The stock market for first-timers

Last updated on 12th December, 2017 at 05:10 pm

The stock market is a potentially lucrative place to invest your money but it’s not a casino where you gamble and luck determines the outcome.

If there is one thing that should convince all of us of the importance of saving for a nest egg, it is the ever-increasing cost of living. Investing your money in the stock market by buying and building up a portfolio of shares on the Johannesburg Stock Exchange (JSE) is one of many investment options available.

What is a stock exchange?

A stock exchange serves a dual purpose: first, to create a market where buyers and sellers can trade in shares; and second, to enable companies to raise capital for expansion or new ventures. When you buy shares, it gives you part ownership of a company; in other words, as a shareholder you own a small part of a business. As a shareholder, you may vote at the AGM and you’ll be entitled to part of the profit when dividends are declared by the board.

It’s not for gamblers

First and foremost, newcomers to the stock market should know that a stock exchange is not for gamblers and you should not lend your ears to talk about so-called big winners and easy gains. Titled Shares Made Simple, Sanlam iTrade offers a free course for beginners that demystifies the stock market. Find out more at www.sanlamitrade.co.za. Instead of jumping straight into the market with real money, first familiarise yourself and learn with a virtual portfolio. This allows you to buy and sell shares with virtual money and learn how they react to factors such as a company’s profit statement as well as news-breaking national and international events. When you finally take the plunge, it is more cost effective to trade in shares online rather than consult a financial planner. “The right way to go about investing on the stock market is to do extensive research on companies, watch TV programmes such as CNBC and Bloomberg that focus on stock markets, movements and trading, and enrol for courses to educate and enlighten yourself about shares and the stock market,” advises Gerhard Lampen, Head of Sanlam iTrade Online at Sanlam Private Wealth. He estimates that you need to spend about 30 minutes to an hour on your portfolio of shares in the evenings. You can protect your portfolio with automatic stop-loss orders while you are at work during the day, he adds.

Selecting shares

Over the years, shares have remained the best performing asset class and have consistently outperformed treasuries, property and cash, Lampen points out. Beginners with limited savings could consider investing in Satrix 40, which offers diversified exposure to the top 40 resources, industrial, retail, telecommunication and financial companies on the JSE. You can start with as little as R300 a month or a R1 000 once-off investment. Once the value of your portfolio has reached approximately R20 000 and you’ve gained sufficient knowledge from virtual trading, you may consider managing your own portfolio and buying an additional, say four, shares in different sectors to ensure that you diversify your portfolio, Lampen suggests. A well-balanced share portfolio could, for example, entail a third of your investment in Satrix 40, a third in Satrix’s financial portfolio and another third in its offshore portfolio, according to Lampen. He adds that one should not be misguided by historical investment returns, as they do not guarantee future returns.

How much and for how long?

Lampen cautions that the days of strong economic and stock exchange growth may be over, so, in terms of expectations of share yields, investors should be realistic. Going forward, he envisages real growth of 6% to 8%. Taking into consideration inflation at 6%, an investment portfolio, including dividends, should grow some 12% to meet your needs, say in 20 or 30 years’ time. The sooner you start investing, the sooner you will reap the benefits of compound interest. If you set yourself an investment horizon of 30 years, it should be relatively easy to reach your investment targets. However, when you start saving only later in life, you’ll need to put aside much more money.

Buy quality before short-term gain

From time to time, when share prices have been consistently very high, stock markets undergo corrections and even crash, causing what is called a bear market, which occurred in 1998 and 2008 and again last year. During a correction, which is short-lived, there is no need to panic and sell your shares. In fact, it gives you the opportunity to buy more shares at a favourable price. The big secret, stresses Lampen, is to buy quality shares that have the potential of future growth. These will always recover to former high levels after a bear market. However, if you buy relatively weak shares, in companies with high debt levels, there is the possibility that you may lose everything.

By Wilma de Bruin