In this blog post I share some insights of the bare basics to get an investment portfolio going of your own. I can’t stress enough of the vital importance of starting investing as soon and as early as you possibly can!
So lets start with the bare basics…
What is a share?
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’.
What is the share price?
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.
How do I know which company to invest in?
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 minimum 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.
What is risk?
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.
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.
Can I minimize the risk of my investment?
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.
Is it difficult to manage my investment portfolio?
Certain investment products require little or no management. However, always be sure to be aware of how your investments are performing. Stockbrokers also offer different types of services to help you manage your investments:
Discretionary
All investment decisions are made by the stockbroker without checking with you, but is made in line with an objective.
Non-discretionary
All investment decisions are made by you, after the stockbroker has given the necessary advice.
Inexperienced investors and even seasoned investors can look at a single investment product that offers you exposure to a wide variety or ‘basket’ of shares, bonds and even gold. This product is known as an Exchange Traded Fund (ETF)
ETFs are fairly easy to do research on (as opposed to researching numerous companies), offer lower costs and are able to spread your risk across a variety of shares, bonds and gold.
However, Exchange Traded Funds do not offer you direct voting rights, as is the case of with ordinary shares. You still however gain the benefit of receiving dividends in some instances.
Do I need a lot of money to start investing?
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.
There are products like ETF’s.
Exchange Traded Funds (ETFs),
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.
How do I gain access to the stock market?
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. Some things to consider is to 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.
I hope this post has helped you and given you some insight on how to begin your journey to investing on the stock market.
Happy Investing