INTRODUCTION TO INVESTINGINTRODUCTION TO INVESTING

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Online Share TradingOnline Share Trading

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““You don’t have to be wealthy to You don’t have to be wealthy to invest.invest.

But you do have to invest to be But you do have to invest to be wealthy.”wealthy.”

Warren BuffetWarren Buffet

(3(3rdrd richest person in the world) richest person in the world)

Impact of costs

Do I need a lot of money to start investing?Do I need a lot of money to start investing?

Explanation

● You don’t need a lot of money to start investing on the stock market as there are many investment products available to suit everyone’s pocket.

● Some products, like Exchange Traded Funds (ETFs), offer investment plans where a monthly debit order (minimum of R300) or once-off lump sum (minimum of R1000) investment can be made.

● Stockbrokers don’t always require a minimum investment amount. With online share trading now widely available, you are able to invest any amount on the stock market via the internet.

● However, be aware that stockbrokers do charge fees and that it makes sense to invest an amount where the costs that you pay aren’t bigger than the amount you’re investing.

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What is investing?What is investing?

Investing is the proactive use of your money to make more money or, to say it another way, it is your money working for you.

Investing is different from saving.

Saving is a passive activity, even though it uses the same principle of compounding. Saving is more focused on safety of principal (the amount you start out with) and less concerned with return.

Many ways to invest

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What is NOT investingWhat is NOT investing

● Investing is not a pastime

● There are no magic formulas or Holy Grails

● It is not luck

● It is not having access to inside information

● It is not a get rich quick scheme (e.g pyramid schemes)

The general misconception

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Many ways to investMany ways to invest

● Stock market

● Art

● SME

● Property (not listed)

● Coins

● Gold

Each have Different Risks

Risk vs. Reward

What are shares?What are shares?

 

Explanation

 

● If you own a share, you own a portion of a company. In the same way you can see your ownership of a company as a slice of pie, cut out of a bigger pie.

● Someone who owns one or more shares is called a shareholder.

● Shareholders may receive cash flows (dividends) if a company’s board of directors declare that the company has performed well and has enough profit to distribute to its shareholders.

● A share in the company gives you the right to vote on decisions affecting the company.

● You can also call a share, ‘equity’ or ‘stock’.

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Why do companies sell their shares?Why do companies sell their shares?

Explanation

● The newly listed company lists its shares to make it available to the public. This is known as an Initial Public Offering (IPO).

● The company uses the money received from selling these shares to develop and grow their business. This is another way, other than obtaining a loan, for a business to expand.

● This process is also known as primary trading

● Also, when listing its shares, a company gains public awareness and it’s brand becomes more well known. This in turn will make new investors aware of the company and its performance and therefore will also be more inclined to invest in a company that they are familiar with.

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Why invest in shares?Why invest in shares?

Explanation

● As a shareholder you receive the following monetary benefits:

● Capital growth – this means that when buying a company’s shares at a lower price and then selling them at a higher price, you make a profit.

● Cash flows (dividends) – this means that when the company performs well and has enough profit, it will reward its shareholders and payout a portion of it to its shareholders.

 

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Where do I keep my shares?Where do I keep my shares?

Explanation

 

● Many years ago company shares were issued to its shareholders as paper certificates.

● Luckily, should you have or know of anyone that still has paper certificates, you can have them dematerialised or converted into electronic format.

● Today, individual investors keep their cash and shares (in electronic format) with a stockbroker, who appoints a Central Securities Depository Participant (usually a bank) to interact with the Central Securities Depository (Strate).

● Strate allows for all share transactions to be done electronically.

● Only once shares are in electronic format, can they be bought and sold.

● The trade (transaction) occurs (day T) and 5 days later, the buyer receives his/her shares and the seller receives his/her money.

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What does a share holder get?What does a share holder get?

● You own a share of the company

● Share in profits (dividends)

● Share in the growth (short term sentiment, long term fundamentals)

● Attend, vote and ask questions at the Annual General Meeting (AGM)

● Right to be informed (Stock Exchange News Service – SENS)

● First right to new share issues (rights issue)

Strategy & Risk Management

What is the share price?What is the share price?

Explanation

● The share price is the price at which a particular share can be bought or sold. The share price is determined by the supply and demand for a particular company’s shares.

●Factors affecting the share price When you have more buyers than sellers for a particular company’s shares, share prices usually rise because these shares are in demand.

● When you have more sellers than buyers for a particular company’s shares, share prices usually fall because there are more of these shares available.

● If a company is very profitable, a share in that company will become more valuable because more people think that it is a good investment.

● Factors such as economic and political events also influence share prices.

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What is RISK?What is RISK?

Explanation 

● Risk is the possibility of losing part or all of your initial investment or the likelihood of making a profit that is less than what you anticipated.

● Different securities or products have different levels of risk.

● Securities that are regarded as lower risk securities include:

● Cash in a bank or money market account that earns interest;

● Government bonds (an interest-paying debt instrument issued by the government with a redemption date of one year or more after its issuance);

● ETFs (even though similar to shares).

● Higher risk securities include:

● Shares, warrants, derivatives and corporate bonds

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Risk vs. RewardRisk vs. Reward

REWARD

RIS

K

Can’t have one without the other

What is NOT investing

Is there a risk involved when investing in shares?Is there a risk involved when investing in shares?

Explanation

● Investing on the stock market is riskier than some other investments. The reason for this is that share prices rise and fall all the time as economic and market forces change.

● However, the higher risk involved also means that you have an opportunity to make a greater profit. Usually, higher risk means a higher return (profit).

● It is important to realize that share trading normally does not make you rich overnight, but that it should be treated as a long term investment.

 

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Can I minimize the risk of my investment?Can I minimize the risk of my investment?

Explanation

● You can minimize your investment risk by diversifying your investment.

● To ‘diversify’ means to invest in a variety of different investments. To protect your investment you should avoid putting all your ‘eggs’ in one ‘basket’. When one company’s share price doesn’t perform well, you can still benefit when your other company’s share price does well.

● Consider choosing your investments from a variety of sectors, companies and investment products.

● To help you with this decision consider regularly reading financial literature, attending investment courses and seeking a qualified expert’s advice.

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StrategyStrategy

Develop an investment strategyVideo2

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Develop an investment strategyDevelop an investment strategy

● Know yourself

● What is your risk profile and risk tolerance?

● INTENT

● What stage of life are you at? What risk can you take?

● Young● Married with children● Retirement

● What knowledge stage are you at?

● What is your investment time frame?

● Investing for Growth or Income?

● Common Sense

Common Mistakes

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Common MistakesCommon Mistakes● No investment strategy.

● Investing in individual shares instead of in a diversified portfolio of securities.

● Investing in shares instead of in companies.

● Buying high and selling low.

● Churning your investments.

● Acting on “tips” and “sound bites”.

● Unrealistic expectations.

● Neglect.

● Not knowing how much risk you can take.

How risk is managed

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JSE investments: Risk vs. ReturnJSE investments: Risk vs. Return

Derivatives

AltX

Mid cap

Large cap/growth

Blue chip shares

Cash / Fixed deposits

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Increasing safety of capital

Start here

What is a reasonable return?

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Choosing companies Choosing companies to invest into invest in

ResearchVideo3

How do I know which company to invest in?How do I know which company to invest in?

● Explanation

● Do research on the stock market through regular reading of financial literature, attending investment courses and seeking a qualified expert’s (like a stockbroker) advice.

● This will enable you to make educated decisions on which companies to invest in.

● Determine how much risk you want to take on, how much return (profit) you expect and which investment products meet your needs. Consult a stockbroker if you need additional advice.

● Try to be committed to this investment objective. Always remember that you should invest for the long run, e.g. have a 5 year investment objective.

● Determine how long you are prepared to wait for a return on this investment and be patient. If a share does not perform you may need to review your strategy.

● Invest with money that you do not need in the short run and can afford to lose, i.e. your disposable income after all your day to day needs have been taken care of.

● Although investing allows you to make a good profit you should also be aware of the risk of losing money in the short run

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How do I gain access to the stock market?How do I gain access to the stock market?

● Explanation

● To buy or sell shares on the Johannesburg Stock Exchange (JSE) you need to open a brokerage account with a stockbroker.

● How to open a brokerage account

● Buying and selling ETFs does not require a brokerage account. You can contact the ETF provider directly to invest in these investment products. However, owning a brokerage account allows you to invest in all kinds of investment products, not only ETFs.

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ResearchResearch

● Start with names you know and trust

● Would you do business with them

● General long term prospects

● Do you know a bit about the business

● Do they have good Leadership

● Financial strength and capital structure.

● Strong companies in strong sectors.

● Buy the company – not the share

Pick & Pay

Some Shares you can invest inSome Shares you can invest in

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Some wisdom to keep in mindSome wisdom to keep in mind

● Invest an amount that makes sense in comparison to the amount of brokerage fees that you’ll be paying.

● Plan your investment objective, exercise self-discipline (commit to your long term investment strategy) and remember to monitor your investment performance.

● Steer away from borrowing money to invest, especially if you are not sure whether the profit you will be making on the investment will be able to repay your interest on the loan and your loan over time.

● Exercise patience and do not become emotionally attached to your investments. Some days your investment will make money and other days it will lose money.

● Ensure that you try to diversify your portfolio.

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Lessons from the Lessons from the MastersMasters

Warren Buffet Chairman Berkshire Hathaway

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Warren Buffet Warren Buffet Chairman Berkshire HathawayChairman Berkshire Hathaway

● You only have to do a very few things right in your life so long as you don't do too many things wrong. Rule No1: Never lose money Rule No2: Never forget rule No1.

● Risk comes from not knowing what you're doing.

● Key lesson : Stop loss, education

John (Jack) BogleFounder and Chairman of The Vanguard Group

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John (Jack) BogleJohn (Jack) BogleFounder and Chairman of The Vanguard GroupFounder and Chairman of The Vanguard Group

If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks.

● Key lesson : Stop loss, know your risk profile

Peter Lynch Former fund manager, today he is vice-chairman of Fidelity

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Peter Lynch Peter Lynch Former fund manager, today he is vice-chairman of FidelityFormer fund manager, today he is vice-chairman of Fidelity

Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it.

● Key lesson : Know the companies you are investing in.

John Templeton Founder of the Templeton Group

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John Templeton John Templeton Founder of the Templeton GroupFounder of the Templeton Group

The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.

● Key lesson : Be contrarian.

Benjamin Graham“father of value investing”

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Benjamin GrahamBenjamin Graham“father of value investing”“father of value investing”

To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.

● Key lesson : Do your home work.

Benjamin Graham“father of value investing”

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Benjamin GrahamBenjamin Graham“father of value investing”“father of value investing”

Intelligent investment is more a matter of mental approach than it is of techniques.

A sound mental approach toward share fluctuations is a touchstone of all successful investment under present-day conditions .

● Key lesson : Don’t be emotional.

Books

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Books

Books

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BooksBooks

● One up on Wall Street – Peter Lynch

● Intelligent Investor – Benjamin Graham

● Making of an American Capitalist - Roger Lowenstein

● Effective Investor (SA book) – Franco Busetti

Summary

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SummarySummary

Summary

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SummarySummary

● Investing in the share market makes sense.

● Develop a Strategy

● Good companies perform in the long term.

● Buy the winning stock in the winning sector.

● Jargon can be overcome.

● Research before and after you buy.

● Buying and selling share is easy.

● Move towards 5 stocks.

● Buy the company not the share.

● Know your risk level and intention.

● Education is ongoing

Summary

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SummarySummary

Top down approach

● Select strong markets

● Select strong sectors within those markets

● Select strong stocks within that sector

Next Steps?

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Next Step?Next Step?

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