What are Shares and how to buy Shares (or stocks)
If you buy Shares (also know as Stocks, Equities or Securities) in a Company the shares you own represents a portion of ownership in the company, normally entitling the holder to vote on important corporate matters and to receive dividends if dividends are paid.
The more shares you own, the greater is the amount of the company you own. You can get a slice of the Companies profits by receiving a dividend.
The share price is determined by supply and demand. For a successful and profitable company the shares will become more valuable. More people will see it as a good investment and the share price should rise, shares become more expensive.
Different Classes of Shares
• Ordinary Shares – Holding ordinary shares gives you voting power, and thus control in the company. You will receive dividends when the board of directors declare a dividend. Most shares listed on the JSE are ordinary shares.
Ordinary shares have no specific maturity date, and no fixed income. Share price is subject to price volatility and risk.
• Preference Shares – Preference shares typically pay a fixed dividend, whereas common stocks do not. And unlike common shareholders, preference share shareholders usually do not have voting rights. In the event of a company bankruptcy, preferred stock shareholders have a right to be paid company assets first.
• Debentures – a Debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. Debentures are akin to fixed bank deposits as they pay interest and not dividends.
• Exchange Traded Funds (ETFs) – An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. An ETF is a type of fund which owns the underlying assets (shares of stock, bonds, oil futures, gold bars, foreign currency, etc.) and divides ownership of those assets into shares. ETF shareholders are entitled to a proportion of the profits, such as earned interest or dividends paid, and they may get a residual value in case the fund is liquidated. The ownership of the fund can easily be bough, sold or transferred in much the same was as shares of stock, since ETF shares are traded on public stock exchanges.
ETFs can be bought and sold intra-day like an ordinary share. One ETF share gives you exposure to a fund of instruments and not just to one instrument. Investors can buy or sell ETFs quickly and at a low cost on the JSE, as well as gain exposure to a wide variety of securities or assets without extensive research and administration.
How to make money with a Share
• Dividend Income: Investing for dividend income is a time honored strategy that can prove lucrative for the individual investor. If you are a long term investor dividend income will be important for your portfolio. Depending on the share dividends can be paid quarterly, twice a year or yearly. An added bonus is that dividends are generally taxed at a lower rate than interest income.
If you are a short term trader potential dividend payments will not play such important role in your decision making.
• Capital Gains: An increase in share price. As an Investor or Short Term trader (or speculator) you will make money on capital gains if the share price rises. You have to sell the share to realize capital gains profits. You will also incur a capital loss if the price of the share falls.
As an investor or speculator you have to Buy Low and Sell High to make money with share movement.
In the Training Modules we discuss the strategies to Buy Low and Sell High. Have a look at the Trading Blueprint.
An Index reflect the aggregate movement of the markets they represent. They summarize the fluctuation of Share prices on a given day. Technically, one can’t actually invest in an index.
Index tracking funds do exactly what the name suggests – they track or replicate a particular index. A tracker fund which uses full physical replication simply holds the same shares that are contained in the index in the same weighting as they appear in the index.
Simple offshore exposure. How Satrix ETFs are broadening investment horizons.
Index trackers are great options because they are broad based, cost effective and there are choices available to suit all needs. You get exposure to world class companies, but you don’t have to choose them yourself. You are also diversified in terms of country exposure, but you don’t have to pick those countries. The index does it for you.
Trading Shares as a CFD
A CFD, or Contract for Difference, is an agreement between two parties to exchange the difference between the opening price and closing price of a contract.
CFDs are derivatives products that allow you to trade on live market price movements without actually owning the underlying instrument on which your contract is based.
Since the CFD industry is not highly regulated, the broker’s credibility is based on its reputation and financial viability. As a result, CFDs are not available in the United States.
Advantages of trading shares as a CFD
• Gearing (leverage):
CFDs are traded on leverage, meaning you pay only a small fraction of the total trade value to open your position rather than paying for it in full, this is known as margin.
If you buy a share there is no gearing (leverage). If you buy 100 shares for R50 your total share value is 100 shares x R50 = R5,000. If the share price rise by R5 your 100 shares will be worth 100 x R5 = R500 profit plus original R5,000 = R5,500. That is an increase of 5% on your capital investment of R5,000.
If you buy the same share as a CFD your margin per share will be +-10%. For a R50 share the margin will be R5. For your R5,000 capital you can get exposure to R5,000 divided by R5(margin) = 1,000 shares.
You can buy 1,000 shares as a CFD with R5,000 margin. If the share price rises with R5 your profit will be: 1,000 shares x R5 = R5,000. The return on your R5,000 capital is 100%.
Gearing is of course a double edged sword, if the share price falls with R5 your loss will be R5,000. You would lose all the capital you risked on this trade.
CFDs are leveraged products and can result in losses that exceed deposits.
It is therefore extremely important to do a comprehensive Trading Plan with Stop Loss and Profit taking Management.
If you believe in a Buy and Hold Strategy you will probably not use CFD’s, but still need a long term trading plan.
• With a CFD you have the Ability to Go Long (buy) or Short (sell)
If you believe that share prices will fall you can sell a CFD and take profit later by buying it back. It is not so easy to sell a share before you bought it.
An investor might decide to use CFD’s to hedge his long share position for a short period.
Make sure about the tax implications of CFD’s, dividends and capital gains.
Where to open an account
If you live in South Africa and want to trade JSE shares there are many banks and brokerage firms where you can open an account to trade shares and/or CFD’s on shares. Compare the costs between different trading platforms. The charting packages should be easy to use and flexible enough to do you’re planning on them.
If you want to trade USA shares you can open an account at a brokerage firm in the USA. You can not trade a USA stock as a CFD through a USA account. As far as I know USA citizens are not allowed to trade CFD’s.
It you stay in another country it is possible to open a CFD account through a brokerage firm in the UK (London) where you may trade CFD’s on USA shares. You can of course trade many other commodities and Forex as a CFD as well.
Make sure about your countries rules and regulations regarding trading of CFD’s.
Buy Shares for as little as R100
How to start buying JSE shares for as little as R100 at very low brokerage fees.
Visit EasyEquities to see how.