A great way to start investing??on the JSE

2015-04-07 07:00

If you want to start trading like a pro, exchange-traded funds provide an easy gateway for the beginner investor, writes Neesa Moodley

When you invest in an exchange-traded fund (ETF), you are investing in a fund that tracks a basket of shares. Even though you are only buying into one share, you have exposure to many different companies on the JSE.

For example, one of the more well-known ETFs is the Satrix Top 40. This ETF allows you to invest in the top 40 companies listed on the JSE.

Ridwaan Moolla, the head of Absa Stockbrokers, points out that a key benefit of an ETF is you don’t have to buy or sell shares to ensure you maintain a holding in the top 40 companies.

“As companies fall off or join the top 40 list, the market maker, or Satrix in this case, adjusts the holdings in the ETF,” he says.

The benefits of an ETF

1 Diversification

This is when you invest in different types of shares across different sectors so that you minimise your risk of losing money. Another way to look at it is that you are not putting all your eggs in one basket.

For example, if you invest in a banking stock such as FirstRand, you should also invest in a resources stock such as BHP Billiton.

If the banking sector goes through a slump, the money you have invested in FirstRand will decrease, but the resources sector could well be going through a peak – the money you make via your BHP Billiton investment could balance out your loss from FirstRand.

An ETF gives you automatic diversification across companies and sectors. To have the same diversification by buying the individual underlying shares, you would have to have about R200?000 to invest with a stockbroker, while you can invest in a single share, namely an ETF, with just R5?000.

2 Liquidity

Trading on the market is more suited to an investment approach of more than five years. However, if you find you need to access your money in a hurry, ETFs are more liquid and easier to disinvest from than, say, a property investment.

3 Transparency

Because ETFs are listed on the stock exchange, there is greater transparency for you as an investor. Companies are required to list their financial results and publicly inform investors of any developments that could cause a material change in their share price. An ETF will regularly publish information regarding the stocks that make up the index the ETF is tracking.

4 Costs

ETFs are referred to as passive investments because they track an index and do not require active fund management in the same way a unit trust fund would. So you do not have to pay a fund manager fee or performance fee.

How to invest

If your aim is to start a share portfolio with a stockbroker, which you aim to build on over time, you need to open a stockbroking account.

Several online brokerages are aimed at the beginner investor and provide free educational materials that can help you become a more confident investor.

These include Absa StockBrokers, Sanlam iTrade, PSG Online and Standard Bank Online Share Trading.

If you don’t intend to build up your own share portfolio but want to invest on a monthly basis, you can invest directly in ETFs via different trading platforms such as etfsa.co.za or Satrix. Be aware you also pay a cost for using those platforms.

Rules of investing

Moolla says, before you think of placing your first trade, you need to understand the following seven rules:

.?Successful investing requires a safe environment. You need sufficient financial liquidity to ensure you are able to sell stock when you want to and not because you have to;

.?To ensure you achieve the best financial outcomes over the long term, you should start investing as early as possible and ensure the investment risk you take on is appropriate to your risk profile;

.?Diversification delivers the best returns for the amount of risk taken, regardless of the investment amount;

.?The most certain drag on investment performance includes costs, fees and taxes. Make sure you know what you’re paying for and why;

.?Inaction delivers better financial outcomes than frequent buying and selling. Investment returns are about time in the market, not timing the market. Stock picking, currency speculation and market timing are usually costly over time and best left to professionals (if at all);

.?Short-term investment outcomes involve considerable luck and it is almost impossible to differentiate luck from skill in the short term. In the long term, however, good investment processes are likely to pay off; and

.?Long-term investment success requires being sufficiently emotionally comfortable with your investment portfolio to stick to your plans and not panic based on what is happening in the market.

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