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Stock market introduction to help you understand how it works

A stock market introduction

Want to start trading but don’t know much about shares? This stock market introduction guide will help you understand the basics around investing in shares in South Africa.

1. What is a share?

Shares are units of ownership in a company or financial asset that provide for an equal distribution of the profits, if any are declared, in the form of dividends.

Buying shares in a business makes you one of its numerous shareholders and because you are a shareholder, you are entitled to a very small piece of everything that company owns and earns.

A share is represented by a share certificate, which serves as proof that you did in fact invest your cash for a stake in a company. In today's digital age, you may not actually get to see this document because your broker may keep these records electronically.

Most noteworthy when it comes to investing in shares is that although you are entitled to a portion of a company’s profits and have a claim on assets – you will be paid out in the form of dividends.

The more shares you own, the more dividends you’ll earn. But it’s also worthwhile to remember that if a company you invest in goes bankrupt, you'll only be paid dividends of what is left after creditors are paid first.

2. Why should you invest in shares?

Investing in shares can be a sound way to achieve long-term financial goals. Historically, share markets continue to outperform other investment mechanisms over the long-term and this alone can be a persuasive enough reason to invest.

People invest in shares for different reasons, depending on life circumstances, age and specific needs. Some people invest in shares to obtain capital growth, others to obtain a regular income such as a dividend.

If you invest R5 000 in a fixed deposit, it’s estimated that after 20 years it could be worth just over R40 000. That same R5 000 invested in the stock market, earning an average of 18.3% per year, could be worth more than R140 000.

Shares offer the potential for both strong capital growth and regular dividend income and they provide protection against inflation. Standard Bank’s Savings and Investment experts say, in general, over a long period there is a strong upward trend in the value of shares listed on the Johannesburg Stock Exchange (JSE).

3. What are the different types of shares?

As an investor, you have a number of options available when it comes to investing in shares. These

are referred to as asset classes, which are a specific category of assets or investments, such as stocks, bonds, cash, international securities or real estate.

  1. Ordinary shares: Ordinary shares make up the majority of listed shares. They represent ownership of the company by the shareholders and each shareholder is usually given one vote per share to elect the company’s board members.
  2. Preference shares: Preference shares have first right, ahead of ordinary shares, for dividend payments and for assets if the company is liquidated.
  3. ‘A’ shares: An A-share is a share that is offered in a family of multi-class mutual funds. A-shares are a common type of class offered for individual retail investors. They are usually characterised by a specific fees and rates when traded through a full-service intermediary like an investment firm or bank.
  4. ‘N’ shares: An N-share or N-Ordinary share is the same as an Ordinary share, but usually gives shareholders minimal or zero voting rights. N-Ordinary shares often trade at a discount to Ordinary shares and, while likely to cost less, they could also pay out the same dividends as Ordinary shares. If you are not concerned with voting rights, an N-share might be the ideal option for you.
  5. Blue-Chip shares: A Blue-Chip share is a piece of stock in a large, well-established and financially sound business that has been in operation for many years. Usually the market leader or among the top three companies in its sector, a Blue-Chip share is often a household name such as Apple or Coca-Cola.
  6. Growth shares: A Growth share is a share in a business where earnings are expected to grow at an above-average rate, relative to the market in which it operates. A Growth share usually does not pay a dividend, as companies would prefer to re-invest retained earnings in capital projects. Growth investors choose stocks based on the potential for capital gains, not dividend income, which some investors caution as risky.
  7. Value shares: Common characteristics of Value shares include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio. What does this mean? A value stock is a stock that tends to trade at a lower price relative to its dividends, earnings and sales potential and is therefore considered undervalued. Your Value share might likely come from a mature company, with a stable dividend issuance, that is temporarily experiencing negative events.
  8. Income shares: Ideal for the investor who is risk averse, an Income share offers little room for capital appreciation but gives the holder a portion of all income earned in the portfolio. This type of share is popular among investors looking for a steady stream of income rather than large capital appreciation.
  9. Cyclical shares: Cyclical shares are affected by ups and downs in the economy. A Cyclical share generally relates to investing companies that sell items consumers buy more of in a booming economy – like luxury cars, smart devices, luxury accommodation – and cut back on during a recession. Cyclical stocks are viewed as more volatile than non-cyclical or defensive stocks, which tend to be more stable during a slow economy. But they offer greater potential for growth as they tend to outperform the market during an upswing.
  10. Large, mid and small capitalisation shares: Depending on your appetite for financial risk and growth, you can invest in:
    • Companies with larger market capitalisations, aka large caps, (USD10 billion and greater)
    • Corporations with mid-cap values (between USD2 and USD10 billion) and
    • Businesses offering small-caps between USD250 million and USD2 billion.

    Large caps tend to be less volatile during rough markets as investors fly to quality and become more risk-averse, but the mid-cap and small-cap markets also offer value depending on your investment budget.

  11. Penny shares: According to financial experts, Penny shares are generally considered highly speculative and high-risk because of their lack of liquidity, small capitalisation and limited following and disclosure. Also, Penny shares usually trade outside of the major market exchanges (JSE, NYSE, NASDAQ) at a relatively low price through pink sheets. Penny shares could be considered if you have a very high tolerance for risk.
  12. Rand-hedge shares: At times when the rand is under pressure from foreign currencies, you can capitalise on exchange rate variances. rand-hedge shares refer to JSE-listed companies that have mostly offshore operations or produce goods or services with prices set in international markets in hard currencies, such as the US dollar. Investing in these companies can provide a “hedge” against rand depreciation. You can leverage rand-hedging opportunities without taking cash offshore or converting it into foreign currency if you invest in hedging shares.

4. How can you go about investing?

If you don’t have the time or expertise to manage a share portfolio – or insufficient capital to achieve a large enough spread of shares, it’s advisable to speak to an investment specialist. The right advisor can help you decide on what the best path is for you.

Exchange Traded Funds (ETFs) that trade on the JSE enable you or your investment broker to buy and sell share units directly. ETFs can provide investors with respectable returns at a relatively low cost because they are cheaper than other managed investment products. They track the performance of a group or "basket" of Shares, Bonds or Commodities. These "baskets" are known as indices. An ETF can be bought or sold in the same way as an Ordinary share. Investors save time and money as ETFs enable investment in a variety of asset classes through a single listed investment product. For those new to the world of investing, these are an ideal vehicle.

If you would like to learn more about investing or to start investing today, visit Standard Bank’s easy-to-use Online Share Trading platform. We provide a range of trading services and investment solutions designed to enhance and grow your investment portfolio and are tailored to suit your individual circumstances, risk appetite and objectives.


Next step

Visit our Online Share Trading platform, or join in on a free course to help you invest or trade. Or use the comments field to chat to customers and consultants in the investments section in the Community.