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How do I select the right shares?
Ask yourself these questions:
What market sectors should I invest in?
In general, the lower risk shares of large companies produce lower returns than their small company counterparts, but because of their size and stability, they tend to be more predictable and they also pay regular dividends.
Exchange Traded Funds
For further information on exchange traded funds, refer to other ways to invest in shares .
Collective investments such as unit trusts
Collective investments such as unit trusts For further information on unit trusts refer to the section on Investment basics. You can also visit FNB Unit Trusts .
As you become more experienced and comfortable with investing in shares, you may wish to start investing in medium to high risk shares, found in medium and small companies. Visit our Share Investor product.
How much should I invest in each company?
A breakdown of what to consider when investing, and what pitfalls to look out for.
This depends on how much capital you have. You should aim to hold a number of shares in different industries (sectors), to benefit from diversification . The more you can save to invest, the better. Some general rules do however apply:
- Do not use borrowed money to buy shares
- Do not use money that you may need in the short-term
It is best to start with equal rand value holdings in different sectors of the JSE depending on how much capital you have available.
It is also best to start with equal rand value holdings in each share. So if you have R5 000 to invest in 2 shares, you should put R2 500 in each one, even if one share costs R20 and the other R50.
Example: R5 000 to invest
| Investment Rs | Price per share Rs* | No of shares | |
| Sasol | 2,500.00 | 244.99 | 10.02 |
| Standard Bank | 2,500.00 | 74.15 | 33.71 |
*Closing price 11 March 2009
Have a look at the example above. You have R5 000 to invest and after having done your homework you decide to invest in Sasol and Standard Bank. If you do the calculations you will see that for your R2 500 you can only buy 10 shares in Sasol. You need to decide whether it is worthwhile to buy such a small number of shares in one company. It may be better to invest the full R5 000 in only one of the two shares above and then invest in the other one when you have more resources available.
It is also important to remember that the costs per rand invested, may be higher if you invest small amounts. It may therefore be preferable from a cost point of view, to invest larger amounts. Always make sure you do your sums.
Which shares should I buy?
The two disciplines that play an important role in understanding the performance of a company's shares are: Accounting and Economics.
Accounting
Under accounting we find two kinds of analysis. They are:
Fundamental analysis
An analysis of a company that involves looking at its financial statements, management, competitors, markets where it operates, competitive advantages etc. Refer to Analysing a company for a detailed discussion on this subject.
Technical analysis
In contrast, technical analysis primarily uses charts (often complex) to study past share prices, volumes and indices to predict future share price trends, and to assist with the timing of purchase and sale decisions. Note: Technical analysis is not covered on this website.
Economics
The share market and economics work hand in hand. Factors that influence the one will always influence the other. This is valid for good and bad influences. Factors that influence the market (Keep these in mind when analysing shares):
- Inflation rate: A high inflation rate results in more investors resorting to shares.
- Interest rates: High interest rates attract people into making investments in interest rate-bearing instruments and not in shares.
- Political uncertainty : Foreign companies do not put money into troubled countries (stock exchange included).
- Rumours and speculation: A favourable rumour can increase a share price and a non-favourable rumour can decrease a share price.
- Government actions, taxes, laws and regulations: All of these have an effect on the market.
Staying on Top of Financial News
Recommended publications to read:
- Newspapers: Business Day, Star business section.
- Magazines: Finance Week, Financial Mail, the Economist.
- Websites: www.moneyweb.co.za ; www.fin24.co.za ; www.jse.co.za ; www.sharenet.co.za ; www.sharedata.co.za ; www.reservebank.co.za , company specific websites.
- Financial radio programmes: World at Six on 702, Classic Business on Classic FM; TV programmes: Summit TV.