If your goal is financial success, then the investment is the vehicle that will get you to that destination. Having said that, many people just do not know the first thing about investing let alone investing in the stock market. Many appreciate the need and the urgency to invest for the future, but they come up short in terms of how to go about the business of investing in a practical manner. Unfortunately, this lack of understanding of this concept has seen many people fall prey to con artists who swindle them of their savings.
What does it mean to invest?
Investment basically means to place funds or resources into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit. Investopedia describes investing and investment as “…the act of allocating resources, usually money, with the expectation of generating an income or profit. You can invest in endeavours, such as using money to start a business, or in assets, such as purchasing real estate in hopes of reselling it later at a higher price.”
What is a stock market or stock exchange?
It is a place where shares of publicly listed companies are traded. These markets are organized into actual exchanges where various participants buy and sell shares and other securities. In Zimbabwe, the stock exchange is called the Zimbabwe Stock Exchange (ZSE) and in South Africa, it is called the Johannesburg Stock Exchange (JSE).
The stock markets are themselves organized into two, the primary and the secondary markets. The primary market is where companies float shares to the public in an initial public offering (IPO) to raise capital for the first time.
Once new securities have been sold in the primary market, they are traded in the secondary market which makes up the second part of the stock market—where one investor buys shares from another investor at the prevailing market price or at whatever price both the buyer and seller agree upon.
The stock market itself is a part of what is known as the capital market. This is the market for long-term loans or long-term capital. The other component of the capital market is the market for fixed-term securities which is also known as the bond market. It is in this market that investors buy and sell corporate, government and municipal bonds. There is no bond market in Zimbabwe even though concerted efforts have been made in the past to create one. These efforts have been undermined by weak macroeconomic fundamentals and inflation that do not support its creation and development.
What are shares and what does it mean to be a shareholder?
When an individual or corporate entity buys shares in another company, they become a part-owner of that company. They become a shareholder in that company, and this gives them a preemptive right to anything of value that the company distributes in the form of dividends from profits or any remaining funds in the event that the company is wound up. Shareholders also are entitled to vote at the annual general meeting on any issues that arise and that pertain to the strategic direction of the company. Depending on the number of shares that they hold shareholders can be allocated seats on the board of directors of the company. What this means is that shareholders with large numbers of shares can nominate to the board individuals who will represent their interest in that company. Ordinarily, shareholders will vote for directors who will make up the board of the company.
When an individual is a shareholder of a listed company, they can expect to gain from their investment in two ways. The first is through dividends. When a company engages in business activity and generates profits, a portion of those profits is paid to shareholders at predetermined intervals. This portion of profits paid back to shareholders is known as the dividend. Companies that pay out a greater portion of their profits to shareholders are called dividend stocks whereas those that pay out a lesser portion and in some instances that do not pay dividends opting instead to retain earnings to fund the growth of the business are known as growth shares.
Shares are also referred to as stocks or equities.
It is important to note that dividends are paid from the profits that a company generates. It is not likely that a company will declare a dividend to its shareholders when the company has had a bad year in terms of profits. At times a company may have a profitable year but opt not to declare a dividend because it is not certain of the prospects of the business environment. This development was common last year with many companies listed on the JSE and ZSE after the outbreak of the coronavirus pandemic. Most companies opted to hold on to cash in the face of a bleak operating environment. It is therefore not always given that companies will always pay out dividends. As a new investor, an individual must exercise care to thoroughly research the dividend history of the companies he or she desires to invest in. There are companies that have had a long record of paying dividends over a long period of time like Remgro, Anglo American and Growthpoint Properties. There are many others and to find them will require a bit of due diligence.
The second way an investor makes money from holding shares is through capital appreciation. This is the difference between the price at which a share is bought and the price at which it is sold. A lot of financial advisors who preach the buy low and sell high strategy share this line of thinking. Share prices of listed companies are driven by various factors chief among them, the financial shape of the company, the future prospects of that company and the industry in which it operates, the developments within that same company and the mood and behaviour of the market towards that company. This last factor at first glance appears conceited and facetious but it has the greatest bearing on the share price of a company. When investors express optimism around a particular stock they tend to buy more of it on the markets leading to the share price rising. The opposite is true if market sentiment around a stock is pessimistic.
A classic case in point is Padenga Holdings, the Zimbabwe-based crocodile skins and gold mining company. The company suffered badly at the onset of the coronavirus pandemic but managed to turn its operations around and expects the profits from its gold operations to make the bulk of the group’s earnings. The company also recently announced plans to list on the Victoria Falls Stock Exchange to raise capital in hard currency and a possible delisting from the main board of the ZSE. Patently there is nothing adverse in these developments; they stem from a generally positive outlook on the future and yet the company’s share price has gone in the opposite direction of what is expected. There is pessimism among investors that should the company move from the ZSE to the VFEX it will not be as liquid as it is on the mainboard as was seen with SeedCo.
These are some of the considerations an investor needs to make when they decide to buy and sell shares in listed companies.
Where can a person buy and sell shares?
It has never been easier for individual or retail investors to buy and sell shares on the stock market. Historically investing in the stock market used to be called a rich man’s game. This perception has fallen away with the advent of technological disruption in this space that has enabled more and more people to invest in the markets. It has been called the democratization of the markets! Traditionally the way a person can buy and sell shares on the stock market is through setting up what is known as a brokerage or trading account with a stockbroker and then instructing the broker to buy and or sell shares on your behalf. This method is still available; however, it is steadily being eclipsed by online brokers that enable individuals to set up accounts and investors can buy and sell shares on their own.
A comprehensive list of all the stockbrokers operating in Zimbabwe is available on the website of the Securities and Exchange Commission of Zimbabwe. For investors in South Africa, the JSE website also has a list of stockbrokers in South Africa. In Zimbabwe, there are online brokers where individuals can set up accounts online and then trade shares on their own. These service providers include C-Trade and ZSE Direct. C-Trade is particularly interesting in that it has a USSD capability that enables investors to trade shares even without an internet connection. In South Africa, Easy Equities has made it easy for individual retail investors to buy and sell shares on the JSE and it operates in a similar manner to the service providers mentioned before.
Should an investor decide to go the traditional route of setting up a brokerage account with a stockbroker there are two main accounts that they can open namely the discretionary trading account and the non-discretionary trading account. The discretionary trading account is one where the broker buys and sells shares on your behalf. This is ideal for individuals who are new to investing as the stockbroker decides on their behalf what shares should and should not be in your account. The non-discretionary account is where the client or retail investor trades their account on their own accord. The broker only buys or sells shares with the express instruction of the investor. The client places orders to the broker either over the phone or by email. The broker then executes the order and provides a note to the client or investor.
As investor’s experience grows, they may attempt to grow returns and their wealth through more sophisticated and esoteric methods like buying shares on margin and short selling. Buying shares on margin is when an individual borrows money from their stockbroker to purchase shares in a particular company. The investor as part of the conditions of borrowing from the broker will put up funds and shares with the stockbroker in what is called a margin account. Should it occur that the value of the shares bought on margin falls below the collateral that would have been supplied for the loan, the investor will get what is known as a margin call from the broker which is a request to top up the collateral. This strategy is best used in markets where share prices generally rise. It is profitable if the investor uses borrowed funds to purchase shares that are increasing in price. The rationale being that the investor will then sell the shares, settle his or her margin loan and then pocket the difference. It is risky and should only be attempted by seasoned and experienced investors because it involves leverage or Other People’s Money. In favourable conditions, it enhances the returns an investor would otherwise earn if they invested without the use of leverage. The downside is that should the market decline the investor stands to lose more than what they would have invested. Prospective investors are advised to tread with caution in this regard.
With respect to short selling, the investor borrows actual shares from the broker and then sells them on the market at the prevailing prices. In margin investing the investor borrows actual cash the same way they would from their bank. The requirements are the same. The client is required to provide collateral to the broker in exchange for the shares they wish to borrow. The reasoning behind this strategy is to sell the borrowed shares in anticipation that their price will then fall allowing the investor to buy them back at a lower or softer price and return them to the broker. The difference between the price at which the shares are sold and what they are eventually repurchased at represents profit for the investor. This is a high-risk market manoeuvre and should only be executed by players who are highly experienced in the markets. It is appropriate in declining markets or where the shares of a company are expected to fall.
Short selling as an investing strategy is highly controversial and has made many individuals intensely unpopular. A famous short-seller that became very unpopular is the investment firm Viceroy which predicted the decline of prominent South African JSE listed companies Steinhoff and Tongaat Hulett. The predictions Viceroy made were accurate; however, the fall-out of predictions it had made was not warmly received by members of the investing community. In the United States, it is illegal to engage in short selling a security that has been in decline continuously for a specified period.
Zimbabwean brokers generally do not offer margin trading or short selling.
CONCLUSION
Investment can be a highly lucrative activity if done in a thoughtful and considered manner. It has made a lot of individuals fabulously wealthy, chief among them Warren E. Buffett, who is unanimously the greatest living investor. He is renowned for his methodical approach of selecting companies his Berkshire Hathaway firm invests in. He has generated returns for his investors that are consistently higher than the S&P 500 market index for decades. Another perhaps lesser-known and less celebrated but not less skilled such investor is Paul Tudor Jones who has similar financial exploits in the marketplace. If these two individuals can create such massive fortunes from the markets, then there is no reason why any other individual cannot do the same and that investor can be you!
Go forth and prosper!
