Investing in the stock market: the starter guide

Ridwaan Moolla of Absa Stockbrokers and Portfolio Management.

Forget the Wolf of Wall Street: the JSE isn’t about quick millions, but neither need it be daunting.

There are three common myths about investing in the stock market, says Ridwaan Moolla of Absa Stockbrokers and Portfolio Management:

- You need a lot of money;
- It’s a quick way to make a lot of money; and
- You need significant technical knowledge.

All wrong, says Moolla: you don’t need a lot of money to get into the stock market; it’s not a route to overnight millions; and while there are technical aspects to investing in stocks, it’s possible to outsource enough of that to make investing in the stock market achievable for the layman. “You’ll find jargon,” says Moolla, “but with the help of Google, that does not need to pose a problem.”

If you, like many, are daunted by the very idea, here’s a motivational thought: “You could buy Apple shares,” as Moolla says, “or you could use the same money to buy the new iPhone. Which do you think will be worth more in five years’ time?”

But to go back a few steps: before we think about investing, says Moolla, there are three questions each of us should ask ourselves:

1. Why should I invest?

Investments are a form of saving. Most of us are motivated to save because we have a specific goal. If that goal is close by – for instance, paying for an upgraded end-of-year holiday – we’ll save up for it; but if we’re looking to a further horizon, investments become the order of the day.

For some, that further horizon might be the education of our children, or the long-term target of knowing we’ll be able to sustain our standards of living post-retirement. For others, the goal might be something tangible – a luxury car, for instance.

What is your reason for saving? Give yourself some time to contemplate this; and when you have your answer, the next question to ask is this:

2. How am I going to achieve that target?

Let’s say your goal is a car which currently costs R500 000; and you’ve given yourself 10 years to get into that driving seat. By process of elimination, you’ll be able to work out the best route to achieving that goal.

For instance, let’s say you are able to save R5 000 a month. If you put your money into a bank, these would be the sums:

R5 000 x 120 months = R600 000 + 6-7% interest compounded, minus costs.

Looks good?

Yes, but where do you think the R500 000 price tag is going to be pitched 10 years from now? It’s fairly certain that a savings mechanism which offers finite growth, and where costs erode that growth over the period of the investment, is going to leave you perpetually on the back foot.

Our thinking, therefore, needs to focus on two things: potential growth, and costs. So the next question to ask is:

3. What are the costs as a percentage of the investment?

Let’s say your monthly costs on your R5 000 investment total an average R100, or 2%. The first 2% your investment grows is swallowed by costs; and you therefore have to make more than R100 a month to see any growth. To make your money work, you need to see as wide a gap as possible between costs and the time the investment stays in the market – and that means looking for low costs, and being patient.

It’s for this reason, says Moolla, that investing in stocks looks attractive; but there’s a golden rule to observe before you go there: understand the stock market. “Most of us don’t,” says Moolla. “Most of us have no idea, for instance, what the underlying investments are for our retirement funds.”

Getting to understand the stock market takes a little effort, acknowledges Moolla. But there are plenty of tools aimed at helping the layman understand the basics, and develop confidence. Absa’s own tool – find it at www.absa.stockbrokers.co.za and click on Education Centre – is excellent.

The most important thing is to forget the Wolf of Wall Street hype. “Don’t come thinking you’re going to make a quick million,” says Moolla. Establish a foundation with a long-term portfolio. Moolla recommends ETFs, or exchange-traded funds, as a cost-effective, highly accessible way of getting into the blue-chip market: Absa’s NewFunds SWIX 40 ETF, for instance, is one of the funds which tracks the FTSE/JSE top 40 index, giving investors broad market access to top-performing shares.

And reinvest your earnings. In the fund above, dividends are automatically reinvested each quarter to provide a total return. There’s an encouraging example from South Africa’s own JSE to make an argument for thinking long term and reinvesting: if you’d bought R100 000 worth of Naspers shares in 1996, they’d be worth R26 million today.