Module 1

Introduction to investing on
the Johannesburg stock exchange

After you have completed this module, you should be able to:

• distinguish between the main classes of investments;

• classify the risk factor of shares;

• categorise the relative returns from the various asset classes; and

• summarise the basic steps for wealth creation.

Why invest on the stock exchange?

'How do I go about investing my hard earned, after tax savings on the stock market?'

'Why should I invest my savings in the stock market?'

Investors do not have too many basic choices in which to invest their savings for growth. Today this may sound strange with the hundreds of 'investment products' generated by the numerous financial institutions and aggressively marketed to you the private investor. If we reduce these 'super sophisticated, financially minimum-guaranteed, products' to their basic level, and analyse exactly where your funds are invested, we then discover that there are really only three main categories or classes of investment:

• your money is invested in property (usually commercial);

• your money is invested in government bonds / money market or other types of fixed income earning investments; and

• the bulk of your money is invested in shares of companies (usually shares listed on a stock exchange).

There are other categories of investments, such as commodities which include gold, silver and platinum etc., alternative investments such as stamps, rare coins and artwork etc. and derivatives (discussed later), but these classes are the exception rather than the rule.

Now you are probably saying to yourself, 'I cannot invest my savings myself, isn't it advisable to give it to someone who knows what they are doing?'

Yes, financial money managers may know all about investing your money but remember that you end up paying for their services - whether you know it or not. Think about the large commissions to the insurance agents, huge head office and branch overheads of the financial institutions and their profit. This expenditure can only come from one source - your 'investment money.'

While commission-driven salesman and large financial institutions may care about your financial independence, they are obviously also very interested in their own profitability, which can often lead to a conflict of interest and lower returns on your investment monies. The smaller your available investment funds, the less personal attention you can expect to receive.

A very important principle to investing is to invest in you. The large proportion of South Africa's population have the pre-conceived assumption that investing, or indeed anything to do with finances, is totally beyond their capabilities. They are quite willing and eager to relinquish this important function to commission driven brokers, consultants, experts, professionals and some not so professionals. Yes, it is important to seek the wise counsel of an expert, but before you do, invest in knowledge. Obtain an understanding of investments; it is not as difficult as what some would like you to believe.

Derek Bok, former President of Harvard once said, '…if you think education is expensive, try ignorance!'

Over long periods, history has revealed to us that capital invested in the equities (stock) market has produced superior returns compared to all other forms of investment. This does not mean that there are guarantees in place. It is extremely important to perform proper research.

Shares are classified as financial assets, i.e. the investment, which although symbolising a stake in a physical underlying company, are only represented by a piece of paper, a share certificate. For this reason, and the fact that the share prices seem to bob up and down for no apparent reason, many people fear investing in the stock market. They feel safer investing their hard-earned money in a 'physical asset' such as a property. To these people, the stock market is similar to a large casino, where luck is the determining factor.

Nothing could be further from the truth – knowledge of the stock market, coupled with the correct approach to investing, WILL determine the level of success achieved.

To be sure, no investment is 100% secure, but in times of inflation and high taxes, investments that hinder your financial independence (and should therefore be considered risky) are those that are heavily taxed and whose returns cannot keep up with the inflation rate.

How risky are shares?

To find out how risky shares are, order the course