What are investments?
An investment is an asset that has been purchased with the intention of generating an income. There are different types of investments available, such as shares and bonds. The most basic of which would be a savings account. Although you are not buying stocks or trading, your money is still working to earn you interest (income).
If a savings account is the route you are going to follow, make sure you shop around for the best account that suits your needs and provides you with a good rate of return. Speak to your bank about which is the best savings option for your needs. Just like a compound interest account, which will earn you interest on the interest.
For example, if you were to invest R10 000 at an interest rate of 6% compounded annually, after 12 months you would have earned R600 interest on your investment, leaving you with R10 600.
If this investment is left for a further 12 months, you earn R636 interest as you have now earned interest on your interest as well as on the original investment. If you invest the money at age 25 and cash in the investment at 65, the money has been compounding for 40 years, leaving you with R102 857,18.
The stock market (stock exchange) is where shares in companies and commodities can be bought and sold. In South Africa the most renowned exchange is the Johannesburg Stock Exchange (JSE). The JSE has a variety of investment options available, each explaining who the investment option is aimed at. For example, bonds are more suited for people who want to lower their risks and want to diversify their portfolios, and equities are a way in for people wanting to invest in a listed company and who are prepared to take on more risk.
The JSE Top 40 is the top 40 companies that are trading on the JSE. Some of the companies listed on the JSE Top 40 include: SAB Miller, Bidvest, MTN, Vodacom, Sanlam and Sasol.
Shares are often described as one of the equal parts into which a company's capital is divided, entitling the holder to a proportion of the profits. So when you own shares in a company, you are in essence part owner (shareholder) of that company. If you buy Sasol shares you are in fact a part owner of the company. The more shares you have the more influence you have over a company. A bond is when an investor loans money to a company for a predetermined period at a fixed interest rate. At the end of that period the investor will get their initial investment back, as well as the interest that accumulated over that period.
An investment term that you will come across is a 'basis point' (BPS). This is one hundredth of one percentage point. So if something goes up two basis points, it has gone up 0.02%. In the stock market this indicates the percentage that the cost of a unit (the shares you buy or sell) has increased or decreased.
What options are available for beginners?
For people just starting out, the thought of picking what to invest in, and knowing what to do and when can be daunting. To ease you into it, banks have several options available that allow the most inexperienced to experienced investor to invest easily.
First National Bank (FNB) offers a range of share investing options. For a beginner, there is the FNB Share Saver. Your shares are chosen for you from the top 100 JSE listed companies. To qualify you need a transactional account with FNB.
You have the option to invest R300 per month or a lump sum from R1 000 and up. Monthly fees are based on the market value of your portfolio (how much all your investments are worth). The other options are the Share Builder for people with a little more experience, and the Share Investor for experienced investors.
Absa offers a selection of portfolios for you to invest in, ranging from low risk options, to high risk. There are target returns portfolios, asset allocation portfolios, and building block portfolios available, each with a selection of fund options offered. Each fund aims to provide investors with a return on investment through a selection of investment options.
Target returns portfolios combine the elements of time, risk and return to provide a framework that is used when investing. The investment will look at the amount invested, the profit that the investor wants to see, and the period over which the investment must reach the target amount.
Asset allocation portfolios make use of different asset classes, such as bonds and stocks, in order to minimise risk and increase the potential for gain by diversifying your portfolio and not having everything invest in one place, where a loss will mean that you lose everything.
Building block portfolios make use of asset classes, which are broken up into building blocks which explain their risk and return characteristics. These are then used to assess investment options.
Nedbank offers clients a range of investment options, each with a comprehensive list of features and requirements. These include the Nedbank Money Trader, JustInvest, Money Market Investment Account and Guaranteed Income Plan.
Standard Bank provides clients with various investment deposit options, where your money earns you interest with very little financial risk.
Picking the right option for you
Financial education website Investopedia states that the type of investment that you make will be influenced by several personal needs and requirements. These include:
- Safety of capital,
- Current income,
- Capital appreciation (how much you need your money to grow by), and
- Your life stage, age, and personal circumstances.
According to experts, your personal financial circumstances will also affect the objectives of your investment. People with more money to invest and who are more financially independent can afford to invest large sums of money for longer periods than people that need the money to survive.
People with less money to invest, who need the money, will usually invest for shorter periods. For people who can only afford to invest for short periods, it is advised to be more conservative when making investment choices. But, short term investments will not bring the same returns as long term investments. Your money needs to earn interest and grow, and the only way it can do that, is if it is invested for a long period of time.
The importance of investing early
Many reports highlight the importance of investing early. It is important to invest from a young age, as this helps you to build up a portfolio, which can help you financially when you retire. If investing in a savings account that compounds annually (see above), the earlier you invest and the longer you leave it, the more money you will have in the long run.
When you are younger you can afford to take more risks with your investments. If you lose everything in a bad investment you have time to make up your losses. The larger your investments and the more risky, the greater the rewards will be, but also there is a greater the chance that you will lose your money. Make sure you know what type of investor you are (high, medium, or low risk investor) and how much money you have to invest.
Find out what risk you are able to take on and how much you are prepared to lose and lose, before you start taking on that risk.
When you are older it is important to be more conservative with your investments, if you lose everything as a result of a bad investment, you don't have time on your side to make the money back.
Before taking the leap and investing, speak to a financial advisor or your bank about what your goals are and the best options to get you there. Everyone's financial situation is different, and your investment portfolio needs to be tailored to your specific needs and desires.
If you are wanting to further your understanding of investing, there are courses available that allow you to interact with industry professional and get to grips with investing. For example, Standard Bank offer courses to suit all levels of investors. For more information visit their website.