Seven investing questions everyone wants answered

by , 25 October 2018
Seven investing questions everyone wants answered
At first glance investing seems inaccessible, confusing and sometimes even scary.

But the concept really is simple - investors (like you) buy small pieces of companies called shares.

The amount of money you make will be based on how well the company's share price does, and whether it gives you any share of the profits it makes (called dividends).
 
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What often makes it seem more complicated is the jargon, but this is easily demystified.

There’s really no reason you should avoid investing just because you feel intimidated.

Here are the seven questions every novice investor wants answered.

 

1. Where do I start?

First – know that money in an investment account is typically better earmarked for a goal that’s at least five years away because you’re probably subjecting your money to some level of risk.

Any shorter time frame than that and you should probably stick to lower risk interest bearing investments instead of stocks.
Now decide your investment goal….

Short/Medium term – Saving for a holiday, car or house deposit or,
Long term – Retirement…

Now think about the level of risk you are willing to take and the goal you have identified. E.g. short term – typically requires a higher appetite for risk, Long term investments usually include low risk stocks.

Then decide how hands on do you want to be?

If you don’t want to get stuck into research and analysis, then stocks may not be for you.

It’s probably best to stick to investing in ETFs or Unit Trust funds in that case.

2. What’s the difference between a stock and a share?

“Shares” are the ownership certificates of a specific company — so you might say you have 50 shares of Facebook. Owning stock, on the other hand, is a more general term that means you own a number of shares in a company or multiple companies.

For example, if you own shares of Facebook and Google, you own tech stock.

But really, this is just semantics. People often use the terms interchangeably.

Whether you call it a “share,” “equity,” or “stock,” it means the same thing: You have some ownership in a company’s assets and earnings.

3. What happens if this investment goes to zero?

There aren’t many companies left on the JSE that were there 50 years ago…

Of the original stocks in the Dow Jones index in 1896, only General Electric is still a going concern–something to think about if you’re a long-term “buy and hold” investor.

The other eleven firms in the original index have either gone bankrupt or have been swallowed up.

This means you need to realise it is a possibility that a company you invest in could lose you money – and perhaps scariest of all go completely bankrupt.

You need to ask yourself: “Will I be financially devastated if this investment goes to zero?” If the answer is yes, don’t make that investment.

When investing for shorter term gains, I always warn readers ‘Never invest with money you cannot afford to lose.”

 

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4. Is there factual evidence that I'll make money buying stocks?

According to Standard & Poor's data, total annualized return of stocks from 1926 through 2013 was 9.9% a year.

Over the past ten years the JSE would’ve returned you a cumulative 244% - that’s an average 24.4% per year
So, it is a fact that over the long run stock markets can provide very attractive returns to investors.

With the potential for those returns, however, comes greater risk.
Despite all the expert advice you'll no doubt come across when researching specific stocks, there are no guarantees as to how a stock will perform. It could stay flat for years on end, and then suddenly spike 100% or more in a matter of days.

The broader market is impacted by so many forces that are uncontrollable and unpredictable - including investor emotion, political events, and natural disasters.

That said, long-term historical market performance data demonstrates the potential benefit of investing in stocks.

This is particularly true for long-term investors who can minimize their exposure to market volatility and avoid buying based on emotion and reacting to market downturns in a panic.

5. How can investing affect my taxes?

If you have a retirement annuity or pension fund, you’ll know you can claim back your contributions against your personal tax bill.

So, I always ask investors whether they are making use of this tax benefit.

When investing in individual shares though you won’t get the same tax benefits.

You will pay income tax at your personal tax rate for all ‘trading’ profits you make. Typically, this is for shares you hold in the short term.

For shares you hold long term, you only pay capital gains tax on your profits. Another reason why long-term holdings can be more attractive.

And then there are dividends. A dividend withholding tax will be automatically deducted from dividends paid to you by companies you invest in.

 

 

6. What is an ETF?

As I mentioned at the start of this article, if you aren’t willing to learn more about investing and you don’t want to get involved with the nitty gritty when it comes to shares, then you need to invest in ETFs.

So what is an ETF? It is an Exchange traded fund. Basically, ETFs are like baskets you can buy that have been filled with products (shares) by someone else for you. They manage it for you, and you get all the growth (and dividends) provided by the shares in that basket.

Typically ETF’s track well-known stock market indices. For instance, the JSE Top 40 index – which shows us the performance of the 40 largest shares on the JSE is tracked by ETFs like the Satrix 40 ETF.

ETF’s typically have management fees you need to be aware of – and there is some variance between the fees charged by companies. Even for ETFs on the exact same stock market index.

7. Is there something like a minimum investment amount?

Different brokers, fund managers and banks have different minimum investment amounts (and some don’t have any).

What you really need to consider is this:

  1. Your goal affects what you start with – if you want to have R1 million in 5 years it is not realistic to start out with R5,000.
     
  2. What is the investment cost of your platform – as I said, some brokers don’t charge minimum fees. Others do. If the minimum fee to make an investment is R100, you can’t go around investing R500. You will lose 20% of your investment to fees from the get go.

From here you can start your investing journey.

Read lots of books, speak to experts and do research. 

That’s the cornerstone to success!

 

 


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Seven investing questions everyone wants answered
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