Introduction to investing

1. Introduction to investing Brought to you by: Online Share Trading Presented by: Simon Pateman Brown

2. “You don’t have to be wealthy to invest. But you do have to invest to be wealthy.” Warren Buffett (Richest person in the world US$62billion)

3. Why are we providing free education? • A study found that people do not invest in shares when they do not understand them • An educated investor is more likely to be a successful investor and hence a long term investor • We want our clients to be successful so that they continue to invest with us • If you lose money you stop investing and we lose you as a client! • The more people invest with us the lower the fees can be • Our brokerage fees have fallen over the last 5 years

4. Educate yourself!

5. Who is the course aimed at?

6. Who is the course aimed at? • Wide appeal. • Novice investor. • Some one new to the share market. • Review or recap on the basics.

7. What is investing?

8. Introduction to share investments • Investing in the share market is not a pastime, is must be taken seriously. Investors require an education and the tools before they can hope for any measure of success. • There are no magic formulas or Holy Grails to becoming rich investing in shares, but through education, you will be in the driving seat regarding your financial freedom.

9. The general misconception • Misinformation regarding the share market. • “My friend Richard made a killing in ABC company, and now he’s got another hot tip!!”. • "Watch out, with shares-you can lose your shirt in a matter of days!“. • Get rich quick mentality. • e.g. The amazing dotcom market in the late 90’s Didata. • Shares can (and do) create massive amounts of wealth, but they aren't without risks. • The key to protecting yourself in the share market is to understand where you are putting your money.

10. Investing and Returns • What is investing? • Putting your money to work for you. • Investing is more than simply hoping that luck is on your side (Gambling). • Successful investing is committing capital only if there is a reasonable expectation of profit. • Why Invest? • Financial security. • What do you invest in? • What are your average returns? • What are the fees that you are paying?

11. Risk vs. Return

12. Risk • Investing is all about managing risk. • Types of risks • Business risk • Financial risk • Liquidity risk • Exchange rate risk • Country / Political risk • Portfolio risk • Psychological risk • Neglect

13. How is risk managed Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries and other categories. • "Don’t put all of your eggs in one basket.”. • Move to five shares.

14. JSE investments: Risk vs. Return Futures Warrants Increasing risk of loss of purchasing power Increasing safety of capital Share instalments Increasing risk of loss of capital Increasing potential for capital appreciation Small caps shares Blue chip shares Cash / Fixed deposits Start here

15. What is a reasonable return? • Return must compensate for: • Time value of money during investment period • The expected rate of inflation • Risk in the business • Market return (beat the market or buy Satrix40) • Buy the winning stock in the winning sector

16. Why the share market?

17. Why the share market? Source: JPMorgan

18. Why the share market? • Over a long period of time, shares generally outperform any other type of investment & often experience extreme returns. • Different types of strategies: • Growth (reinvests profits to grow the business) • Income (distributes most of profits as dividends) • Speculating (short term buy/sell) • Buy and hold • Liquidity (speed of sale or purchase) • Accessibility • You’re in control

19. Why the share market? • An investment of R5000 in Standard Bank in 1990 when the share price was R1.77. Jan 08 it was R126, Jun 08 R75 now worth R211k, a return of over 4,220% excluding dividends (386c in 2007). • Note that one can also experience extreme losses e.g. Didata. 18 September 1995 R3.20 18 September 1999 R23.80 18 September 2000 R69.60 18 September 2001 R10.70 18 September 2002 R2.40 18 September 2007 R8.01

20. Before you start investing

21. Develop an investment strategy • INTENT • What stage of life are you at? • Young • Married with children • Retirement • What knowledge stage are you at? • What’s your style? “Know thyself” • What is your risk profile and risk tolerance? • Being able to master risk is being able to master the markets • Success depends on ensuring that your investment strategy fits your personal characteristics. • What is your investment time frame? • Invest, buy & hold or speculate?

22. Investment policy • What are the real risks of an adverse financial outcome, especially in the short term? • What probable emotional reaction will I have to an adverse financial outcome? • How knowledgeable am I about investments and the share market? • What other capital or income source do I have? How important is this part of the portfolio to my overall financial position? • What, if any legal restriction maybe applicable to my investment needs? • What, if any unanticipated consequence of interim fluctuation in portfolio value. • Don’t risk more then you can afford to loose

23. Common Mistakes • No investment strategy • Investing in individual shares instead of in a diversified portfolio of securities. • Investing in shares instead of in companies. • Buying high and selling low. • Churning your investments. • Acting on “tips” and “sound bites”. • Paying too much in fees and commissions. • Decision-making by tax avoidance. • Unrealistic expectations. • Neglect. • Not knowing your real tolerance for risk. • Averaging down.

24. The mechanics of the share market

25. What is a share? • Your “share” of a company you have invested in. • If a company does well (is growing its profits) then its share price should rise. • Likewise if a company is not doing well (is making losses) then its share price should fall. • You can profit from share price movements and share income (dividends). • You have a right to your say.

26. What is a share market? • Like any other market. • Requires buyers and sellers. • Shares are bought or sold when buyers and sellers agree on a price.

27. JSE Over the last 45 years • Logarithmic scale • Excluding dividends

28. Different types of shares • Ordinary shares. • Preference shares & Retail notes (bonds). • Exchange Traded Funds (EFT). • Satrix • DB x-trackers • NewGold • PropTrax • Derivatives. • Options (Warrants (calls & puts), Share Instalments) • Futures (Single Stock Futures and Currency futures) • Contract for difference - CFD

29. Shares vs. Other investments

30. Share categories • Income shares. • companies which pay large dividends. • Blue chip shares. • Issued by companies with long histories of growth and stability. • Growth shares. • Issued by entrepreneurial companies experiencing a faster rate of growth. • Cyclical shares. • Issued by companies that are affected by general economic trends. • Defensive shares. • The opposite of cyclical shares.

31. Different types of market • Primary market. • New issues of ordinary and preference shares are sold by companies to the public to raise new capital. • Initial public offering (IPO). • e.g. Pick ’n Pay may issue shares to grow the number of supermarkets it has. • Secondary market. • This is what people are talking about when they refer to the “share market" . • Allow trading in issued shares in the market.

32. Characteristics of a good share market • High liquidity. • Timely and accurate information. • Price continuity. • Low transaction costs. • JSE meets all the above mentioned criteria.

33. 30 323 All Share +87.1 Nikkei 12 433 +387.7 12 100 +25.9 Dow Jones FTSE-100 5 693 +56.5 What are share indices? • “The market performed well today” – what do they mean when they refer to the “market”? • An index is a way of measuring the performance of a selection of shares across the market. • When an index is up it means that on balance the share price of most of the shares in that index have increased that day. If the index is down then on balance most share prices of the shares on the market have decreased that day. • Indices can be used as market barometers for the market as a whole. Examples of well know indices are:

34. What determines a share price? • Supply and demand. • Market Issues. • Overseas markets. • Interest rates and inflation. • The economy. • Government policy. • Company issues. • Earnings prospects. • Management. • Strategic initiatives. • Competitive environment.

35. How to make money in the stock market You can make money with shares in two ways: • Buying a share at a low price and selling that share at a higher price at a future date This is referred to as capital growth. • e.g. buying Sanlam on 02 Jan 2007 for R19.00 per share and selling on 02 Jan 2008 for R22.81. A profit of R3.81 per share or a return of 20% over that period of time. • From dividends received from a share. This is referred to as income. • Growth and income are usually mutually exclusive.

36. What is a dividend? • Dividends can be seen to be like tax free interest earned on the share. • Dividends are distributions of a companies’ earnings to shareholders. The dividend earned on shares depends on the profits earned by the company and payment is decided by the company. • The return that you receive from dividends can be expressed as % and is referred to as the dividend yield.

37. Dividend Yield • The return that you receive from dividends can be expressed as % and is referred to as the dividend yield (like interest). • Dividend Yield = • Represents annual income from the share. • Different for different types of shares. • Income stocks DY 3-8, growth stocks DY 0-3. Dividend per share Price per share X 100

38. The Dividend Yield - Example • If you purchased Sanlam on 02 Jan 2007 at R19.00 you would have received a divided payment of R0.77 per share. This is a return of 4% per share (R0.77 / R19.00 = 4%) • e.g. Sanlam paid a dividend of 77c in 2007, which is a 4% tax free yield

39. Choosing companies to invest in

40. Choosing companies to invest in • Would you do business with them? • General long term prospects. • Will they be around in five years (or even better forever)? • Do you know a bit about the business? • Start with names you know and trust. • Sound management. • Financial strength and capital structure. • Strong companies in strong sectors.

41. Methods used to chose companies • Fundamental analysis • Involves looking at any data, besides the trading patterns of the share itself, that can be expected to impact the price or perceived value of a share. • Technical analysis • A method of evaluating shares by analyzing statistics generated by market activity, such as past prices and volume.

42. Put another way • “The story”- what the company does & what its outlook is (e.g. Pick ’n Pay is a supermarket chain. The outlook could be good for the economy and hence for personal spending could lead to more purchases at Pick ’n Pay hence the profits could be up and hence the share price could go up as well). • “The numbers” – review the financial statements of the company to see how healthy it is (Look at the income statement to see the profitability of Pick ’n Pay. Look at the balance sheet to see how financially secure it is). Look at the Price Earnings (PE) Ratio. • “The picture” – look at the history of the companies share price in a price chart (e.g. look at the past performance to see if the share is rising or falling, what is its trend?). Fundamental Analysis Technical Analysis

43. Fundamental analysis

44. The story (eg Pick ’n Pay) From the Standard Online Share Trading Website

45. The numbers (e.g. Pick ’n Pay) From the Standard Online Share Trading Website

46. Company A is worth R1m Issues 100,000 shares Each share is worth R10 Company B is worth R1m Issues 10,000 shares Each share is worth R100 Share Price vs. Value • Which company is cheap based on price? • Share price alone does not always tell the full story. • P/E ratio will be used to explain the concept of price vs. value. • A 10% rise in Company A , is the same as a 10% rise in Company B. • Price per share is not the same as amount invested.

47. The Price earnings ratio (P/E) • PE ratio is one of the most widely regarded barometers of a company’s value. • It establishes a direct relationship between the profitability of a company’s operations (EPS or the earnings per share) and the share price. P/E ratio = price of share (EPS) • It allows you to compare one share to another within the same sector. • If Pick ’n Pay has a share price of R36.00 and Spar has a share price of R60.00 which one would you buy? PE helps you.

48. Is this stock expensive? MNO & Co has a net profit (EPS) of R2000 for the year Asking price is R100 000 P/E = R100 000 R2 000 =50 Is this stock cheap? ABC & Co has a net profit (EPS) of R2000 for the year Asking price is R12 000 P/E = R12 000 R2 000 =6 The importance of the P/E Ratio • This means that the business would pay for itself in 6 years instead of 50, which is much more of a sane purchase! • Income stocks P/E10-15, growth stocks P/E 20-30.

49. ABC & Co has a net profit (EPS) of R2000 for the year Asking price is R12 000 P/E = R12 000 R2 000 =6 XYZ & Co has a net profit (EPS) of R6000 for the year Asking price is R24 000 P/E = R24 000 R6 000 =4 The importance of the P/E Ratio

50. Fundamental analysis Uses key financial indicators to analyse company performance. Growth Price/earnings Income Dividend Yield