A beginner’s guide to the stock market

Last updated on 21st October, 2019 at 10:00 am

Is it for me?

According to head of Sanlam iTrade, Gerhard Lampen, more than 100 000 people in South Africa invest online in the stock market. Most are ‘ordinary people’ who have learnt how to invest for themselves. Remember that the stock market comes with risks; the outcome is never guaranteed. You’re putting your trust in companies that can be affected without warning.

Investing in the stock market isn’t the same as saving. Here are some key differences between the two:

Saving

What you put in is what you get out.
Time period: 0-5 years.
Goal: New car, a holiday, an emergency fund.
Pro: Withdraw when you need to, low risk of losing money.
Con: Because you’re less willing to take risks with this money, you won’t be rewarded with as good a rate. Your money won’t grow as much.

Investing

Put away money now so you can get more in the future.
Time period: 10-50 years.
Goal: Your children’s university education, your retirement, growing your wealth without a specific purpose.
Pro: Your money grows exponentially over time.
Con: Investing involves a risk. The more you risk, the greater reward you could see. But this means you could lose money, especially in the short term.

When should I start investing?

There is no time better than now. Time allows your money to grow with the power of compounding interest. Markets also need time. Although they may drop suddenly tomorrow, they tend to grow in the long term

Some terms, defined

Stock/share

A share of a company bought for investment. The price of a share is the company’s worth divided by the number of shares it creates. When you buy one, or a percentage of one, you’re hoping the company does well and the value of your stock increases.

Stock market/exchange

This is a central place where you can buy and sell stocks. The Johannesburg Stock Exchange (JSE) is South Africa’s stock exchange.

Stock broker

A person or company who buys and sells stocks on your behalf, for a fee. They’re your way of interacting with the stock market and they need to be licensed to do this.

Shareholder

Someone who owns at least one share in a certain company. Sometimes this gives them the right to vote on company issues.

Dividend

Income you get just for having a share in a profitable company, paid quarterly or annually.

ETF (exchange-traded fund)

A type of stock that splits your investment across a collection of stocks from top companies. Learn more about the benefits of an ETF here. [https://www.sanlamreality.co.za/wealth-sense/etfs-explained/]

Diversification

Protect your investment by buying stocks from companies with focuses in different areas. If something bad happens in one sector, you’ve limited the effect it will have on your investment.

4 Tips for buying your first stock

1. Research online

“Spend some time reading and learning,” says Lampen. Online information, like the courses he offers through the Sanlam iTrade Academy, is free. Be wary of investment opportunities that sound too good to be true – they often are. One such opportunity is pyramid schemes.

2. Consider an ETF

For your first investment, it’s easier to have a suggested basket of stocks that should perform well.

3. Do a demo

“Investment platforms often let you try out investing with fake money first,” says Lampen. Practise investing without the risk before taking the plunge.

4. Be patient

Watching your investment rise and fall can be stressful. Nicolé Cupido, brand manager at Sanlam Investments, says: “Stay the course. Markets fluctuate, but always remember that investing is for the long term.” Inflation will also affect your investments. Find out how to beat it here. [embed: https://www.sanlamreality.co.za/wealth-sense/inflation-beaters-protect-investments/]

How do stocks make money?

1. Over time, the company you have a share in will hopefully grow and your stock will become more valuable. You make money when you sell your stock for more than you bought it.
2. Profitable companies can use their profits to strengthen their business, but they might also give a portion to shareholders as a dividend. Not all companies pay dividends.

Get started online with these Sanlam investing platforms (or speak to your financial planner):
Sanlam iTrade
Satrix
Sanlam Smart Invest

Want more tips on how to invest as a first-timer? Click here.

If you have a growing family but want to balance it with financial security, consider these options.

Speak to a financial planner to get the right, personalised advice. Plus, if you’re a Reality Core, Reality Plus or Reality Health member, you’ll earn tier points! Visit www.sanlamreality.co.za/contact-an-adviser for more.