Why would I want to buy shares?

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1 Why would I want to buy shares? How can I invest on an exchange? Can a young person also make an investment on the Stock exchange? What are shares? Do I need millions to be able to invest? Investment in shares on an exchange

2 Shares Why would I want to buy Shares? People invest in shares in order to achieve financial independence. They can even pay for any long-term projects including payment for their children s education. The costs of trading in shares are usually lower than investing in other markets. Research indicates that the return on shares has in most cases exceeded the inflation rate for the last hundred years. Most companies also pay a portion of their net profits (return) to shareholders - this is called a dividend. Diversifying your savings into different savings vehicles, such as shares, spreads your risks. What are Shares? Shares represent ownership of a company. If you buy a share of company A, you become a part-owner of that company. Because you are a part-owner (shareholder), you are entitled to a portion of the company s earnings. The profits that a shareholder is entitled to are paid to him or her in a form of dividends. Normally companies pay out dividends once or twice a year. If the company in which you bought shares fails and is liquidated you as the shareholder can claim against the assets of that company. The shares you own also come with voting rights. This means that as a shareholder you can vote at the company s annual general meeting. Remember that shareholders are not involved in the day to day operations/management of the company. Once you buy these shares your broker will send you a note which notifies you that a sale or buy of shares has been performed on your behalf. After that a share certificate will be forwarded to you as proof of ownership. Today share certificates are no longer in a paper form but in an electronic form. Your broker keeps the share certificates in electronic form for you. In 1996, the exchange terminated the buying and selling of shares on the floor. This was replaced by an electronic system of buying and selling of the shares. 2

3 Where can I buy shares? Shares can be bought on an exchange through a broker. These are known as listed shares. In South Africa, these shares can be bought on the JSE Limited ( JSE ). The JSE is a licensed stock exchange. However, there are other shares that are not listed. Shares that are not listed on an exchange are bought on the over the counter (OTC) market. For your own protection as a consumer you should buy shares that are listed on the exchange as opposed to the ones that are not listed. Shares that are not listed are more risky as the market in which they trade is not regulated. In this market if anything goes wrong, you would have little recourse as an investor. The JSE brings buyers and sellers of shares together and matches the prices. The JSE stands good behind every deal in this listed market, which is quite different for the minimal security offered and by the (OTC) market. Who issues shares and why? Most companies issue shares. Companies come to the exchange to list their shares for the purpose of raising money (capital) they require for growth. The money is raised through the issuance of shares which are traded on the exchange. Issuing shares is advantageous because the company is not required to pay back the money or make interest payments on the money raised. What determines the price of a Share? Share prices change often, sometimes many times in one day! If a company makes a profit, more people will want to own shares in the company and the prices of the shares will rise. However, if the company does badly, people will not invest in the shares of the company. It will result in a decrease in the demand for the shares and shareholders will start selling shares. The price and the value of the shares will decline as a result. Economic and political factors also play a role in influencing the price of shares. Who can buy Shares? Shares of most of the world s large companies are listed on stock \exchanges which means they can be bought by ordinary people who then have an investment in the company. This market is not only for the public, but also for institutions. People who are financially independent are the ones that can buy shares.you should only invest in shares with the money that remains after all your basic needs have been taken care of. You should not borrow money to buy shares. 3

4 Investing How much does one need to start investing in shares? If you would like to invest in shares, you need to shop around for a JSE member firm that will be prepared to act on your behalf. There are JSE member firms that are prepared to take as little as R5 000 or R as an initial amount from you in order to begin investing on your behalf. As a would-be investor you need to comply with the Financial Intelligence Centre Act (FICA) which among other things requires you to provide proof of identity as well as banking details. In the case of the Black Economic Empowerment (BEE) deals, different conditions apply to different schemes/deals. For instance, some schemes may have a minimum number of shares to be bought by a black individual or a group of people or a black owned company of 100 shares. Other schemes will also have a maximum number of shares that can be bought. Furthermore, there are lock-in periods that are normally associated with these types of schemes. They may differ from scheme to scheme. There are conditions that need to be observed by shareholders if they wish to sell their shares after the expiry of the lock-in periods. Shares of these BEE deals are normally bought through the post offices. This is a special arrangement between the post office and the issuing companies. This arrangement is convenient especially for people in the rural areas. It does not mean that post offices are broking firms. What are the risks involved in buying shares? There is no investment that is hundred percent safe. Every investment is subject to some form of risk. It is important to remember that companies can fail, markets can collapse, and prices can plummet as well as soar. Investment in shares is risky but there is a greater chance of making higher profits because of the increased risks. How does one know which share to buy? You should study the company s business model, management, financials and history. Most importantly, you should understand how the company makes its money. Economic and political conditions play a significant role in influencing one s choice. All this information will help the prospective buyer to make an informed decision. If your knowledge of shares is limited, you should give your broker the powers to decide on your behalf which shares to buy and when to buy or sell. The kind of agreement normally entered into between the broker and the investor is called a discretionary mandate. On the other hand if you are knowledgeable about shares you can enter into an agreement with your broker where he /she is limited to managing your investment only and this is called non-discretionary mandate. In this case you will give instructions to the broker when you want to buy or sell shares. 4

5 How should one go about investing in shares on the exchange? a) Authorized user (Member firm) route You should contact a member firm of the exchange if you want to buy or sell shares. The JSE s website is This website contains a list of all approved member firms. Alternatively, you could phone the JSE at (011) for assistance. The member firm will act as an agency and as a result will buy or sell shares on your behalf. You should enter into an agreement with the member firm of your choice. The list of the member firms can found on the website of the exchange. b) Asset Management /Portfolio Management route In the case where a firm is not a member firm of an exchange but is in the business of buying and selling of shares on behalf of investors, you can con-tact the FSB s FAIS department to check whether the firm is licensed as a fi-nancial services provider (FSP) in terms of the FAIS Act. c) Online Stockbrokers Should you want to invest online you will need to have access to the internet. Most of the big member firms and especially the big banks provide online share trading facility. As a prospective investor you should go to the branch of that bank and ask them to open an account for you. In the case where the member is not a bank you will have to phone them to open an account. If you know their website you can visit it and find all the relevant information. Once you have opened an account with a member firm you will have access to the trading platform of the JSE. This system works like internet banking. The stockbroker can give you buy or sell recommendations. The fees that you pay are very low and there is no minimum investment amount required. Member firms provide support to investors in the form of training or seminars designed to assist the investors to manage their share portfolios. 5

6 Investing What protection does one have as an investor in share market? All exchanges have established an Investor Protection Fund which is normally called the Guarantee Fund. This Guarantee Fund only covers clients of the member firms of an exchange. The Guarantee Fund will be used in the case of a member firm failing to honour his/her obligations. This Fund is solely established to protect investors. What is the procedure for lodging complaints related to the buying and selling of shares? You should first of all discuss any complaints with the member firm that acted on your behalf. If the member firm cannot resolve the complaint you can go one step further and refer the matter to the Surveillance Department of the exchange for f urther investigation. If the complaint still cannot be resolved, you can then lodge the complaint with the FSB. The FSB will then raise the issue with the exchange with the aim of resolving it to the satisfaction of the parties concerned. Key Concepts As a prospective investor it is important that you understand the following concepts: Authorised user: Is an approved member firm of an exchange. Discretionary mandate: Is an agreement between the investor and the member firm that gives the investor the power to give instructions to the member firm /broker regarding what shares to buy or sell and when to buy or sell them. In this agreement the broker can only manage the share portfolio on behalf of the investor. Dividends: A portion of net profits that the companies pay to their shareholders. Exchange: A market that brings together buyers and sellers of shares. Financial independence: Money left after all basic needs have been paid up. Financial Services Provider (FSP): A person who gives advice and or gives intermediary services in relation to financial products. 6

7 Financial Advisory and Intermediary Services (FAIS) Act: An Act that regulates financial services providers and representatives of financial services providers selling financial products. Guarantee Fund: A Fund established to protect the investors in the event of the default by the member firm. Lock-in period: Period within which an investor cannot sell his /her shares Mandate: An agreement between the investor and the member firm. OTC: Is Over the Counter Market which is not regulated. Non-discretionary mandate: Is an agreement between an investor and a member firm that gives the member firm the powers to buy, sell shares on behalf of the investor and manage the share portfolio on his /her behalf. Financial Services Board Riverwalk Office Park, Block B, 41 Matroosberg Road (Corner of Garsfontein and Matroosberg Roads), Ashlea Gardens, Extension 6, Menlo Park, Pretoria, 0181 Call Centre: or Website: Visit the FSB s first consumer education website: for guidance on how to make the most of your finances. 7

8 Disclaimer This booklet is the property of the FSB. Permission for replication or use must be obtained from the author in writing; Consumer Education Department of the Financial Services Board, Permission to use resource material request, PO Box 35655, Menlo Park, 0102, or Call

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