If you are new to ETFs, you probably feel bewildered. You’ve mustered the courage to transfer your money to a broker, you bought an ETF on the recommendation of a friend or based on your online research. You are a Serious Investor, so you’re ready to see the stock market at work. However, so far you’re not impressed. You’ve checked your account every day since you’ve invested and you’ve had less money than you started with. What’s going on?
ETFs: a recap
A share is proof that you’ve bought a piece of a company. Now that you’ve bought a share, you can get some of the profits of that company. An ETF share does the same thing as a normal share, but for many companies. A Top 40 share entitles you to the profit of 40 companies. That’s great, because you have more chances to become a shareholder of companies that actually make a profit. This is good.
Where’s the money?
You can buy over 300 shares on the South African stock market, the JSE. Unfortunately, though, you can’t buy those shares directly from the stock market or the company. You have to go through a broker.
This works exactly the same as a vegetable market. Instead of going to the farmer or the market organiser to buy vegetables, you have different stalls that all sell the same produce. You can go around from stall to stall until you find a vendor you like. The farmer is the company whose shares you want to buy, the market organiser is the JSE and the stall is the broker.
Just like the vendor at the market, a broker charges a fee for making shares conveniently available to you. Unlike a vendor, the broker doesn’t add a markup to every share you buy, but rather to every transaction you do. Unlike a vendor, the broker has to tell you how much this is before you buy from them.
At this point I’d like to mention a broker is a company or an online platform, not a person. This fact confused me for many years. If you got this right away, I apologise.
Yes, so where’s the money?
You transferred an amount to your brokerage account, but when you buy your ETF shares, the broker takes the brokerage fee we discussed above. If you chose a good vendor, that’s only a few parts of a percent of the amount you’re buying, like 0.25% of R200.
In addition to that, there are fees investors are required to pay by law. This includes 0.005787% (minimum of R10.19) for settlement and administration, investor protection levy at 0.0002% on the value of each share you buy and a tax of 0.25%. You also pay VAT. These fees aren’t great, but if you want to participate in the stock market, these are the entry fees.
Your invested amount will be less than the amount you transferred on the very first day you invest, because of these fees. The brokerage fee is the one you can control by choosing a broker that doesn’t charge too much. Remember, your investment has to grow by the same percentage as the fees you paid to be back where you started. If you give it time, this will happen, but it might not happen right away.
Yes, but I’ve lost more than that
The fees above impact every investor, but some investors will start with even less than the fee amount. Welcome to investing!
Share prices can (and do) change from one minute to the next. Share price movements are determined by transactions between buyers and sellers on the stock market – that’s you.
Bad news is not your friend here. When there’s bad news (or even just rumours) about a company, the company’s share price will fall in the market because a lot of people will want to get rid of their shares. Most of the time, it will recover once buyers and sellers have forgotten about the bad news.
This can happen for all the companies in a market at the same time too. For example, when there is a political event that makes investors feel unsafe about leaving their money in the country, those investors will all try to sell their shares at the same time. There will be more shares in the market than willing buyers, so buyers can shop around to find shares as cheaply as possible. As a result share prices go down. It’s a sale!
When people talk about a financial crisis or a stock market bubble, it’s an extreme example of this. However, smaller versions of this happen all the time. Usually the market is only affected for a short period before life returns to normal again.
When the rand/dollar exchange rate changes, the share prices of some companies are affected too. If a company earns dollars but converts them to rand, the company will make more profit when people pay more rand for a dollar. When people pay less for a dollar, the company will make less money. This can affect the share price of a locally-listed company that operates overseas.
What do I do?
It’s extremely important that you don’t invest money you might need in the short term. In this podcast we explain all the things you have to have in place before buying your first share. Short-term market movements are exactly why you shouldn’t invest money you might need in a pinch. If you don’t need to withdraw the money, the best thing to do is also the easiest – do nothing. If you happened to buy just as some bad news hit the market, your investment will be at a loss right off the bat. Over time, the market will recover and so will your portfolio.
Hang in there! You got this!
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