Investing 101 - getting started

Cape Town - Investing is a good way to preserve and accumulate wealth, but finance can be overwhelming and intimidating, according to Munozovepi Gwata, founder of Kukura Capital.

There are so many different investment vehicles to choose from: bonds, mutual funds, ETFs, property, stocks and more. With so many options, it can be hard to decipher what to invest in.

Gwata provides a brief description of some investment vehicles you may consider when building your own personal investment portfolio:

Bonds

A bond is a debt between the bond holder and the bond issuer. The bond issuer issues a bond (loan) to the bondholder, with an expectation that they will receive interest on this loan over an agreed period of time.

The interest on the loan is paid at frequent intervals such as every six months, quarterly or annually. These fixed interest rate payments are called bond dividends.

Therefore, to profit from bonds you would become the bond issuer by purchasing a bond from the government or a corporation. Once you purchase bonds from an organisation, you are in agreement with them that you will receive your initial investment (principal amount) as well as your bond dividends.

Bonds are considered a stable investment option as they are less volatile in comparison to other equity assets such as stocks.

The disadvantage of bonds is that there could be an entry barrier for people opting to purchase them with a limited budget, because you usually have to invest a minimum amount of money to purchase bonds.

Mutual funds

Mutual funds are professionally managed investment funds from pools of money gathered from investors with the purpose of investing in securities. Mutual funds allow investors to benefit from capital markets without any experience or knowledge of the markets, because they are managed by professionals.

There are different types of mutual funds, increasing the likelihood of an investor finding something that caters to their budget and financial interest and objectives.

Mutual funds can prove to be a lucrative deal. Their biggest advantage is that they offer more diversity in a portfolio, as a fund consist of several different securities.

The disadvantage of mutual funds is that they are usually associated with high fees - the price to be paid for having the fund managed by a professional.

ETFs

Exchange-traded funds (ETFs) are a perhaps the cheapest way to start investing. ETFs are similar to mutual funds, and are a basket of securities such as stocks, commodities and bonds. However, unlike mutual funds they are traded on a stock exchange.

The advantage of ETFs is that they are highly affordable to invest in and have very low fees. This means that even if you are investing on a budget, you can still get a piece of the action.

The disadvantage of ETFs is that, because they are traded on the stock exchange, they can be more volatile than some investment vehicles such as mutual funds.

Property
 
Property is regarded as the classical way to build wealth. It rarely depreciates in value and is a good way to protect your money from inflation.

There are several ways to invest in property. You can opt to “flip" homes - buy rundown houses at cheap prices, renovate them and sell at a profit.

You can buy developments, which is property that is still in the process of being built. You can buy at a cheap price and sell for a profit once the development has become completed.

Alternatively, you can purchase land and develop it into real estate such as apartment blocks and office spaces. Once your development is complete, you can sell them for a profit.

The more common known way to invest in property is to buy properties and lease them out to tenants.

Stocks

When people think about investing, they often think in terms of stocks. Stocks are issued by a company in order to raise money for it.

When you purchase stocks in a company, you gain a percentage of ownership in that company. The amount of ownership is proportional to the amount of stocks you own.

This ownership allows you to benefit from the company as it performs well. If it does, the stock price will increase and this allows you to make a profit.

For example, if the stocks of company X were at the value R15 a stock when you purchased them, and they increase to R25 a stock five years from when you bought them, you make a profit of R10 per stock.

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