Investing is often a scary concept, particularly if you’ve never invested money before. A beginner’s guide might come in handy.
The whole exercise is made even more daunting by the jargon used in the industry and the many different players involved. Let’s start with the people who actually manage the money – those who choose which companies and asset classes (cash, bonds, property, equities and international investments) to invest in. These are the asset managers or portfolio managers. There are two broad ways in which they can invest your money. One is to make ‘active’ decisions or bets on the future price of a share. A lot of research goes into trying to identify the winning companies, but the proof of success lies in whether they beat the benchmark or not. A typical benchmark is a market index, like the FTSE/JSE All Share Index. Research suggests that after all the fees and costs are deducted, only about 15% of active asset managers beat the market indices over five-year periods.
The alternative, cost-effective way of managing money is not to try to guess which shares will outperform, but rather to buy all the shares that make up a market index like the All Share Index, in the same proportions as they are represented in the index. That way you are effectively investing in the entire market and will earn the return of the market. This is called ‘index tracking’ or ‘passive management’. It comes at a much lower cost because asset management companies do not need to employ expensive portfolio managers to manage these portfolios.
Most asset managers offer investors unit trusts that pool the investments of many smaller investors and are then managed as a single account by the asset manager. Instead of owning shares directly, you own units in the unit trust that owns the shares. So, with small amounts of money you can gain exposure to a large number of underlying shares, all in a single product. The various types of unit trusts are differentiated by what they invest in.
The next player in the game is the stockbroker. Only a limited number of companies are licensed to buy and sell shares on the JSE. Every asset manager has to employ the services of a stockbroker to execute these transactions on their behalf. The fee associated with each transaction is called ‘brokerage’.
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