"Make it your mission to understand & invest wisely. Everyone has the potential to succeed in their search for true wealth & happiness & everyone can be successful in their pursuit of financial freedom." Contrarian Invest

Thursday, 3 April 2014

Investing - The best way to grow your money!

Investing in the stock market is surely by far the best way to grow your money but it can either be a very inviting or intimidating experience to new investors. It was exciting to me when i started my journey into investing on the stock market 13 years ago. I enjoy working with numbers alot which is probably why i also love Accounting so much. After all, Accounting is the language of business. I was always interested in investing & i’m glad I took the plunge into investing back then. I liked the idea that i could own a small share of a business that i liked & share in their profitsMany years later those investments have paid off handsomely.

After reading copious amounts of literature & doing some trading courses on investingI set up an automatic debit order. I bought my very first ETF (Exchange Traded Funds) in 2001. (more about ETF's later in the blog post) . 

It was the Satrix40 ETF. Since inception its yielded a annualized return of 17%.  - My investment horizon is typically five to ten years, and my investment goals are split – between having some stable cash inflow and at the same time build a strong cash base.  I am investing for my early retirement. I plan to 'retire' at 40 :)

The market fluctuates on a daily basis & very difficult to predict, but because i have a long term view i don't stress about the daily movements of the shares or ETF's  i own. I know in the long run i'll benefit from my Rand Cost Averaging strategy & expose myself to less risk. I invest in businesses that have good management teams, competitive advantages in their industries, clean balance sheets, high returns on non-leveraged equity, steady earnings growth and long histories of increasing their dividend every year.  These businesses are easy to understand and the products they sell are recognize brands sold worldwide and don’t change all that much.
It’s best you start investing early. Be consistent. As you know, time is a non redeemable commodity and therefore time in the market can be most beneficial to your portfolio.

In this blog post I share some insights on 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 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.

Are there different types of shares and investment products?
There are various types of shares and investment products to suit different individual needs, for example conservative or “safe” shares versus riskier shares. A list of basic share investment products is included below:

·         Ordinary shares
·         B-Ordinary shares
·         N-Ordinary shares
·         Preference shares
·         Exchange Traded Funds

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:

– all investment decisions are made by the stockbroker without checking with you, but is made inline with an objective.

– 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.
Some products, like…

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 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 :)