In investment terms, shares are like that word that you use in a sentence, but cannot explain. Here’s what you need to know.
Most advisers will tell someone new to investing to stick to unit trusts. But there’s something in our nature that wants to know more, so we can do better.Investing in shares (or stocks), is like the intermediate level of investing. These are some common questions you need to answer before you can level up.
As the word suggests, a ‘share’ is a piece of a company. When you buy a share, or a stock, you’re buying a ‘share’ of that company. The price of a share is determined by the estimated worth of the company, and how many shares are made available for purchase.
Is A Stock A Share?
The words ‘stock’ and ‘share’ can be used interchangeably, but actually mean slightly different things when used accurately.Shares are pieces of a company released for public purchase, and the stock is actually the financial amount - or capital - the company raises through their sale. A company does this through an initial public offering (IPO) – also called ‘taking a company public’.
Are There Different Kinds Of Shares?
Yes. Two, actually. There are ordinary shares, or ‘common stock’, which are, as the name suggests, the most common type of shares and the kind you will nearly almost be dealing with on the stock market (i.e. the JSE).Ordinary shares carry dividends that adjust according to a company’s profit (they’re flexible), and they bear full voting rights for shareholders.Shareholder (noun): an owner of shares in a company.Preferred shares have fixed dividends and no voting rights, but they must be paid before ordinary shareholders get their share of dividends.
How Do You Make Money From Shares?
You make it over the long-term. As in, five years at the absolute minimum. But let’s dial it back a notch…You buy shares in the (preferably calculated) hopes of reaping some of that company’s future profits. These profits are paid in the form of dividends.Dividend (noun): a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits (or reserves).You could also make money when there is a rise in the price of each share (a.k.a. a capital gain), or you could sell your shares for a profit.But, as Benjamin Graham wrote, "The real money in investing will have to be made – as most of it has been in the past – not out of buying and selling, but out of owning and holding securities, receiving interest and dividends, and benefiting from their long-term increase in value.”Even the successful, high-profile investor, Warren Buffett, made the bulk of his money holding onto stocks and businesses more than 25 years (in some cases more than 50 years).To borrow from Buffett’s strategy: select shares from well-run companies with strong finances, and a proven track record of management practices that are favourable to shareholders.
Just as an example, Ronald Read was an American janitor, earning close to minimum wage, who accumulated more than $8,000,000.00 in his stock portfolio.
How Do You Buy Shares?
There is no minimum amount to start investing in shares. But do your homework and be sure of your appetite for investment risk beforehand. You can visit the JSE website to open a brokerage account with a stockbroker. This will allow you to invest in JSE listed shares.You don’t have to use a stockbroker as there is an option to ‘DIY’, but unless you’re exceptionally confident in your investing prowess, it’s not advised. Stockbrokers, who are licensed members of the stock exchange trading on your behalf, do, however, charge a fee. Compare prices and ensure the fee charged is less than the potential for profit.The stockbroker will need:
Copy of your ID, licence or passport;
A copy of your utility bill to see your proof of address;
Copies of your SARS documents as proof that you have an income tax number.
The JSE website has a list of licensed stockbrokers.