Savings and investing are much talked about topics and they go hand-in-hand. Saving a small proportion of your monthly income can help you during emergencies and even help you in buying household appliances, buying a jewelry or even planning a vacation. But, how much you can save depends on your income or on how much you earn.
For most people, savings alone will never be enough to achieve significant objectives like buying a house, retirement planning, or child planning as our savings & expenses are under constant pressure from market forces like inflation and for many their savings are not simply enough.
To fight against the growing inflation and to grow your wealth from your savings, it is essential to wisely invest savings in a right financial instrument or investment. Even a starting investment like in unit trust can help you grow your savings by 15-50% annually depending on market conditions.
Various financial instruments are available in South Africa depending on the financial objective and risk appetite of investors. The Financial Sector Conduct Authority (FSCA) oversees the conduct of the financial markets & institutions in South Africa.
Following are the ways you can invest in the financial markets in South Africa
- Stocks on JSE Equity Market
Stock or equity market is one of the oldest capital markets in South Africa. The Johannesburg Stock Exchange (JSE) has been connecting the buyers and sellers of South African stocks for the last 132 years.
Investing in stocks involves buying and selling stocks of any company that is publicly listed on the stock exchange. Buying shares of a company means owning a part of the company. If that company performs well and flourishes, the stock prices will increase and vice versa. These stocks can later be sold at higher (or lower) prices to book profit (or loss).
Shareholders can also earn profits by holding the shares for a longer period through a dividend. A dividend is a variable amount that is paid out by concerned companies to divide the profits among shareholders. The frequency as well as the amount of the dividend is not fixed and depends on the profits made by the company and the decision of the company’s board.
Whenever a new company is listed on the stock exchange, it issues new shares for the public in an Initial Public Offering (IPO). The funds gained by a company in return for stocks is used to accommodate its financial activities.
Interested investors in South Africa can invest in stocks listed on JSE by opening an account with a JSE authorized broker. The stock market is ideal for long-term investors & day traders with moderate to high-risk appetite. Effective technical and fundamental analysis of the stocks, regular market updates, and investment experience can increase the profit-making opportunities and probability in the stock market.
- Mutual Funds or Unit Trusts
Mutual fund is the most ideal financial instrument for beginner investors. A mutual fund also called a unit trust, is the method of investment where multiple investors pool their investment amount which is reinvested in a diversified portfolio by the fund manager.
The fund manager is the expert in investments and takes investment decisions independently according to the objective of the mutual fund scheme.
A wide variety of mutual fund or unit trust schemes are available in South Africa for different types of investors in achieving their financial objectives & risk appetite. Each fund manager follows a different investment strategy for each mutual fund scheme. A fund manager might invest the pooled capital in stocks, bonds, debentures, commodities, derivatives, another mutual fund scheme, etc.
Unit trusts in SA are governed by The Unit Trusts Control Act and Investors must select a FSCA approved fund manager. New investors can take the assistance of a licensed financial advisor to select the most ideal scheme for oneself.
- Bonds & Debentures on JSE Debt Market
Debt instruments are the low-risk investment option in which the money is invested in the bonds and debentures available on the JSE debt market. These bonds can be issued by the government, corporations, or local bodies to raise capital from the public.
Each bond and debenture have a fixed maturity period and provides a predefined or variable interest rate upon investment.
Each bond has a safety rating depending on the creditworthiness of the issuer. The government issued securities are considered the least risky as they are backed by the government of a country. Bonds and debentures with higher credit ratings generate lower returns while the ones with lower creditworthiness deliver higher returns at slightly higher risk.
Bonds and debentures are ideal for investors with a low-risk appetite. Individuals in South Africa can buy the bonds and debentures directly from the JSE debt market through any of the JSE authorized member.
- Indices on JSE
Investors in South Africa can also invest in a group of stocks that are collectively called an index. The price of a unit of the index depends upon the average value of all the elements present in the particular index. The indices are considered lesser volatile than individual stocks as the price movement depends on multiple stocks.
Indices are also used as a benchmark to measure the performance of each element in the portfolio of the index. South African investors can invest in Indices on JSE through any of the JSE authorized brokers. The selection of the index must be done according to the suitability as a wide variety of indices are available in SA.
JSE has divided indices into 6 categories in South Africa:
- JSE Fixed Income Index Series – FTSE/JSE ALBI & FTSE/JSE CILI
These include indices for fixed income instruments namely FTSE/JSE All Bond Index (ALBI) and FTSE/JSE Inflation Linked Index (CILI). These index act as a benchmark for multiple low risk fixed income securities in South Africa.
- FTSE/JSE Africa Index Series
It is an equity market index series that is a joint venture between Financial Times Stock Exchange (FTSE) and Johannesburg Stock Exchange (JSE). The series has five major indices categorized according to IOSCO namely All share, Top 40, Mid Cap, Small Cap, and Fledging Index.
- FTSE/JSE Responsible Investment Index Series
It is an index series of South African companies meeting ESG criteria defined by the FTSE model.
- Rand Index (RAIN)
It is a currency index that represents the performance of Rand against five different currencies.
- FTSE/JSE Responsible Investment Index
This index comprises all the eligible companies that satisfy the FTSE Russel ESG criteria that keeps on changing.
- Volatility Indices
The South African Volatility Index (SAVI) represents the market sentiments of upcoming trends in the equity market.
- REITs
Buying and selling real estate is another investment option but it can be quite complex and costly for a layman to gain benefits from real estate investments. Real Estate Investment Trust (REIT) allows investors to gain the benefits of owning a real estate property without actually owning it.
REITs have a real estate portfolio in which a pooled money from various investors are used to manage, own, and operate the income-producing properties.
REITs are of two types named as Company REIT and Trust REIT. Any individual in South Africa can invest in REITs by opening an account with a JSE authorized broker that offers REITs.
- ETPs
Exchange Traded Products (ETP) are the investment tools that may track underlying securities without the involvement of a fund manager or a third party broker. Exchange Traded Notes (ETNs) and Exchange Traded Funds (ETFs) are the commonly chosen ETPs in South Africa.
ETNs act as a debt instrument in which the investor lends money to the issuer and receives a return based on the performance of assets involved in the ETN.
ETFs are similar to a mutual fund that can involve a variety of underlying instruments in the portfolio. The difference is that the ETFs are not managed by any fund manager and the elements in the portfolio remain fixed.
There are around 70+ ETFs available in South Africa ranging from Stocks, Bonds, Commodities, Property and 51 ETNs for Equity, Commodity, Currency, Money Market, Interest Rate.
Individuals in South Africa can invest in ETPs by opening a brokerage account with a JSE authorized broker.
- Derivatives on JSE
Derivative is a capital instrument in which the value or price is derived from a different market. It is a contract between two parties in which the value can be derived from any underlying asset. The derivative instrument can have bonds, equity, currency, commodities, or interest rate as the underlying asset and is used for risk hedging or speculation. Futures and options at JSE are the commonly chosen derivative tools in South Africa.
- CFDs
A Contract for Difference (CFD) is an investment option in the financial market in which the price of the underlying asset is speculated without owning the asset. It is a contract through which the price difference is settled between opening and closing positions.
CFDs are available on various financial instruments including, forex, commodities, indices, cryptocurrencies, etc. CFDs involve high risk and must be chosen by short term professional investors or speculators with enough experience and high-risk appetite.
It is important to check the broker’s FSCA licence, FSP number while choosing a CFD or Forex broker in South Africa. Also, check if the broker has ODP license for offering derivative instruments.
Bottom Line: Things to remember while investing in financial markets
Investment in the right instrument is necessary to achieve financial objectives and grow wealth. However, investors must be aware of all the risks involved and must educate oneself regarding every component of investing.
There are different types of instruments for short-term speculation & long-term investing. Speculative instruments generally carry more risks than long term investments. Investors should carefully analyze the risk factors and must choose a suitable instrument to achieve their predefined financial objective.
Short term volatility must not disrupt the perseverance for the long-term financial objectives. Long term investors should not look out for short term gains and must invest according to their objective. Diversification in the portfolio can reduce the risk factor while certain risk management techniques can further assist in lowering the potential losses.
Those who are investing for the first time must use a demo trading account to gain experience. Mutual funds or unit trust can be a good way to begin investing, if you are a beginner who cannot keep track of the market.
But you must remember that every financial investment is subject to market risks. So, you must choose an investment wisely & seek advice from a licensed financial adviser.
*This article was provided by Forex Brokers SA
