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Investing on the JSE

How to Invest: A Tutorial For Beginners

The only way to attain financial independence is by saving and investing for the long run. The goal is to put your money to work for you through a diversified collection of investment vehicles.

Starting a successful investment journey and structuring a long-term plan requires that you should at least know the basics of investing so you can enjoy the benefits of managing your own money.

Investing Vehicles

What is an investment vehicle? An investment vehicle is simply the method by which you invest your assets and control your money.

Here is a list of investment vehicles available in South Africa:

  • Fixed-Term Savings Account
  • Stocks
  • Bonds
  • Exchange-Traded Funds (ETFs)
  • Unit Trusts (Mutual Funds)
  • Annuities
  • Tax-Free Savings Account TFSA
  • Commodities
  • Real Estate Investment Trusts (REITs)

Fixed-Term Savings Account

A fixed-term savings account is a savings account that holds an amount of money for a fixed period of time. At the end of that period of time, you receive the money invested plus interest. So if you invest R5,000 in a fixed-term savings account for 1 year with a 7.60% (effective) interest, you will make a profit of R380 (7.60% x R5,000).
(Reference: Forum thread and Capitec Rate Table)

PS: The nominal rate is when the interest from your fixed deposit account is paid out every month, and not reinvested. The effective rate is higher because you earn interest on the interest that is reinvested in your fixed deposit account.

Stocks

Stocks are a way of investing in a company. It’s a security that gives the investor a share of ownership in that company in return for their money. They are also referred to as “equities”.

In terms of investment, you can have a return through dividends or capital appreciation.

Additionally, you can have two main types of stocks:

  • Common: Where you receive dividends and vote on shareholder meetings.
  • Preferred: Usually, receive dividends before common stocks. Also, they have priority over common stock if a company goes bankrupt.

If you would like to get started with stocks then you can take a look at the Platinum Wealth Basket we were fortunate enough to form a strong relationship with EasyEquities – a low-cost broker that removed most of the barriers to entry that exists with investing.

Bonds

When a company, government or municipality wants to raise money from investors, one way is to issue bonds (debt security) where they promise to pay a specified rate of interest throughout the life of the bond and in the end repay the principal (the money that I’ve invested).

There are other types of bonds such as:

  • Corporate (Private or Public corporations)
  • High-Yield (Lower credit rating -> more risk – Government and Corporations)
  • Municipal (Bonds from cities)

Most governments raise funds via the taxation system. However, to raise as much money as would be needed to fund the total government spending, the rate of taxation would be higher than is politically or economically acceptable.

To fund any shortfall (budget deficit) the government may borrow money by issuing bonds. These bonds are issued in the domestic currency and are deemed to be the securest form of investment in that currency.

RSA Bonds, as issued by the Asset and Liability Management division of the National Treasury, are interest-bearing bonds.

Exchange-Traded Funds (ETFs)

This type of investment represents a way for investors to invest in a fund that makes investments in stocks, bonds or other assets. A way to look at ETFs is to think of them as a basket of assets, you can buy the basket as a whole instead of having to buy everything inside the basket yourself.

Another key feature of ETFs is that you can trade its shares on the stock exchange. (Mutual funds don’t have this option)

There are essentially two types of ETFs:

  • Index-based: Where the fund seeks to track a number of securities from an index such as S&P500. In essence, it tries to buy stocks from the 500 companies that comprise the S&P500. An example of this would be the CoreShares S&P 500 ETF (CSP500).
  • Actively Managed: This type of ETF is more like a mutual fund. Therefore an adviser will actively buy or sell securities regardless of the index. An example of an actively managed ETF would be the NewFunds Equity Momentum ETF (NFEMOM) from ABSA.

ETFs have become popular because they are less costly than active funds: TERs are mostly under one percent, although, according to etfsa.co.za, some specialized ETFs have TERs of up to 1.68 percent. However, because ETFs are traded like shares on the stock exchange, they incur some additional costs, such as brokers’ fees, which are usually not included in the TER.

Unit Trusts (Mutual Funds)

A mutual fund or unit trust is a company that attracts money from investors and then invest in securities such as stocks, bonds or commodities. As investor buys shares in the mutual fund, which represents the investor part ownership in the fund.

Top-performing South African Unit Trusts from 2017

Fund 12-month performance
Satrix Quality Index Fund A1 38.88%
Satrix Momentum Index Fund A1 31.87%
Momentum MoM Emerging Managers Growth Fund 31.37%
Ci Engineered Equity Core Fund A 28.16%
Sanlam India Opportunities Feeder Fund A 28.08%
Absa Property Equity Fund A 26.79%
Satrix Dividend Plus Index Fund A1 26.40%
Coronation Resources Fund 26.33%
Sygnia Divi Index Fund A 26.22%

The big difference in comparison with ETFs (index-based) is that you have a “Professional Management Team”. These fund managers do the research and select the securities where they will invest your money in return for a yearly fee. Generally, the fee of a mutual fund/Unit Trust is far higher when compared with the fees of an ETF.

Annuities

An annuity is a financial product with a contract between the financial institution like an insurance company, and the investor you. As an investor, or I can buy an annuity by making either a single payment or a series of payments.

On the same token, you can receive your money as a one lump-sum payment or as a steady cash flow during your retirement years.

We recommend you speak to 10x Investments if you are interested in a living or retirement annuity.  All 10X funds are index funds. And because index funds don’t need expensive fund managers or the structures needed to support them, 10X can charge you less than 1% in total fees excl. VAT. The industry average is 3%. Paying that higher fee, compounded over time, means you could end up with 40% less money at retirement.

Tax-Free Savings Account TFSA

To encourage saving, the government has introduced tax-exempt investment and savings accounts. This means you won’t be taxed a single cent on any of the returns on these investments. There is no Capital Gains Tax (CGT) or tax on the growth, interest, and dividends earned.

You can put up to R33,000 per tax year (the equivalent of R2,750 a month), and R500,000 over your lifetime, into tax-free investments.

People often think a TFSA is a short-term savings vehicle in which I save money for an expense that I expect to have in two to three years’ time. The real value of your tax savings on a TFSA needs time to compound with your investment return. So if you contribute to a TFSA and you withdraw that money in two years’ time, you’ve used up two years of contribution limits, but you’ve actually gained very little in the way of tax savings – Jaco van Tonder Investec Asset Management

Our view is that you should have a 15 year or longer investment horizon when choosing a tax-free savings account. We have made it easy for you to get started with a TFSA if you do not have one already. You can read more on how to open a TFSA here using the EasyEquities platform.

Commodities

Oil, gold, grains, sugar, and so on, are examples of commodities that can be traded.

One way of investing in commodities is to invest in what is called an ETN (Exchange Traded Note). The main difference between an ETF and an ETN is that the ETF owns the stocks and bonds that make up the portfolio, while the ETN is merely a note that pays the return on the portfolio.

Since they’re simply debt notes, ETNs can precisely track their index – something that ETFs can occasionally struggle with because of the constant fluctuation of their holdings’ prices and the numerous trades they have to execute to maintain their proper proportions.

You can buy Copper through the Standard Bank copper Exchange Traded Note (SBACOP) for instance or you can track the commodity index as a whole with the Standard Bank Africa commodity index ETN (SBACI).

The downside: Since ETNs are debt products they come with a unique risk: the investor assumes the credit risk of the issuer of the note. Most issuers of ETNs are large banks, so this credit risk is minimal. But investors should always keep in mind that when they buy an ETN, they are buying a bank note, not stocks and bonds.

Real Estate Investment Trusts (REITs)

Similar to a unit trust, a REIT is a company that invests in income-producing real estate, such as shopping malls, hotels, office buildings, warehouses and so on.

REITs allow investors to reap the benefits of owning property as an asset class without directly owning and managing the property.

Growthpoint Properties Limited (GRT) is an example of a REIT listed on the JSE. Growthpoint Properties (Company Website) which owns Cape Town’s V&A Waterfront together with the Public Investment Corporation, manages property assets worth R122 billion made up of 547 retail, office and industrial properties.

Top five largest real estate companies on the JSE by market capitalization

Company Market capitalization
Growthpoint Properties R 88 Billion
New Europe Property Investments R 69 Billion
Redefine Properties R 64 Billion
Resilient Property Income Fund R 62 Billion
Fortress Income Fund B R 36 Billion

Investment Portfolio

These are the main types of investment vehicles. A portfolio should always be diversified therefore it’s important to spend the time to find a healthy combination of investment vehicles to form diversified investment portfolio with.

Investing sounds more intimidating than it really is. Yes, there’s always a potential risk for loss, but there’s an even bigger potential for serious gain when you do it right.

Doing anything for the first time can be terrifying, especially when it involves your hard earned cash, but here’s an excellent thread to get you started.

Newswire

Newswire

The Platinum Wealth Newswire publishes content from opinion pieces submitted by various financial writers, journalists and analysts. Got a story? Send us an email to: news [at] platinumwealth.co.za