The Johannesburg Stock Exchange (JSE) provides valuable long-term investment options to all South Africans.
Companies have three choices when they want to raise money to grow their business - to borrow from a bank, issue bonds or issue shares.
The key advantage of issuing shares is that the company doesn’t need to pay back the capital amount or make interest payments. Funds received from the selling of shares are used by the business to expand and for finance projects, etc. If you own a share, you own part of the company. You are called a shareholder. As a shareholder, you can receive dividends if a company’s board of directors declares that the company has made sufficient profits and that some these profits should be returned to shareholders. A share in the company gives you the right to vote on decisions affecting the company. You can also call a share an equity or stock.
You can purchase shares on the exchange and invest any amount. Note, however, that you can only trade through a stockbroker. Stockbrokers are licensed members of the stock exchange who trade securities on behalf of clients as investors cannot invest directly on the exchange.
They also provide advice on stock exchange investment issues. The fees charged on share transactions include brokerage charges, VAT on brokerage charges, securities transfer tax and settlement fees. Transaction costs also include an Investor Protection Levy.
Advantages of investing in the JSE
Shares have shown the highest returns in the long term, outstripping other assets such as bank deposits and property. Investing in shares gives you a good chance of beating inflation. South Africa’s inflation target is between three and six per cent.
To make a profit the return on investment should, therefore, be greater than six per cent. Research indicates that the return on shares on the JSE has in most cases exceeded this percentage for the last hundred years. The value of shares would, in the long-term, often increase. Generally you would sell shares for more money than you paid for them. Some companies pay a portion of their net profits (return) to shareholders – this is called a dividend. When you buy shares of different companies, you are diversifying (getting a variety) your collection of shares and also limiting your risk of losing money.
Other advantages include:
- The inflation rate is higher than the interest rate paid by commercial banks but lower than equity price appreciation.
- You are protected from the eyes of the public. People won’t know your worth unless you tell them. In other investments, people can easily look at the assets of the business or your property (real estate) and come up with approximate worth.
- The rate of growth is far beyond the bank interest rate.
- Dividends - this is a cash reward given to shareholders as part of the profit made by the company at the end of each financial year. It is declared at the annual general meeting of the company. The larger the units of your shareholding, the more money you receive at the end of each financial year. There are companies that have a yearly dividend policy. Your financial adviser should be able to tell you some of them.
Disadvantages of investing in shares
The benefits of investing in shares are many but there are few pitfalls to avoid.
- Crash in share prices. For one reason or other, sometimes share prices drop a lot. A discerning investor should know what to do at any point in time.
- You may lose out if the company you have invested in goes into liquidation. You must be vigilant to watch over your investment if you consider it important to you.
- Fraudulent stock brokers. Some stockbrokers are unfaithful to their clients. They may collect your money when there is perceived information that the shares of a particular company is a good one and instead of making the transactions in your name, they may divert the money for their selfish interest or use it to make their own investments. You must be careful when selecting your stockbroker.
For more information on the Johannesburg Stock Exchange go to www.jse.co.za
*Marilyn Williams is a registered debt counsellor. Contact her on 0861 777 293.