Welcome to the wonderful world of stock market investing
“The gold price may go up, and it may go down—and not necessarily in that order!” – attributed to Harry Oppenheimer, former chief executive of Anglo American
THE STOCK market. Some have likened it to a casino. Others consider it to be more like a zoo (all this talk about bulls and bears certainly feed into this image). Its disciples argue that no investment portfolio is complete without it. Its detractors(usually those who have had their fingers burned) won’t touch it with a barge pole. But what exactly is this “nebulous thing called ‘the market’ ”?
Historically, a market was a physical place whereby traders of goods would gather on specific days each week to dis-play their wares. This physical presence would provide potential buyers to view what was on offer, and make purchases of those items caught their fancy.
Many such physical markets still exist today, ranging from the local ‘flea market’ where many people while away their weekends in search of a bargain, to sophisticated agricultural and commodity markets turning over many billions of rands annually.
A stock market is simply a market whereby buyers and sellers of shares in companies come together to trade their holdings. The term ‘shares’ will be explained in greater detail in a future article, but for now it is sufficient to understand that a share represents a part-ownership in a company. Markets thus developed to provide a platform whereby those seeking to invest in a company could buy shares, which those looking to cash out of their investments would offer for sale.
The original stock markets were very similar to their physical counterparts, and until fairly recently one could still visit the Johannesburg Stock Exchange (when it was still located in Diagonal Street in the CBD) and watch hordes of traders yelling at each other while clutching pieces of paper representing offers from their clients to buy and sell shares.
Things have however become more sophisticated in recent years, with the ‘open outcry’ market having been replaced by computerised trading platforms. Nowadays, courtesy of the Internet, institutions and even ordinary individuals can trade shares at the click of a mouse (or even at the touch of a mobile phone screen) from anywhere in the world.
The Internet has also made a vast wealth of information on stock market investing available to just about anyone. However, the sheer volume of information can be overwhelming for even the most sophisticated investor. This is why we have partnered with FNB Stock brokers to bring you this exciting new four-page feature, in which experts who invest on the stock market for a living share their wisdom, as well as their ‘tips’ (including the reason why they view a share in a particular way).
If you are new to the stock market, have been wondering what all the fuss is about, yet at the same time sensing that foregoing investing in this exciting area means that you are losing out on partaking of the greatest proven wealth-builder over the past couple of centuries, then we have good news for you! Investing in the stock market is not as complicated as it is made out to be.
Granted, you do need to do your home-work, though. Like any pursuit in life, there are rules involved, and you need to under-stand the pitfalls as well as the benefits.
• For instance, it’s important to understand the underlying business that you are looking to invest in particularly, how the business makes its money. The timing of your investment decisions also critical.
• Like anything you buy, you don’t want to pay too much; at the same time, like anything you sell, you don’t want to receive less than what your investment is truly worth.
• You need to be aware of where share investments fit into your overall investment and spending plans. The stock exchange is not really the best place to park the money that you have saved up for next month’s holiday.
• It’s a good idea to check your emotions at the door, and keep a cool head. The stock market can resemble a roller-coaster at times.
• You also need to determine whether you are looking for long-term investment returns (which can come from dividend income as well as capital gains), or are after a short-term profit by trading in shares. You are not limited to being one or the other, though you can do both!
• Then of course, there’s tax. Wherever money is being made, you can be sure that the outstretched hand of SARS is not too far behind. You want to minimise your tax bill, but you don’t want to break the law this can be extremely costly!
Stock market jargon demystified
Are you confused by all the jargon? Here are some commonly-used terms, and their explanation:
BEAR MARKET: The opposite of a bull market, this is where share prices are in a falling trend. Traders who believe that the price of an individual share, a sector, or the market overall will continue to fall are often referred to as ‘bears’, and their pessimism is described as ‘being bearish’.
Is there a market term that confuses you? Send us an email at email@example.com.