This article was first published in the third-quarter 2013 edition of Personal Finance magazine.
Investing directly on the JSE is much easier than you think, thanks to the advent of online stockbrokers. However, you must exercise care when choosing an online trading platform.
How you choose to invest on the JSE will depend on your needs. If you are a first-time investor, it is unlikely that you require a comprehensive and, therefore, more expensive service. Most first-time investors are probably looking to buy and hold securities that will provide long-term capital growth and a steady flow of dividends.
A good starting point for first-time investors might be the virtual trading game recently launched by the JSE. The game, which is a risk-free way to learn about investing in shares, has an entry fee of R100 and prizes of up to R30 000. It can be accessed at https://virtualtradinggame.jse.co.za
The JSE’s website, www.jse.co.za, provides extensive educational materials on how to buy securities on the exchange.
If you have only small amounts of money to invest and want to learn while actually investing in shares, First National Bank (FNB) and Standard Bank offer sound platforms that do not require the minimum investment amount – usually R5 000 or more – that is considered cost-effective by most online share-trading platforms.
FNB’s product, Share Builder, allows you to invest as little as R300 a month in its portfolio of 20 company shares, two exchange traded funds and Krugerrands. The Standard Bank product, Auto Share Invest, allows you to invest a minimum of R500 a month in a choice of 100 top company shares. It is available only to Standard Bank clients.
These products provide an entry point for buying and selling shares or securities on a monthly basis. Investors are also provided with education and information about their investments.
The platforms, because of the lower investment amounts, do come at a higher price. FNB charges 2.28 percent, with a minimum of R57 for each trade, plus R25 for every 60 days you do not trade. Standard Bank charges R20 plus one percent of each trade, plus a monthly fee of R17. So, with both platforms, the more you invest, the less you pay.
Both products can be accessed through the online banking platforms of the banks.
However, you will need all the facilities and choices available on an online stockbroking platform if you want to invest fairly substantial amounts of money for the medium to long term and are looking for capital and dividend returns, or if you are trying to make money by actively trading shares. The online stockbroker platforms offer a wide variety of research tools, consulting services, trading and product options and – importantly – real-time trading.
If you are tentative about entering the realm of direct investment in listed securities and are not sure which online platform you should use, you can take advantage of the fact that many of the JSE online stockbroking platforms allow you to have trial runs using phantom investments and simulated trading. Using these facilities, you can learn a lot about investing directly in securities, be they simple exchange traded pro-ducts (ETPs) or more complex derivatives.
A major advantage of using an online platform is that you are not rushed into making decisions. You can take your time, using the platform to conduct research and ensure you understand the investments you choose to make.
Simon Brown, well-known investment commentator and chief executive of JustOneLap.com, a free investment education website, says anyone who wants to manage their own investments should consider using an online share-trading platform. The process is simple and cheap, and if you don’t know much about the investment options, a lot of educational material, research and data are available on the websites to help you.
Nicola Comninos, JSE senior manager: market development, says online share-trading is often an entry point for the first-time investor.
“At the JSE, through education and awareness, by creating a comfortable, secure environment and by responding to the market’s needs, we hope to encourage online investors.
“There has been lots of growth and development by online brokers, for example, trading offerings that cater for first-time investors by merging financial advice with trading services, such as providing a stream of investment advice from analysts, access to live data or a pre-selected range of recommended shares,” she says.
Comninos warns that you need to check the online stockbroker’s credentials and ensure that the stockbroker is an authorised member of one of the JSE markets and registered as a financial services provider with the Financial Services Board.
There are 26 equity market stockbrokers whose businesses are geared towards offering retail clients access to the JSE. Of these brokers, 13 offer online share-trading facilities (see table, link at the end of this article). However, only 10 have been included in this survey. Of the other three, Afrifocus declined to provide information, because, it said online trading was not its primary focus, while AngloRand Securities and 28eOnline did not respond to questions and all the information required was not available on the open section of their websites.
You are not limited to using the online platforms of the 13 stockbrokers; there are other platforms that offer online trading. For example, Sharenet is not itself a stockbroker but uses stockbrokers AngloRand, Nedbank Private Wealth and Imara. Companies such as Sharenet receive a bulk discount from the stockbrokers.
There is also ETP specialist etfsa.co.za, which uses the administration platform Automated Outsourcing Services, which, in turn, provides access to the full spectrum of ETPs, for both lump-sum investments and savings plans.
But Comninos says you need to exercise caution when choosing platforms that are not registered with the JSE, because there are many fraudulent companies.
Guy Algeo, a director at Imara SP Reid, agrees that membership of the JSE is important, because it provides increased regulation and oversight, as well as segregation and protection of client assets.
“We do not hold any assets in our own name, and all records are centrally stored in the JSE Broker Deal Account System. This provides a level of security to clients that is often overlooked by the market. In addition, the JSE Guarantee Fund makes good if there is misappropriation of client funds or negligence in their administration.”
Inevitably, membership of the JSE comes at a significant cost, Algeo says, but any comparison of services should take into account the advantages to clients of JSE membership.
Personal Finance has received complaints from readers about companies that hard-sell share-trading courses with claims of “foolproof” systems that will “make you rich”. These courses often come with a “money-back guarantee” – but fail to make it clear that your money will be refunded only if you return the course package unopened.
Brown says it is unnecessary to pay to learn about share-trading, because ample education is available free on the various online platforms.
GOING DIRECT: NOT FOR EVERYONE
It’s good news that technology – in the form of online stockbroking websites – is adding a new do-it-yourself dimension to investing, and reducing costs. This trend is supported by a great deal of freely available information, not only on the websites themselves, but also through the Johannesburg Stock Exchange, which sees retail investing as an important developing sector.
But even with great support, trading as an individual is not for everyone – just as DIY in the home is not everyone’s cup of tea, however desirable it might be to do things your way, when it suits you, and to have control over costs. Natasja Norval-Hart, the 2010 Financial Planner of the Year and a financial adviser at Sasfin, says you have to weigh the cost-savings against the time-savings, and the value of expertise and experience against the satisfaction you would derive from acquiring knowledge and acting on your own behalf.
The first thing to consider with direct investing, she says, “is that you can’t dip in an out of it, doing a little bit here and a little bit there. You need to develop skill, knowledge and insight, and you need to monitor the market constantly. At the same time, you should consider the information and insights you might be missing in the absence of a professional adviser.”
Norval-Hart says asset allocation is an enormous challenge, given the choices available, and it takes discipline to select shares on rational grounds, rather than emotional ones, and to hold firm through the inevitable market fluctuations. As always, you need to take a long-term view and be sure that diversification is central to your strategy.
Barry O’Mahony, of Veritas Wealth, who was named the 2013 Financial Planner of the Year in June, says his company believes that the financial services industry must assist DIY investors who prefer to do their own research through internet resources and implement their buy-and-sell decisions themselves.
“People who see the value in advice will then pay for it, whether this advice is through a certified financial planner, a stockbroker or an asset manager,” O’Mahony says. This advice would include helping you decide at the outset whether you are a long-term investor or a trader and explaining the significant tax implications of each option. “Importantly, you should consider an online share portfolio only for surplus assets; it is not suitable for someone with limited disposable income. If our clients show an interest in online investing, we make them aware of the downside risk of this investment strategy, while making sure they have no other need for these surplus funds,” O’Mahony says. – Roz Wrottesley
MYTHS AND TRUTHS ABOUT ONLINE TRADING
There are both misconceptions and hard truths about going it alone on an online share-trading platform. This list was compiled from information provided by online stockbrokers.
* You need to have a lot of money. Brett Duncan, of Standard Bank Online, says that people assume they need a huge outlay of capital just to get started. This is simply not the case. You can buy shares from as little as R300 a month, depending on the avenue and administration platform you use.
Erol Zeki, head of stockbroking at First National Bank Securities, says that investors who want to invest small amounts cost-effectively in a passive investment should consider exchange traded products (ETPs) that have an investment plan, building up a portfolio to which individual securities can be added over time. “ETPs make the entire market available to investors cost-effectively,” Zeki says.
* You can make a quick buck. This is not the case, particularly with penny stocks (low-value shares that can double or halve in price overnight), Duncan Ingram, chief operating officer at Absa Stockbrokers, warns.
“Share-investing works best for people who are looking for medium- to long-term capital returns and dividend income. Trading frequently, and the concomitant trading costs, can undermine any profits you may make,” he says.
* Investing is a difficult process. The many options available on the JSE make investing far less complicated than it used to be. However, Zeki says that you should have a view on investment markets and develop skills so that you can translate the information available to you (including research provided by an online share-trading platform) into sound investment decisions.
Duncan says investing is very easy if kept simple. You need to develop an investment strategy and understand the companies in which you invest. Alternatively, if you are not comfortable with selecting individual companies, you can invest in exchange traded funds, diversifying your risk and minimising the transaction costs. Guy Algeo, a director of Imara SP Reid, says that online share-trading is probably more appropriate for experienced or professional traders, whereas new entrants might require full-service stockbroking.
Online brokers tend to target the person in the street, and in this way they grow the market. But many people are not fully aware of the risks in the equity market while they struggle to build up the discipline to become successful investors, Algeo says.
“We find that many clients need ‘hand-holding’ (advice and assistance), which they can’t get from the online brokers, and eventually appreciate contact with a dedicated portfolio manager.”
* Only professional fund managers can invest in the stock market. This misconception is driven by the belief that large sums of money are required to invest in shares. Zeki says online share-trading is designed for retail investors who have smaller amounts of money to invest. However, it is important for investors to understand the concept of risk versus return and for them to take a long-term view based on a well-diversified share portfolio.
Zeki concedes that large institutions have an advantage, because they have teams of professionals. However, he says, individual direct investors can have real-time access to the same information as large institutions and they have more flexibility to react quickly to changing market conditions. Institutions have to go through a process to make a decision, and it can take time to build up a position, because a significant amount of money is required and the shares have to be available.
Gary Booysen, of Vunani Private Clients, says that, with social media, a fast internet connection and a plethora of new low-cost products, private investors can be way ahead of their institutional counterparts.
He says individual investors often have the advantage with smaller, less liquid shares, which are often overlooked by the institutions, because their cash flows are so large that the small and microchip stocks are hardly worth their consideration. (Any large purchase by an institution could push the price of the share to an unrealistic level.)
Gerhard Lampen, head of Sanlam iTrade, says many individual investors actually do better than large institutions because of the better use of opportunities with smaller amounts of money than big fund managers.
By the time a stockbroker has placed an order for his biggest client, thousands of individuals could have completed trades on our platform, Lampen says.
But he warns that investing on stock markets “is not a casino. You must do the “sweat hours required to study, read financial magazines such as Personal Finance, listen to financial radio and TV shows”.
You should not act on rumours, but you must act quickly on market trends and confirmed reports, he says. An important source of information is the JSE SENS service, on which sensitive company information must be released first before being provided to anyone else, Lampen says.
* Equity markets are extremely high risk. Many people have this view, particularly because they believe that prices are artificially driven by short-term speculators.
Zeki says you should appreciate that solid returns result from investing for the medium to longer term, taking advantage of the power of compounding (reinvesting interest and dividends), and diversifying investments across asset classes and sub-sectors of asset classes.