GRADE 8 EMS (Business)
The Johannesburg Securities Exchange (JSE Limited)
The JSE Limited (previously the JSE Securities Exchange and the Johannesburg Stock Exchange) is the largest stock exchange in Africa and is presently the 16th largest stock exchange worldwide. However the Egyptian exchange has the most listings.
The JSE provides a market where securities can be traded freely under a regulated procedure. It not only channels funds into the economy, but also provides investors with returns on investments in the form of dividends.
The exchange successfully fulfils its main function - the raising of primary capital - by rechanneling cash resources into productive economic activity, thus building the economy while enhancing job opportunities and wealth creation.
The JSE's fully automated (electronic trading) trading system is called JSE TradElect. TradElect is operated under licence from the London Stock Exchange. The system was modified to suit the JSE's specialized needs.
Companies have three choices when they want to raise money to grow their business: to borrow from a bank, issue bonds or issue shares. The key advantage of issuing shares is that the company doesn’t need to pay back the capital amount or make interest payments. Funds received from the selling of shares are used by the business to expand and finance projects etc.
If you own a share, you own part of the company. Someone who owns one or more shares is called a shareholder. Shareholders can receive dividends if a company’s board of directors declares that the company has made sufficient profits and that some these profits should be returned to shareholders. A share in the company gives you the right to vote on decisions affecting the company. You can also call a share an equity or stock.
Anyone can purchase shares on the exchange and any amount can be invested. Note however that trading can only occur via a stockbroker. Stockbrokers are licensed members of the stock exchange who trade securities on behalf of clients as investors cannot invest directly on the exchange. They also provide advice on stock exchange investment issues.
SHARES MADE EASY
Adapted from: http://www.jse.co.za/HowToInvest/Online-Courses/Shares-made-easy.aspx
What are shares?
If you own a share, you own a portion of a company. In the same way you can see your ownership of a company as a slice of pie, cut out of a bigger pie.
· Someone who owns one or more shares is called a shareholder.
· Shareholders may receive cash flows (dividends) if a company’s board of directors declare that the company has performed well and has enough profit to distribute to its shareholders.
· A share in the company gives you the right to vote on decisions affecting the company.
· You can also call a share, ‘equity’ or ‘stock’.
Why do companies sell their shares?
The newly listed company lists its shares to make it available to the public. This is known as an Initial Public Offering (IPO).
· The company uses the money received from selling these shares to develop and grow their business. This is another way, other than obtaining a loan, for a business to expand.
· Also, when listing its shares, a company gains public awareness and its brand becomes better known. This in turn will make new investors aware of the company and its performance and therefore will also be more inclined to invest in a company that they are familiar with.
Why invest in shares?
As a shareholder you receive the following monetary benefits:
· Capital growth – this means that when buying a company’s shares at a lower price and then selling them at a higher price, you make a profit.
· Cash flows (dividends) – this means that when the company performs well and has enough profit, it will reward its shareholders and payout a portion of it to its shareholders.
· Shares have shown the highest returns in the long term, outstripping other assets such as bank deposits and property.
· Investing in shares gives one a good chance of beating inflation. South Africa’s inflation target is between 3% and 6%. To make a profit, the return on investment should, therefore, be greater than 6%. Research done indicates that the return on shares on the JSE has in most cases exceeded this percentage for the last hundred years.
· Investing is a good way of providing for retirement or unexpected expenses.
· When buying different companies shares you are diversifying (getting a variety) your collection of shares and also limiting your risk of losing your money.
Rights of shareholders
As a shareholder, you receive certain rights:
· Right to a dividend once declared – however as an ordinary shareholder, this isn’t always guaranteed. Preference shareholders, usually always receive dividends.
· Right to attend meetings and vote – your vote allows you to participate in important company decisions. You are generally required to attend the Annual General Meeting, but you may send someone in your place.
· Right to receive company information – you will always be kept in the loop regarding the financial state of the company, be it via financial statements or market alerts.
· Pre-emptive right to acquire additional shares – you have the right to obtain newly listed shares issued by the company.
Listed vs. Unlisted Shares
Listed shares offer the shareholders benefits that are not available to investors that own unlisted shares:
· Fair valuation – the share price of a company’s shares are determined in a market ruled by demand and supply. Therefore, the share price is a fair price.
· Liquidity – listed shares are quicker to buy and sell
· Enhanced regulation – listed companies need to follow very strict listing requirements, therefore listed companies are generally of a high calibre and closely observed for any wrong doing.
How do I gain access to the stock market?
To buy or sell shares on the Johannesburg Stock Exchange (JSE) you need to open a brokerage account with a stockbroker.
· Online share trading or simply phoning your stockbroker will allow you to invest on the stock market.
· Buying and selling ETFs does not require a brokerage account. You can contact the ETF provider directly to invest in these products.
· However, owning a brokerage account allows you to invest in all kinds of investment products, not only ETFs.
What services does a stockbroker offer me?
Stockbrokers also offer different types of services to help you manage your investments:
· Discretionary – all investment decisions are made by the stockbroker without checking with you, but are made in line with an agreed objective.
· Non-discretionary – all investment decisions are made by you, after the stockbroker has given the necessary advice.
How does trading happen?
An investor decides to purchase a particular company’s shares.
The investor either lets his stockbroker know via email, phone or makes use of online share trading where he/she enters a price at which he wants to buy the shares as well as how many shares need to be bought.
This is known as a BUY ORDER
At the same time another investor wants to sell his company shares.
The investor either lets his stockbroker know at what price he wants to sell his shares as well as how many shares need to be sold.
This is known as a SELL ORDER
Both orders are entered into the market by each respective stockbroker. The orders MATCH in the trading engine and a trade or transaction occur. The buyer receives the shares and the seller receives the money.
Factors affecting the share price
· When you have more buyers than sellers for a particular company’s shares, share prices usually rise because these shares are in demand.
· When you have more sellers than buyers for a particular company’s shares, share prices usually fall because there are more of these shares available.
· If a company is very profitable, a share in that company will become more valuable because more people think that it is a good investment.
· Factors such as economic and political events also influence share prices.
Are there different types of shares and investment products?
There are various types of shares and investment products to suit different individual needs, for example conservative or “safe” shares versus riskier shares.
A list of basic share investment products is included below:
· Ordinary shares
· B-Ordinary shares
· N-Ordinary shares
· Preference shares
· Exchange Traded Funds (ETF)
What is RISK?
Risk is the possibility of losing part or all of your initial investment or the likelihood of making a profit that is less than what you anticipated.
Different securities or products have different levels of risk.
Securities that are regarded as lower risk securities include:
· Cash in a bank or money market account that earns interest;
· Government bonds (an interest-paying debt instrument issued by the government with a redemption date of one year or more after its issuance);
· ETF's (even though similar to shares).
Higher risk securities include:
· Shares, warrants, derivatives and corporate bonds
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