for those of us that aren’t ‘trust fund kids’ or owners of that company. The key advantage of Why recent lottery winners. issuing shares (or equity) is that the company As Graph 1 shows, shares have shown the highest doesn’t need to pay back the capital amount returns in the term, outstripping other assets or make interest payments. invest in such as bank deposits and even property. Instead, shareholders – the people who buy those shares – can hope for future capital gains on their What are shares? investment and may also receive . shares? Companies have two choices when they want to raise money to grow their business: to borrow from HOW A EXCHANGE WORKS Investment: the word conjures up grey-shaded a bank or issue shares. The New York (NYSE), the images of everything you never wanted to be, A share is a slice of a company that, technically, Stock Exchange (LSE), such as strait-laced and sensible. But investing means that its owner has a small claim on that and the JSE Limited (JSE) are all, simply, markets doesn’t have to be boring – in fact it is the business’s earnings and assets. for shares. only route available to financial independence As a shareholder, an individual is one of many Stock exchanges offer two benefits: 1. They reduce the risk of investing by providing a

Graph 1: The 20-year return of various asset classes transparent pricing mechanism for trades. 2. They police listed companies. Stock exchanges 20-year average annual returns - before and after tax (1985-2005) 25 operate in a strict regulatory environment and companies have to comply with stringent 19.8 Before Tax 19.7 19.3 requirements. 20 18 After Tax 16.6 What makes share prices move? 13.6 15 The forces of supply and demand are the key 12.7 12.2 determinants of changes in share prices.

9.2 9.3 In the simplest terms, the share price will go

% R eturn 10 up if more people want to own a share than are 6.8 5.2 prepared to sell. Over time, a share price will track 5 the underlying trend in the earnings of the company: if earnings (and dividends) grow consistently, the share price should follow. 0 Fixed dep. Inflation Property Unit Bonds Own Mortage Equities Other aspects that affect appetite for Trusts shares include the performance of international Source: JPMorgan markets, general economic growth, sector or company-specific news, share buybacks and Graph 2: FTSE/JSE All Share Index 20-year performance graph futures trading.

26000 Overall, share prices

21000 tend to go up when the economic news is good as this means 16000 companies should see their earnings increase. 11000 Good news from a certain sector or 6000 company can also drive share prices up, as well

1000 as creating expectations 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Daily Price Ranges for ALSH of good future earnings. Apart from individual , other buyers of bought that share for the income. The importance of cutting costs shares include companies (through share If a company goes bankrupt, shareholders Ultimately the value of buybacks) and futures traders. may lose the entire value of their investment. your investments will Ordinary shareholders only receive Risks of investing in shares what’s left over once creditors and be determined not only Share prices can – and do – go down as well preference shareholders have been paid by the return those as up. Investors can reduce their risk by doing their due. shares generate in the their homework and always knowing exactly Companies can disappoint the market by future, but also by how what they’re investing in. That includes reporting lower-than-expected earnings. little it cost you to evaluating ‘tips from friends’. This can mean the share price either falls invest in the f irst place. Some shares can be illiquid. This means that or lags the growth of its peers. they are difficult to trade, often because there Share prices factor in the market’s view of As Graph 3 shows, you will be better off investing is a controlling shareholder that owns a large management’s competence and integrity. directly in shares rather than letting someone else percentage of the company and does not sell Scandals, such as the revelation of fraud manage your money. those shares in the market. This means a share or poor corporate governance, can hurt If you believe that you don’t have the skills to can be difficult to sell when you want to exit the share price. manage your own portfolio of individual shares, that investment. But most listed companies are well-run consider buying an Exchange Traded Fund (ETF). Companies do not have to pay dividends. This businesses and their share prices should These let you buy an index of shares at relatively is not necessarily a bad sign if the company increase over time, so there is no need low cost. is keeping that money to invest in its future for investors to be afraid of investing growth, but is a risk for shareholders who in companies listed on the JSE. Investment Seminars The JSE and Online Share Trading from the Standard are hosting a series of free, one-hour Graph 3: DIFFERENT INVESTMENT SCENARIOS: educational presentations called ‘Getting started DIRECT INVESTING VS THIRD-PARTY MANAGED FUNDS in shares’. The presentation covers basics such as understanding the share market, how to make 20 Year Returns on a lump sum Rioo,ooo investment money on the JSE, deciding what shares to buy R 1,800,000 Investment A: Lump sum R100 000 (Initial brokerage at and how to go about it. R 1,600,000 0.7% plus taxes, 15% growth pa with R54.15 monthly fee) A - R1,554,570 The timetable below shows the seminar dates e.g Online Broker – share investment up to May 2007. R 1,400,000 Investment B: Lump sum R100 000 (15% growth pa with 5% R 1,200,000 upfront fees and annual management fee of 2%) To register, send an email with your name, contact e.g. a managed investment details, desired date and location to R 1,000,000 nvestment

I [email protected]. R 800,000 For more information, visit www.securities.co.za alue of

V R 600,000 B - R1,038,011 or call 0860 121 161.

r 400,000 Dates City r 200,000 6 February, 12 April Pretoria R- 8 February, 29 March, 25 April, 3 May 1 March, 17 May Cape Town 8 March, 19 April, 10 May Durban Year 2 Year 4 Year 6 Year 8 ear 10 ear 12 ear 14 ear 16 ear 18 ear 20 Y Y Y Y Y Y 31 May Centurion Time