Investing in SA: what are the options and how you can invest?

Two main factors you need to consider when investing your money

There are several types of products and avenues are available to the modern investor.
There are several types of products and avenues are available to the modern investor.
Image: Supplied/Forex Brokers SA

Investing can be complicated. One of the most common complaints that new investors have is that it’s hard to develop an investment strategy that suits their needs.

The two main factors you need to consider before starting to invest your money are: risk and return.

Individuals who have never invested before assume they can double or triple their money in a few years without much risk to their capital. However, the reality of investing is that investment options that allow you to gain large returns also carry higher risk.

Hence, developing an investment strategy is an exercise in figuring out a balance between your appetite for risk and your profit goals.

There are several types of investment products and avenues that are available to the modern investors. Each type of investment has its pros, cons and risks and you should study the terms and details of your investment carefully before investing.

Types of investments options in SA

Here are some of the most popular investment options that are available to SA investors:

  • Equity or shares 

Investing in shares or stocks or equity of a company is a way for you to take part in the success (or failure) of a company. Owning shares of a company essentially means that you own a part of the company.

A company issues shares to the public in return for money that they can use to run or expand their business operations. When you own shares of a company, you can make money in two ways.

You can sell the same shares of the company to a different buyer at a higher price when the value of the shares goes up or you can keep the shares and earn dividends. A dividend is a sum that is paid by a company to its shareholders at regular intervals. There is no guarantee that a company will pay dividends and the amount of dividend that is paid may also vary.

For example: You can buy one share of Prosus (formerly Naspers) for R1,172, and this will make you a shareholder of the company. If the share price goes up to R2,000, then you can choose to sell it at that price and make a profit of R828 per share in this example.

There is no guarantee that the share value would go up; it can even go down in the future.

Investors in SA can buy or sell shares of companies listed on the JSE. There are many JSE-authorised brokers that you can sign up with to invest in shares listed on JSE.

  • Property and tangible assets (such as gold or silver)

The most traditional form of investing is real estate investing. Land or property increases in value over time if the demand for that property increases.

Your own home can also be an investment if you own the property. There are two basic advantages of owning your home. You don’t have to pay a rent for being able to live on that property and you can even sell the property at a later date.

You don’t have to directly buy a property to be able to invest in real estate. You can also invest in the real estate market through a real estate investment trust (REIT) or a property exchange-traded fund (ETF).

Since buying a property outright can be expensive, you can invest lesser amounts of money in real estate through a REIT or an ETF. Similar to property, you can purchase tangible assets such as gold or silver, that can increase in value over time.

  • Cash fixed deposits or money market funds 
You should understand the risk and returns that the investment carries, and you should only invest in a way that is suitable to your own needs. 

Investing through cash can take many forms. You can deposit your cash in a savings account of a bank and gain moderate returns or interest on your money.

You can also invest that money in a fixed deposit held with the bank which grants you higher returns than a savings account. However, you will be penalised if you withdraw the money from the fixed deposit before maturity.

Further, you can alternatively invest in a money-market fund. A money-market fund receives investments from several investors and in turn they invest the money in treasury bills, commercial papers, short-term bonds and more. A money market is usually a safe investment and you gain moderate returns from it.

  • Fixed income assets such as bonds/debt

There are several types of debt-related instruments available in the market. Debt instruments are a way for governments, corporations, and local bodies to borrow money from the public instead of a financial institution. The most common debt-related instrument is a bond.

A bond is a financial agreement used to borrow money. An investor can purchase a bond and in return, they receive regular payments from the issuer of the bond. The amount of money that the investor in the bond will receive at regular intervals is predetermined.

Government-backed bonds are a low-risk type of investment. However, a bond can also fail if the issuer of the bond is unable to repay its debts.

Alternative types of investments 

There are several types of alternative investments that can be made in today’s SA capital markets, which carry varied risk profiles.

An investor has the option of investing in the futures and options market, commodities market, over-the-counter (OTC) derivatives, contract for difference (CFDs), and currency markets ie forex trading.

Commodities such as metals, energy, metals, agriculture and currencies are available as futures and options derivatives on the JSE derivatives market. For investing in the JSE derivatives you need to open an account with a JSE-approved broker.

For investing in forex and CFDs you can sign up any FSCA-licensed forex brokers in SA. Check for the broker’s FSP Number before signing up and verify it on the Financial Services Conduct Authority website.

It’s important to note that derivatives are complex investment instruments and to invest in the derivatives markets, you should be a relatively sophisticated investor who understands the nuances and movements of such markets.

For example, if you are interested in the commodities market, then you should understand how the prices of commodities such as crude oil or copper or tin can vary over time.

Alternative types of investments such as derivatives are linked to market prices of the underlying asset and there can be no guarantee that you will see a positive return.

There are also many associated risks such as margin trading, market volatility that you need to be aware of as an investor investing in these instruments. So, you need to understand these products and educate yourself before investing, and only trade with regulated brokers.

  • Unit trusts

A mutual fund or unit trust is a way for multiple investors to pool their capital together and invest in a variety of diversified products.

A mutual fund is run by a fund manager who has expertise in investing so that you do not need to take care of your investments yourself. You can invest in a mutual fund by buying units issued by the unit trust.

There are several different types of unit trusts with different investment strategies. If you decide to invest, then make sure that the fund or unit trust is regulated.

Some unit trusts only invest in large-cap equity while some unit trusts only invest in the commodities market. You should understand the investment strategy and investment type of a unit trust before buying their units.

How to invest?

Before you start investing your money in any of the above ways, you should have a clear investment strategy or plan.

You should understand the risk and returns that the investment carries, and you should only invest in a way that is suitable to your own needs.

Here are a few “rules” of investing that you should be aware of before diving into the market.

  • Know the risks

Investments can be broadly categorised into fixed-income investments and market-linked investments. In fixed-income investments, you are normally guaranteed a rate of return and there is low risk to the money that you have invested.

Fixed-income investments such as government bonds or fixed deposits in a bank are considered safe investments that provide a moderate rate of return.

In market-linked investments, there is no guarantee that you’ll be able to see positive returns on your investment or even that your principal amount is protected. These investments depend on the movement of the market and the changes in asset prices. Hence, you may see some profit, but you may even lose a considerable portion of your money, or even more than the capital invested depending on your market exposure.

Before you start investing, you should be aware of the kind of risk that your investment carries. You should have the ability to sustain any losses that you may incur from your investment.

  • Invest for the long term 

As a rule of thumb, you are more likely to receive higher profits if you invest for the long term. Short-term movements in the market are more likely to be negative than long-term movements. Over a longer period of time, there is a higher chance that your investment will see positive returns.

Hence, you should plan your investment strategy while keeping that in mind. Short-term investments are more common in the capital markets whereas investments in property are usually long term.

  • Educate yourself on the market and take advice from professionals 

You should not enter the investment market of any type without being well aware of how it functions. A good way to safeguard your money is to do extensive background research before investing.

There is extensive information available on almost any type of investment online. However, you should be careful that the information you are reading is coming from a trusted source.

Be vary of financial gurus who promise large returns with no risk. If it sounds too good to be true, then it probably is.

However, this should not stop you from consulting with financial professionals. Licensed professionals who have work experience relating to a certain market understand it better than anyone else. You can always benefit from gaining sound advice. You can also hire a certified portfolio manager or adviser to help you manage your investments.

  • Reduce your risk 

There are several strategies that you can apply so that your overall returns are positive over a period of time. The most important way to ensure that your financial capital remains protected is to invest in a diverse range of investment products. Remember to only invest through a licensed broker or fund.

You should not limit yourself to investing in only one or two companies or spend all your money on buying gold. If you invest in a diverse range of products and in different geographies, investments that are bearing negative returns can be balanced out by investments that are doing well.

The bottom line is investors in SA have choices when it comes to options for investing. You should educate yourself on the markets and only invest according to your own appetite for risk.

This article was paid for by Forex Brokers SA.