Investing in equities is key to growing wealth – no doubt about it. But what does this mean for the average person and how does one know where to start?
It can all be very confusing. For starters, there many different words used to describe the same thing – shares, stocks, equities, are all one and the same – shares in a company. How does it work? Well, a company will decide it needs to raise capital, and in order to do this, they want to attract investors. This is facilitated by the company listing on a stock exchange, and then selling shares in its business to individual investors. These investors then each own a small piece of that company.
Over time, the company may pay a portion of its profits to its shareholders (called dividends). The share price will also fluctuate over time, and this volatility (which can be substantial at times), means that investing in shares should not be a short term investment – invest over a longer term (five years plus) will allow the investor to ride out the highs and lows, and benefit from steady growth.
There are two main reasons why investors buy shares – either because they pay good dividends, or because they are expecting the price to increase in future, and they can be sold at a profit. Sometimes it is a combination of both. In South Africa, dividends are subject to 20% Dividend Withholding Tax and if you sell shares at a profit, this is subject to Capital Gains taxation laws.
So how does the average person access shares? In South Africa, we have the Johannesburg Stock Exchange (JSE), where around 400 companies are listed. The JSE has been quoted as being the best performing stock market worldwide since 1990, and study conducted two years ago showed that by investing in the JSE, you would have doubled your money in 9 years, and if you put your money in a bank account, it would have taken 92 years!
But while the returns are impressive, investing directly on the JSE is a complex area and very high risk. If you want to go this route, you can open an online share trading account, where you make your own investment decisions. It would also be very wise to invest in knowledge – do a comprehensive course and make sure you understand the markets and have the time to research before you make investment decisions.
If you don’t want to be hands-on, but still want to benefit from the excellent growth provided by the equity market, you can get someone else to make decisions for you. There are a number of different ways:
– via a unit trust investment which are portfolios of shares, managed by a portfolio manager. Individuals invest in these unit trust funds and get the benefit of growth and dividends of the underlying shares in the portfolio.
– via a ETF or Tracker Fund, similar to a unit trust find, except there is no human intervention – decisions around which shares form part of the fund is calculated by algorithms and shares are bought and sold accordingly.
– via a Real Estate Investment Trust (REIT) where you are investing in companies that manage commercial and industrial properties.
– via a financial services company savings plan. This includes Tax Free Savings, Life Wrapped Investments and other products that have underlying investments in shares.
Making the right decisions around your hard-earned money can be tough. No-one wants to gamble. I’m a great believer in knowledge and advice. Ask, investigate and take action. Start building your long term wealth today!