Podcast: What happens to your money when you buy a share

Kristia van HeerdenLatest, The Fat Wallet

Clean swearing bleeped out show is below.

The question that inspired this week’s show is one of my favourites: what exactly happens to the money when you buy a share? Who gets it? How do companies deal with shares in their books?

We talk about the mechanics of buying a share. We discuss the differences between the primary and secondary markets for shares, where the concept of share buying came from and how shares get from person to person. It’s fascinating!

Thanks very much for all the great iTunes reviews and messages of support we get every week. It’s wonderful to be reminded that our work has a real impact.

Cindy van Heerden wins for being a Van Heerden and for writing us a lovely upbeat email.

Flip, you guys. Jissie. So much love!

I have been binge listening to the Fat Wallet Show the past two weeks! Some episodes I listen to twice because they are just soooo good.

Firstly, I am so impressed with the quality of your podcast. I listen to a lot of podcasts, which are mostly American. The quality of sound, content and lekker hosts are important and boy oh boy does your show deliver. I feel happy and a little bit proud that such a top notch show is South African.

I am still so clueless about a lot financial topics, but I am slowly learning. So I don’t have any questions yet (you are a show about questions after all). I just wanted to say thank you for encouraging us to do the smart thing. I am paying off my crap-credit-card debt and am putting away a R100 each month for my emergency fund until I pay off my debt and can put away more. Also, I just got an increase and instead of buying more shit – I am using it to pay off my debt faster! Yay for finances. It is all I think about since I started listening.

I think every and all South Africans should listen to your podcast. I think this is just what South Africa needs – proper education that will help our youth become money-smart.

Thank you. Thank you. Thank you!

PS – Kristia, I love your surname 😉 Yours too Simon! Brown like chuckles.

PPS – I am a Graphic Designer. Don’t know if you’ve had any of those yet.

Wim wins for taking charge of his finances in a very serious way. He already started the process of moving his RA to a cheaper provider, but he’s still struggling with that process.

Your advice on finding more places to save money has led me to stop my AA contribution of R1,300 for me and my wife. I have adequate cover on my short term insurance. My wife also has car under warranty which includes roadside assistance. That money is going into EE EFT.

Thanks Simon, upon checking my car insurance, I realized my premium of R550 on my Toyota bakkie could only pay out R75,000 if stolen – it’s an old 2006 model. Even increasing my co-payment to R10,000 only reduced my premium by R100. I decided to take only fire, theft and third-party insurance, saving R250 per month.

He made an investment in a cow through Livestock Wealth.

I always wanted to be farmer, but wasn’t born into farming, so took a fat chance. The CEO was explaining their model at Allan Gray’s investment summit. Your explanation is correct, but it also seems there is a monthly maintenance fee of R315. Times 24 (18-24 months to mature to 500kg) adds another R7,560, totalling around R16,000. IF you get selling price of  R18,500 you get around R2500 over 2 years gives you 15%.

You can actually visit your cow and get picture- im opting out on that one, keeping it strictly business. I will send you a picture of my cow, not naming it though.

Dale inspired our topic this week.

Could The Fat Wallet explain what happens, exactly, when you buy a share or a portion thereof? Where does that money actually go?

If I buy R1,000 of STX40 through EasyEquities, after fees and costs, what happens to that R1,000?

Do all 40 companies physically get paid a portion relative to their weighting?

Would EasyEquities literally transfer R240 to Naspers, for example?

If they do – how and where does Naspers account for that “income”?

Is there an item “income from sale of shares” on a financial statement somewhere? I don’t actually read financial statements (which is why I buy ETFs in the 1st place, because I don’t care to), so maybe it is there, and this is a really obvious question?

And what happens the opposite way around, i.e. if I sell R1,000 of STX40?

Home buying feedback

Deen says I should ask for a drone shot of the unit I’d like to buy to get an idea of freeway access and the surrounding areas.

Debt Lady is in a financial pickle and wonders if she should sell her house.

I owe in total of R134,000 credit cards, overdraft and loans.

I take home R26,700 per month and I am drowning.

I’m thinking of starting afresh by selling my house and take the profits and clear my debts. Would you ever advise a person to do that? After I paid everything I am left with R1,200 which should carry me through the month. It doesn’t and I still have to pay rates and buy food.

It dawns on me when you talk about property that I didn’t properly plan buying this house. It’s inside an estate where I’m paying R2,600 for two levies. I was excited about the increase I got in a new company. I bought a new car and got a new house and now it’s taking its toll on me. I keep on applying for loans to pay my debt.

Where do I start as I know I need freedom from this debt?

Hamster says buying a home can be a good financial decision, not just a lifestyle decision. He re-shared the Rolling Alpha buy vs rent calculator.  

It can be a great financial decision to buy rather than rent, as long as you apply (and stick to) a few rules, like staying in it for at least 8 years to counter the negative financial effect of having to have paid all the transfer-, financing- and lawyer fees, pay it off ahead of schedule.

Some time in the future, you’ll have paid off your bond and will be living very cheaply. By that time rent will have increased (at least with inflation) to enormous amounts. Having a long-term view on property-ownership is a lot like having a long-term view on your investments.

Lastly, the freedom one has when owning a property is amazing. The day before we moved into our house, I had the garage doors automated, installed an automated sprinkler system in the garden and had a plumber come out to install a “retrofit” solar panel on our roof to assist the geyser with heating the water (our electricity bill for a family of 3 is only R500 per month).

I also installed thermal insulation in the ceiling myself and we’re next going to convert the stove hob from electricity to gas. You can’t do these alterations (most of them we did to bring down our long-term cost of living and energy-footprint) when you’re renting. The same goes for painting the rooms the colours you like, putting up (or taking down) shelving where you want, etc.

I love the point about doing alterations to reduce costs in the future, as opposed to cosmetic alterations.

He explains the eight-year breakeven point as follows:

When you purchase a house, the general rule is that you want to be sure you’ll be in the same home for at least eight years.  Otherwise, you’re going to take a hit financially.  Why?

The first hit is your closing costs. Every time you go through closing — buying and selling — money hits the table. This can easily add up to thousands. Limiting how often you have to pay that kind of money is always a good idea.

So extrapolating the cost of closing’s impact on your return on investment, you’ll need around eight years to make up for the money you had to spend now, so that you break even with someone who rented instead. As rent goes up over time, a tenant will eventually pay more than a home owner, the break-even point typically lies about eight years into the future (assuming buying and renting the exact same property).

You take a second hit when you look at your bond statement to see exactly where your monthly payments are going. The way bonds are structured, you pay much more interest in the first few years you own a house. Usually, it isn’t until you’re about seven or so years into paying down your bond that you’ve made enough progress on the principal to make it a better deal than paying rent each month.

Note: When you take out a bond, you are paying an interest rate on what you owe. So, in the first year, when the principal is highest, the interest you need to pay is also the highest.  However, since the monthly payment is the same throughout the term of the loan (at least with a fixed rate bond), more of the payment will be used to cover the interest payments, meaning less is going towards the principal. As your principal goes down, your interest payments will go down, leaving more of your money to go towards the principal, so it snowballs nicely.  This is one way of getting ahead of the eight-year R.O.T.

If you can wait at least eight years before selling again, you’re in a better position to be ahead of the game, especially if you bought less house than you can afford and making extra payments into the bond.

To explain it a little differently, if you keep buying a house, live in it and sell it again every eight years, you’re no better off than if you just rented. Any equity you would’ve built up in the property plus money saved in the long run on not paying for rent escalations, is cancelled out by the costs incurred when buying and selling.  Even worse, if you buy and sell in fewer than eight-year intervals, you would definitely have been better off renting!

The Fat Wallet Show with Kristia van HeerdenThe Fat Wallet Show is a no-nonsense personal finance and investment podcast hosted by Kristia van Heerden and Simon Brown. Every week we answer questions by a growing audience of finance enthusiasts. Submit your pressing money and investment questions to ask@justonelap.com.

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