By Duma Mxenge
Are you a first-time investor, or do you want to know how to start investing? Embarking on your investment journey might seem like a daunting task, especially if you're new to the world of finance, but fear not!
Here’s how you can get started with these five easy steps:
1. Set aside a manageable principal amount. This can be as little as R10 each month deposited into your savings account. You can gradually increase this amount as you see fit.
2. Learn how the stock market works. Understanding how the stock market is affected by changes in the economy will assist you in managing your investment.
3. Create a detailed plan and time frame for your investments. Having a clear idea of what you wish to achieve and by when will keep you grounded and on track to achieve your goals.
4. Have a diversified investment portfolio. Once you have found your footing in the investment space, investing in different asset classes (assets are the different types of things you can invest in, eg property, shares, bonds, cash) and industries will mitigate the risk of your investments underperforming should the economy take on a downward trajectory.
5. Always be willing to learn. The world of investing is a dynamic and interesting space, with so many niches to tap into. Take the time to learn about how your investment personality is affected by the ups and downs of investing, how to keep your cool during volatile times in the market, and which investment is worth committing to.
When entering the world of investing, you may encounter many new terms, and understanding these terms will help you become a confident investor.
Here are some of the terms you should know to ensure a smooth and confident investing journey.
Asset Class
An asset class is a group of securities (investable instruments) that have similar characteristics; they behave similarly in the marketplace and are subject to the same regulations.
The main four asset classes are equities, fixed income, property, and cash. Each asset class has a particular level of risk associated with it. The risk level is an indicator of the potential return; a higher risk equals an increased probability of a higher return, and vice versa.
When making an investment decision, the first choice you are making is which asset class to invest in. Think about the choice you make to either keep your money in a bank account or invest in an index-tracking fund.
Equities
Equities are shares of companies that are listed on a stock exchange. Equity investments are for those who want maximum capital growth and can tolerate short-term price movements and the high risk associated with this asset class.
If you’re willing to take on higher risk to increase the probability of a higher return, then this is the asset class for you. You should be prepared to invest for a longer period, at least five to seven years.
Fixed Income
Fixed-income instruments, or bonds, are debt investments in which you are effectively lending money to government or companies in order to earn a regular interest payment, i.e. a fixed income in interest terms.
These funds are for investors looking for a predictable income stream and are associated with a moderate risk level. Be aware, however, that these funds may experience some price fluctuations in the short term. Fixed-income instruments can be invested locally or offshore, usually via foreign bond exposure.
Cash
Cash investments include bank deposits and short-term money market assets. They are low-risk investments and highly liquid. Along with the low risk comes a lower level of return. It is suitable for investors who have a shorter investment term, i.e. 6–18 months.
Listed Property
Listed companies that invest in local and international properties (eg shopping centres, industrial blocks, and offices) make up the listed property sector.
Listed property is often seen as a hybrid asset class because the shares exhibit qualities of both equities (due to their listing on the JSE) and bonds (due to the anticipated yield or rental income from the underlying properties). This asset class has a high-risk profile and should be seen as a longer-term investment.
Investing across asset classes
By diversifying your investments, you lower the risk of some of the higher-risk asset classes in the fund, allowing a moderate or conservative investor to find a fund that suits their risk profile.
A money market portfolio is not a bank deposit account
The price is targeted at a constant value. The total return to the investor is made up of interest received and any gain or loss made on any particular instrument, and in most cases, the return will merely have the effect of increasing or decreasing the daily yield, but in the case of abnormal losses, it can have the effect of reducing the capital value of the portfolio.
Excessive withdrawals from the portfolio may place the portfolio under liquidity pressures, and in such circumstances, a process of ring-fencing withdrawal instructions and managing pay-outs over time may be followed.
A seven-day rolling yield is calculated by taking into account the interest earned by the fund during a seven-day period minus any management fees incurred during those seven days. Income funds derive their income primarily from interest-bearing instruments. The yield is current and is calculated on a daily basis.
Duma Mxenge, Business Development Manager, Satrix.
*The views expressed here are not necessarily those of IOL or of title sites.
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