenario is losing the money you’ve put in, because of inflation, companies collapsing, an unstable currency, and so forth. But diversification is the best way to protect yourself from anything that might happen externally.”
Even if the economy is struggling, like it did in December 2015, financial shares dropped in value but gold shares did very well and gained a lot. So if you invested in both these sectors you would be doing well.
Do you want to know more? Hop over to Absa’s dedicated stockbrokers website, where you’ll find video tutorials, quick links and all the information you’ll need to successfully grow your money over a period of time.
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.