Introduction: Part A
(Please
note that our website audience is global - therefore Dollar based terms are
used. South African members get their CD with Rand-based instruction material)
From the author:
While at school, my dad helped me to put a small amount (which was a lot
of savingsfor a kid in 1987), into
mutual fund – or something called a unit trust. I kept a file with history on
the unit trust prices, saw how they fell, how they rose, and never really knew
why it all happened. I knew how to calculate my money’s worth, but that was
about it. I was overjoyed when I got a letter in the post saying how much the
unit trust is worth.
But all I knew is that I was gradually earning more money,
without having to work for it. That in contrast to the
vegetables I sold to my mothers’ friends – which gave me more pocket money –
but with much more work! I realized then: You can earn money, without having to
work for it… Your money can work for you, to earn more money!
Now, almost 20 years later, I would like to share with you, what I have
learnt over the since that day I was 9.
Certain practical sections will be included to further improve your understanding of the world of shares. These sections will be in blue text color.
In
this introduction you will see the topics covered in this course. After the
course, you should fully understand the stock market, and how you can use it to
financially benefit you, without exchanging your work for it, and even
in a downtrending market!
Be aware: Greed is a nasty habit. And gambling has trashed
many lives. Always remember to always first ask yourself: Am I greedy when
buying this share? Is the risk in this share so high or uncertain, that I’m in
fact gambling money when I buy it?
We
will teach you how to use your head to make share-buying decisions, and not
emotions. We will show you how to make money even when the stock market is
falling. I wish you great success on the stock market, although failure is
probably a better teacher. I hope that greed may never rule your decisions, and
that your investments will reward you and others alike.
Practical section
You will need to actively participate in the course, and for this
purpose you will need to create 3 files, and grow them as we progress:
·
Economic data
·
Company data
·
Market Data
Each file should be able to have different sections, and content
for each section. For example, the Economic Data file, could have sections such
as Exchange rates, Inflation, Interest Rates, etc. Within these sections you
would need to add content as you read or hear about it in the news or papers.
For the Company data file, now is a good time to pick 5 to 8
companies to watch as you progress through the course. You won’t be watching
them as a potential share buyer, but just to learn how the economy, politics,
etc impacts on share prices.
I suggest you pick these shares from the business section of
your daily paper, preferably from different sectors. If you have no idea what a
sector is – do not despair, you will soon learn! For interest’s sake, we
suggest that you pick a few companies spread over sectors such as
·
Resources
·
Financials
·
Beverages
·
Consumer goods
·
Transport
·
Health
·
Telecommunication services
As you progress through the course, try to summarize business
news articles as often possible regarding your selected companies. For example,
if a share price goes up, try to summarize the reasons. If a dividend is paid,
summarize the comments of the author and note if he compares it to previous
years. Try to learn about the industry, and start collecting articles about
competitors as well. What brands does your company cover, or which other
companies do they own?
The reason you shouldn’t flood yourself with a watchlist of 20
or 50 companies for now, is that to analyse a company properly, you need time.
Working through the data of 20 or 50 companies would rob you of spending
quality time on each individual company. Therefore, we suggest that for this
learning ecxperience, you elect ideally 5, and preferably no more than 8 to 10
companies. If you can pick companies of which you understand their product or
services, even better so! Analysing a company in a totally unfamiliar industry can
be really confusing at the start.
As
author, I’m constantly collecting more and more articles about a selection of
just a few of m preferred companies, and from these articles the forces of the
markets and industries are revealed as your indulge them.
Let’s
be honest and ask some intelligent questions about investing!
WHY SHOULD WE INVEST ?
Lets answer that with a question: Do I
need to work for money?
The
answer is … No. You don’t. There are thousands of people who do not work for
their income. These people can go shopping, and buy what they need, with money
they didn’t work for. How is that possible? Well, something else is earning the
money for them: They have money that is invested, and they generate an income
from this money. For this income they don’t have to work. They just have to own
a piece of the business that generates that income. Why are so few people
earning this type of income? Simply because many others do not know how to use
the tools these people are using – such as the Stock Exchange.
Do I need money to make money?
Yes and no. Yes, you need money to invest, so that you can get a return on your
investment. But No – you don’t need lots, nor your own. For example, if you
decided to buy fruit from a farmer, and sell it next to the road, you might
loan some money from your cousin, buy the fruit, sell with a profit, keep the
profit, and return your cousin’s money to him. You made money without having
had the money at the start! We can’t tell you how to fund your investments, but
we can definitely guide you to some good books about it. We strongly suggest
you invest in your own financial education, and a good place to start is by
reading books in the Rich Dad Poor Dad series. Some of Robert Kiyosaki's books
in the series that I can strongly recommend are:
These books discuss general
principles of financial management. One of the key messages of his books is to
raise your “financial IQ.” He teaches you principles that even precede the investment
decision. Our material follows on that knowledge by teaching you how to
practically pick the best investments.
The intent of this site is to
raise the financial literacy and intelligence of young and old alike. People
were or are not tought the basics of managing their money at school.
Some parents have ventured
uneducated risks on the stock market, and believe it to be something to be
avoided. However, with a thorough understanding
of financial instruments, markets, and
risks, you can intelligently manage your risk and receive the
rewards for that. People not willing to invest time in educating themselves and
their children, will be the losers in this game, and people investing time in
their own financial education will be the winners.
Do
a search on the web and see if you can come up with some statistics about how
many people would be able to retire at the age of 65. The forecast of
retirements and quality of life during retirement is gloomy. And that is because people are
apathetic towards their own finances and their own investment strategy.
Investment is an essential aspect of personal financial planning, and educating
yourself to invest intelligently can help to ensure you don’t become a
statistic.
So before just investing in any financial market or instrument or provident
fund, first invest in your (and your children’s) financial education. Only once
you have financial savvy, can
you choose the instrument to suit you.
Lets
review some terminology
o Investment is the
saving of money with the aim of making it grow.
o The amount you invest is called capital
o Assets are the
carriers of value that can grow in value, giving you capital gain
o Assets can also spin off cash, giving you income, also called dividends
o A Bull market is a
market with rising share prices
o A Bear market is a
market with share prices spiraling down.
Back
to the question: Why invest?
The
example below will explain. (Please
note, for reasons of simplicity, I omitted transaction costs
that accompany all share-trading transactions, and rounded share prices
roughly.)
Lets
be honest: Investing means you take
money that you could have used to buy something nice with immediate
gratification, like a bike, a radio, or clothes, and you use it for something else that will only reap
future rewards.
Pretend
you were in school; Instead of taking $100 and buying some great CD’s or DVD’s,
you invest it in shares in an oil company in December 2006. Your friend, who
also got $100 for his birthday in December, buys a DVD player for $99and spends
the remaining $1 on sweets.
In
March 2007, a prolonged freezing winter caused the
So
your initial $100 is now worth $150. With this, you can buy a DVD player, a
DVD, and have money left. Your friend however, is still saving pocket money to
buy a DVD!
So why did your friend not invest?
Unfortunately our “live for the
moment” society and our urge and greed to satisfy our desires instantaneously,
is our greatest enemy. You could probably invest your $150 in a put warrant
(Something that lets you make money if a share price falls) on the same
company, and if the demand for oil decreases, you can double your money. By
this time your friend might have bought his first DVD. You however will be able
to buy the DVD player, a few DVD’s, and still have $100 cash to re-invest.
This brings us to the next
question: What can I invest in? Well, anything! Like you could have invested in
shares, there are other assets you could have invested. Assets are classified
into asset classes. Next, lets discuss assets
and asset classes!
THE DIFFERENT ASSET CLASSES
Lets
reiterate what an asset is:
Asset classes are in essence
different categories of assets. Lets focus on three main asset classes:
(During the rest of the course we
will expand on this list to ensure you fully understand all the financial
instruments available to you)
In summary, the three aspects
distinguishing asset classes are risk, return, and liquidity. The
investor searches for an ideal mix between risk, potential return, and
liquidity (the ease with which it can be converted to cash) when he makes his
investment decision. In the back of his mind, he has this matrix to guide him
throuogh that decision:
|
Asset Class |
Risk |
Return |
Liquidity |
|
|
High |
High |
High |
|
Property |
Medium |
Medium-High |
Low |
|
Cash |
Low |
Low |
High |
An investor should decide how he
allocates his money into these asset classes. Lets look at an example:
The list we've looked at includes:
These asset classes are in
sequence from highest to lowest risk.
A share price moves by the minute. Therefore, if you invested $10000 two
minutes ago, it might be worth less already. That is high risk.
Property value does not fluctuate
as much. But as some areas might become highly polluted, or have high crime
rates, their value might start to decline. You might not be able to find a
buyer in these circumstances – which adds to the risk of further loosing value
on the property. The ability to sell
your asset quickly, is termed liquidity. Property is less
liquid than shares, because a share you can almost always sell within a few
seconds online, whereas the process of selling a house is much more cumbersome
Cash – or money in the bank – is
unlikely to loose value, and is a very safe investment. However returns are
very low and barely beats inflation. Cash has a very high liquidity, as it is
can be moved into another investment almost instantaneously.
In summary, the three aspects distinguishing asset classes are risk,
return, and liquidity. Next we will look at structuring your
portfolio. The portfolio is a list showing the assets, or asset classes you
invest in, and what portion of your money is invested in each of the asset
classes.
In previous terminology
explanations, we have mentioned bull and bear markets. If you have a bullish
outlook it means you expect prices to go up. If you have are bearish outlook,
you expect prices to go down. For example, you believe that share prices are
going up, therefore you are bullish on the stock market. Or you believe that
property prices are just too high and will come down - then you are bearish
about the property market.
Your
outlook on markets should be based on thorough knowledge of the markets,
economy, etc. However, for now, it's important to understand that you should
structure your asset portfolio according to your outlook on the markets. The
table below suggests how an investor could structure his portfolio, by
investing a certain percentage of his capital in different asset classes:
|
Asset Class |
Bullish Outlook - prices expected to go up |
Bearish Outlook - prices expected to go down |
|
Shares |
50% |
10% in put warrants |
|
Property |
25% |
60% |
|
Cash |
25% |
30% |
To
summarize what we have learnt up to now, we can say that to be clever
financially you need to know and understand:
-
That you can get an income without working for it
- That there are different tools or assets you can use to generate such income
- That these tools differ in risk, return, and liquidity.
Also,
to be financially clever you need to understand the markets in which these
assets are traded. In addition to the reading in this course, I suggest you
start reading the business sections of daily newspapers relating to these asset
classes.
Before
you continue, have a look at this Powerpoint presentation about some personal
financial principles you can apply to ensure your wealth trends upwards...
Note, you can exit the presentation by using your browser's BACK button at any time
Lets move on and get a further view on what financial
instruments are available to you.
Introduction:
Part B
When
you first open your eyes to the concept of having your money work for you and
not visa versa, you are faced with a list of financial instruments that can be
very confusing.
Shares,
unit trusts, warrants, bonds, cash deposits… how do you choose? Understanding
the difference between all these options will help you choose. Before we start
with Lesson 1, let’s understand what our options are.
·
Shares
o
Shares are pieces of ownership in a company that is
listed on a stock exchange. A company that wants to expand issues shares for
sale.
o
With shares you can make money with either income
from the share or from capital gains if you sell at a higher price than you
bought. If you buy shares in a company, the number of shares you own determine
your portion of ownership in the company. As part-owner of the company you can
get a share of profits. This is an income stream from your shares
o
You can also sell your shares, sometimes at a higher
price, sometimes lower. The price of your shares has nothing to do with the
company anymore. It’s determined by what people are willing to pay to get a
part of the ownership of the company, however the company’s performance has a
strong impact on the market’s view. It would be called capital gain when
the share price increases.
o
Every share purchase or sale transaction requires has
some inherent costs – brokerage, taxes, etc. A base brokerage fee makes it
difficult to invest smallish amounts – since the base brokerage fee would make
up a higher percentage of the total investment. Your shares would need a steep
increase in price just to cover this base costs. If you however invest bigger
amounts, the proportionate brokerage fees gets less, and you can benefit more
from share price increases.
o
Shares are organized into various sectors, such as
Resources, Industrials, Health, Food Producers and Processors, Media and
Entertainment, etc. When valuing a share you can compare its performance
against other shares in the same sector.
o
Once you understand market dynamics, how to read the
economy, when to buy and sell, and how to analyze what companies are worth
buying, the share market can be a lucrative opportunity. The famous investor
o
One of the main reasons that private investor’s are
increasingly using online tools to manage their own finances, are that fund
managers have a certain mandate within which they may apply the funds under
their management: The fund manager usually have set of criteria, e.g. he must
keep a minimum of 25% in cash at all times and may only invest in South African
blue chip companies. Individuals might not like this strategy
o
o
Another reason investors prefer doing online share trading them selves
is because they usually hold far fewer shares in any specific company;
therefore they can buy into or sell shares much faster than a large fund
manager can.
To explain the importance of this with an example:
Assume news hits the market that the oil price is likely to fall by 20% over
the next week as oil production increases by manufacturers will ensure a
tremendous oversupply: The fund manager would immediately start selling shares
in oil companies. However, he has hundreds of thousands of shares to get rid
off. If he opts to offer all of these for sale, there would be an oversupply of
these shares, and the market would shred the share price to bits. So the fund
manager starts selling bit by bit, to try and cushion the price drop. The
individual investor, who holds $2000 of shares in an oil company, can hardly
cause an oversupply of oil shares that would expedite the drop in the share
price. He can sell within a minute or two before the worst drop occurs. (This
example is an over-simplification to make a point!)
·
Unit trusts or Mutual Funds
o
Unit trusts are ideal for the investor who would
rather rely on a professional account manager to manage his investment than
learn about the stock exchange and manage his own money.
o
A unit trust or mutual fund is just that. It’s a pool
into which you can buy in. From the pool of money, multiple shares are
purchased at the fund manager’s discretion.
o
From this collective pool of money the fund manager
buys and sells certain underlying shares, bonds, or property as the fund
manager sees fit, within his permitted range. The fund manager has a benchmark
as to which he or she should perform (such as the all share index).
o
Unit trusts are also more affordable to the smaller
investor – you can invest smaller amounts than you could in shares.
o
A unit trust is a pool of money with which the fund
manager buys and sells certain underlying shares, bonds, or property as the
fund manager sees fit. The fund manager has a benchmark as to which he or she
should perform (such as the all share index).
o
With shares you can spread your risk over multiple
shares with a strategy called diversification. With unit trusts, the fund is
already spread over a number of underlying shares or bonds, and therefore has
an inherent diversification and less risk. If any one share into which the fund
has bought would steeply fall, the other shares would cushion the effect.
o
This however is also true for sharp increases in a
certain share. If you had invested in such a share, you would have fully
benefited from the price increase. However if that share was one of the shares
your fund have invested in, the increase would be cushioned by other shares in
the fund which did not increase as steeply.
·
Options or warrants
o
Warrants are financial instruments with which you can
amplify the effects of the market. Usually options are given to directors
within the company, based on their performance, and warrants are available to
the general investing public.
o
They offer the ability to “gear” your initial
investment. When you buy a call warrant on specific share, it might have a
gearing of 5. If the share price increases by 3 percent, the warrant price will
increase 3 X 5 = 15 times.
o
The same is however true of the opposite happening:
If the share price drops 3% , the warrant price also drops 15%.
o
Warrants however offer you the opportunity to make
money even if the markets go down, with a put warrant. These will be explained
in Lesson 1 already.
·
Share installments
o
These instruments offer you the opportunity to buy
shares on “debt”: You can purchase shares now, pay only (for example) 50%, and
pay the remainder a year later with a (For example) 5% interest on the total
amount.
o
When dividends are declared and paid out, you however
get dividends on the full number of shares, even those you have “financed.”
o
If the share price does increase to the value of the
two installments, payment of the second installment can be rolled over to the
next year, effectively postponing the payment while you will still get the
dividends paid out even for the second year.
·
Bonds and Cash
o
With the interest bearing securities, you do not get
capital gain, rather a steady income.
o
Interest bearing securities are the safest asset
class, since the original value of the investment wont decrease.
o
However, normally interests paid are fairly low, and
inflation might eat up some of the value of your investment.
o
Bonds are money which you lend to government or a
company. They have the liability to pay the full amount back at some point in
the future. In the meanwhile they also have the obligation to pay you interest.
o
Bonds are traded on the capital market just as shares
are traded on the share market or stock exchange
o
There is a direct opposite relationship between bond
prices and interest rates: If interest rates drop, bond prices will go up. The
reason is that the bond’s interest rate is fixed. When the share prices of
interest rates with banks drop, you will get less from your money in the bank
than you could get from interest repaid from your bonds. So people will be
willing to pay more for the bond.
o
The reverse is also true – if interest rates go up,
bond prices will fall.
You have now covered some of the basic yet vital elements of investing. Once this content have settled in and you have started with the practical parts, move on to the first lesson, by clicking on Lesson 1 in the left-hand navigation bar. (Available to subscribers only.)