Please
note this article is written to refer to South African investment products. The
concepts are however relevant to all economies
The beginner investor can be flooded by terminology, baffled
by the range of financial instruments, swamped in fundamental analysis
exercises and confused by technical analysis and market movements.
Can a beginner-investor then enter the market without
getting stuck in the gold mines he will later learn to exploit? If it is
possible, how can the beginner-investor tap into these opportunities?
Before we explain such opportunities, let us summarize the
basic requirements a beginner investor will have:
-
Limited risk
o Whatever
your skill lever, always be sure to protect your own capital. See each rand or
dollar as an employee that may never leave your “company”
-
Maximum profits
o Cash in
the bank is the easy option but could be as low or even lower than inflation.
There are investment options that allow much better profits with a negligible
risk increase.
-
Easy-to-use financial instruments or market entry
o As a
beginner investor you do not need to understand the complexities of warrants
and what terms such as “delta” and “cover” mean. You want to be able to use the
instrument, get into the market, and start getting gains.
-
Easy decision making considerations
o A beginner
investment does not have the skill or frame of reference yet to make education
decisions about a single company. Instead, the decision making process for a
beginner-investor should be simple enough to understand; comprehension leads to
intelligent decisions.
-
Limited values.
o The
beginner investor often does not have millions to split over multiple shares. He can afford putting a sum
of money into one or two shares, but can’t spread it over 10, 20 or 40
companies. The transaction costs to buy into 40 companies with R50000 would be
much higher than buying into 3 or 4 shares with the same R50000.
So what are my options? This article will focus on Exchange
Traded Funds as answer to the beginner-investors quest for investment
opportunities available to him or her. As an example, we will use SATRIX TOP
40.
These investments follow the movement of the index. In the
top 40 example, you would “own” and earn the same percentages from owning
Satrix top 40 shares than you would have from owning the shares within the
index. I added “own” in brackets, because you never really own the underlying
shares. The shares are actually held in a trust managed by Satrix managers
(Pty) Ltd.
Satrix 40 offers you the benefit of investing a relatively
small amount yet spread it over the top 40 shares, without having the
transaction costs of multiple purchases of multiple shares.
It offers the opportunity to spread risk over 40 of the
biggest and best companies within the country. Therefore your rewards will be
linked to the performance of the top 40 companies, and you are risk protected
since all your eggs won’t be in one basket.
You are able to make decisions by analyzing a single
“share’s” trend, instead of having to sit with the overheads of studying all 40
individual shares.
Satrix currently offers three such exchange traded funds:
-
Top 40 (Top 40 listed companies index)
-
Indi 25 (top 25 listed industrial companies index)
-
Fini15 (Top 15 listed financial companies index)
When you own one of these exchange traded funds, you are
also liable to receive dividends. Satrix pays these dividends quarterly. The
amounts paid out will be all the dividends and interest which accrued within
the trust, less the costs incurred on managing the trusts assets. You will
therefore get an income and not only capital gains on your Satrix shares.
You can learn more about the Satrix instruments on www.satrix.co.za