Stock Market Investing 101

I went to the JSE recently, and was stunned to find out that only 200 000 individuals actually trade equities on the bourse. That’s hectic! In a bad kind of way. I’ll make the assumption that as a reader, you’re not investing in shares. If you are, leave this site and go check your portfolio.

In your mind, you might think that keeping your bucks in a savings account is the way forward. Well, it might be, but inflation pretty much cancels out any growth you might have. Your money will become less valuable.  What the banks do with your money is lump it together with a lot of other peoples’ and “rent it” to a corporate or individual to finance some asset. Like a house, or a new Massey Ferguson tractor. Maybe even a massive coal truck. They’ll charge that person/company a particular interest rate, a few points above what you earn. The difference? The bank’s profit.

It is a good idea to keep some of your money in a savings account, just to diversify.

Guys, I'm part owner of this here truck!

When you invest in the stock market, you actually buy a little bit of a company, or a number of companies. Lets say a Coal Company. You buy some shares in that Coal Company. You then have equity.

But your friend left their money in a savings account, and a bank lent money to the Coal Company to buy a big monster truck, which is used in the process of making money – taking coal from the earth and selling it to Eskom. The Coal Company does very well, because of the energy demand in South Africa, and the recent price hikes on electricity. So at the end of the financial year end, the Coal Company pays the bank back it’s money for “renting” cash to purchase the truck. Your friend earns a wee bit of interest. But because you own a portion of the coal company, you earn a share of the profits as dividends. The market favours your company and are willing to buy shares in it at a higher price than you did. You earn the difference as profit, too.

So the risk is that the company does badly. Then you might not earn a dividend, but you still have shareholding, which you can hold on to for future potential growth, or sell and cut your losses.

Still, equity returns win. Over the past 10 years, the average ANNUAL return on the JSE has been 20.04%. So if you want to be wealthy one day, why aren’t you investing in shares? Even if you start with R5000.00?

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  1. murraylegg
    Chris Calitz
    29/06/2010 at 8:45 pm Permalink

    Really cool post. Been meaning to get into it for a while but never been able to figure out where to start with out some snake oil salesman conning you. Any tips on where to start? I would like to manage it myself but feel that I don’t have enough knowledge about shares as it is.

    Thanks!

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