In episode four of the second season of our Unpacking Wealth Creation podcast series, Willemien Dawes and Jared Nestadt, both advisory stockbrokers from Investec Wealth & Investment, share their insights about share trading, what technical indicators are and which financial ratios are important.

What is a stock market index?

“An index comprises underlying companies that are listed on the stock market. For example, the Johannesburg Stock Exchange (JSE) is the main stock exchange in South Africa and is made up of more than 800 securities," explains Dawes.

“When you see an index “in the green’ it means that the index has moved up; if it’s “in the red” the index has moved down. The aggregation of the share prices of the underlying securities determine whether an index moves up or down.”   

What is short-term trading?

“Short-term trading is generally driven by short-term data and newsflow. You have to have your finger on the pulse, be in front of the Bloomberg screens and scouring news channels to see what’s happening in the world.," says Nestadt.

“If you’ve got a job, and equity trading isn’t your primary focus – maybe it’s just something you do on the side – then short-term trading is quite difficult as you don’t necessarily have the time to spend doing all this sorting through short-term data and news.

“That’s where a stockbroker can come in because we do the research for you. If we see something happening on the market, perhaps a data point that’s been released which moves a company’s share price, we can immediately phone up our clients and discuss what to do with their position in light of the data. We can make the decision to hold or sell together. But stockbrokers don’t only facilitate short-term traders, we can help clients with their long-term investment decisions too.”

How does it compare to fundamental analysis for long-term holdings?

“For longer-term investments, fundamental research is key to understanding how a business works and how it’s likely to fare in different economic climates," explains Nestadt. "It means you don’t need to worry as much about short-term volatility if your time horizon is long-term, but it does require patience. It’s a less risky approach compared to short-term trading.” 

Do stocks follow a random path? Is there value in active management?

“I think it’s necessary to do fundamental analysis and hand-pick the shares you want," says Nestadt. "Passive investing is quite useful if you don’t have any experience in investing and just know you want exposure to stocks."

What is an exchange-traded fund?

"It’s a basket of investments that tracks the performance of an existing group of investments. For example, you can get an ETF that tracks the performance of the JSE. It essentially provides you with exposure to the whole index so you can expect your investment to move with the market," says Nestadt.

“If you partner with an advisory desk, you have access to all the information and skills on that desk. If you bought a Top 40 exchange-traded fund (ETF), you are getting exposure to the top 40 companies in South Africa. If we as an advisory desk come up with other stock ideas that we think will beat those companies, we would put together a basket of these stocks that give you a similar exposure but that we think will do better than the Top 40.  That’s the main difference between active and passive – with active, we do the research for you while with passive, you’re on your own."

That’s the main difference between active and passive – with active, we do the research for you while with passive, you’re on your own.

“I think passive investing definitely has a place. It can be a great tool for people who, for example, don’t have time or experience to undertake in-depth research in individual stocks, or who don’t have the appetite for short-term market movements," adds Dawes. "It can give people easy exposure to an offshore index, especially if they feel they don’t have the funds to take offshore or trade overseas themselves. In general ETFs are easy to trade, denominated in rands and take the same amount of time to settle as it would if you bought a stock on the JSE.”

What are some of the financial ratios an investor should be looking at?

Dawes explains: “Two of the most common ones are dividend yield and price-to-earnings. The dividend yield tells you how much cash you earn from your stock investment: a dividend yield of 5% will mean you earn 5% on the original investment you made at the current share price. Lots of investors like companies that pay dividends because it’s a form of income from your investment. A lot of new companies, or start-ups, won’t pay dividends as they’d rather reinvest the cash they generate back into the business to continue to grow (rather than paying it out to shareholders). You often see this with technology companies for example.

“The price-to-earnings – or PE - ratio is simply the price of a stock divided by its earnings per share for the year. This ratio gives you an idea of how long you need to stay invested in the company for the earnings to pay you back. Let’s use an example: a company has a PE ratio of 6 means that you have to hold that company for 6 years in order for the earnings generated by the company to pay you back for you original investment. The higher the PE ratio, the more expensive the stock is because it’ll take longer to pay you back,” she explains.

What should I be looking out for as an investor?

“Who you choose to manage your money is very important. First you should check that they’re registered with the Financial Conduct Authority of South Africa," warns Dawes. "But stay away from people who promise you things that seem impossible – if they promise you returns that seem too good to be true or quick growth on your capital, be aware that markets and investments don’t often give quick or exorbitant returns in most cases. Rather choose someone you feel comfortable with, who understands you and your individual financial circumstances, who listens to you, who wants the best for you and who looks at the bigger picture."

How can investors start their investment journey?

“There are numerous routes to the market for new investors. The easiest way is through an online trading platform. If you want to do this at Investec, there’s a full trading desk to do your online trading for you. This is mainly for clients who know which shares they want to buy and they’re happy to do the research themselves and just get us to buy and sell for them," says Nestadt.

“There’s also an advisory broking desk, which is where you’d be assigned a personal broker with whom to build a relationship and discuss what you’re looking for. The broker can then give you advice tailored to your needs. The advisory arm includes offshore broking.”