Shares

What are shares?

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.

Who can invest in shares?

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. The fees charged on share transactions include brokerage charges, VAT on brokerage charges, securities transfer tax and settlement fees. Transaction costs also include an Investor Protection Levy (IPL).

Why invest in shares?

• 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.
• The value of shares would in the longer term often increase. Generally one would sell shares for more money than you paid for them.
• Some companies pay a portion of their net profits (return) to shareholders – this is called a dividend.
• 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.