Investing in the Stock Market

Interested in investing in the stock market, but don’t know where to begin?  Look no further… we are here to guide you

By:       NICHOLAS RIEMER

A note from the Editor

IN LAST month’s article, ‘Bulls? Bears? Who cares!’, we introduced this wonderful world of stock market investing, that to many people still looks like shark-infested waters.

Perhaps you are looking to make that first tentative step towards dabbling your little toe in, but are fearful of losing … if not a limb, but possibly your money?  Well, you asked the questions, and from this month, we’ve asked an expert from FNB Stockbrokers to provide some helpful answers.

Getting started: Knowing the basics, asking the questions, and understanding your objectives

What is the stock market?

The stock market is essentially a marketplace where shares are bought and sold.  It can be linked back to your favourite grocery store.  A grocery store connects sellers and buyers of food.

The stock market does the exact same thing.  However instead of food, the stock market connects buyers and sellers of shares.

How does the stock market work?

Again, lets link this back to our favourite grocery store.  When certain food items are in high demand, you will notice the price going up.  Foods that are readily available all year round will have a stable price in-store, where items such as out-of-season fruit can spike up quite heavily due to lower supply of the fruit and higher demand.

Like a grocery store, the stock market works on supply and demand.  When a certain share is in high demand, it means that the price will increase because investors are willing to pay more to acquire the share.  When a share is in low demand, so the price of that share will decrease because of less investors wanting to buy it.

Factors that affect the supply and demand of shares are company fundamental, meaning how well that company is doing from a numbers point of view as well as public perception in the news.  The better the numbers and news around a company the better the share price will perform and vice versa.

Buying and selling shares on the stock market is always about supply and demand, like any other purchase you make.

How much money is needed to get started?

Investments can be made from as little as R300 per month into vehicles like unit trusts.  Unit trusts give beginner investors access to a wide variety of assets in the form of a balanced fund.  Investors can purchase units in the fund—and as the fund performs, so the investor receives returns based on the number of units held.

For individual share investments, there is no minimum other than the physical price of the share the investor wants to buy.  However, an investor must always keep in mind that there will be fees to open an account as well as to place an investment, and sometimes in smaller amounts such as R100 or less, the fees can outweigh the returns.

That is why for smaller amounts for initial investors, a unit trust can be a great vehicle to begin an investment journey with. From there individual shares can then be bought and built up over time, as the investor gains investor confidence.

How much time is required to see a return?

This is all dependent on the individual investor’s goals and timelines.

Long-term investing means selecting shares for a period of three years and above.  However, it involves investing through short-term market moves, with a long-term goal in mind, staying patient and invested to achieve sustainable returns.  This means spending time researching and selecting shares that are in line with your long-term goals and investment strategy.

You can do this on your own, or with the help of a professional in the form a financial advisor or wealth manager.  However, investing is about understanding what you are investing in, regardless of whether you do this on your own or with assistance.

Once investments are placed, that asset must be given the correct time to perform—however short or long that period may be.  Long-term investing is not about the quantity of time; it’s about the quality of understanding of your investments, and ensuring that all investments still meet your strategy and goal outlook.

Trading is something different, which we will examine in a future article.

Nicholas Riemer is head of investment education at FNB Wealth and Investments.