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Johannesburg - Many people think it is complicated and expensive to start saving, or to invest on channels such as the stock market, but this doesn’t have to be the case, says Mpho Ledwaba, head of marketing at the Johannesburg Stock Exchange (JSE).
"When compared to other emerging markets, South Africa has a weak savings culture in general and our savings rate is quite low. Young people of every generation tend to find it difficult to prioritise saving, especially for retirement. It can be strange for the youth to start thinking of saving for retirement when they are in their early twenties and still getting to grips with the reality of their first job," says Ledwaba.
For example, many young people need to pay off student loans before they can begin saving and this has become harder to do as the cost of tertiary education increases.
Ledwaba says in order for the economy to thrive, everyone needs to take action regarding their personal finances and take the first steps towards saving.
There are different ways to gain access to the earning opportunities that can be unlocked by investing on the JSE. According to Ledwaba, a good rule is to invest only as much as you can comfortably afford after meeting your personal and household expenses.
For example, if you invest in a tax-free savings account (TFSA), it’s possible to be an investor on the stock exchange for around R300 per month.
The JSE offers a TFSA that provides investors with a way to invest in exchange traded funds (ETFs) on the JSE. Investors in a TFSA are allowed to invest up to R33 000 a year in monthly payments and limited to a R500 000 lifetime contribution. Investors can choose to either contribute monthly or as a once-off lump sum. There is no tax on interest earned. Other terms and conditions apply.
Investing in shares means you are buying a part of a company that is listed on the stock exchange. A company which has chosen to list has to operate according to strict regulation that is set out by law. As an investor, you hope that over time the value of your shares will go up, so that eventually you can sell your shares to make a profit.
"It’s important to set out what your savings and investment goals are and how long you need to invest for. Are you planning for your retirement? Your ‘investment horizon’ – how long you need to invest so you can meet your goal - could be between 15 and 30 years," explains Ledwaba.
"Are you saving for your children’s education, or perhaps a dream holiday? Here, your investment horizon could be a decade or perhaps three years, respectively. Your investment objectives will influence how long you plan to invest."
For first-time investors an ETF is an easy and affordable way to get started. Instead of buying shares in one company, ETFs allow you to invest in a "basket" (a variety) of different shares. ETFs work by following a particular stock market index - an index combines the share prices of a group of shares to show how they are performing.
For example, the FTSE JSE Top 40 Index combines the share prices of the top 40 largest investable companies on the JSE. If you buy an ETF that follows this index, it is as if you are buying shares in these 40 companies. The value of the ETF moves up and down with the share prices of these 40 companies.
This is less risky, because if one or two companies in the Top 40 do very badly in the short term, and their share price fall, there will likely to be other companies that will be doing well. The companies which do well can help to cancel out the companies which do badly. This is known as diversification.
"Whatever investment you make, it’s best to make an investment choice that is based on what you can afford and suits your investment horizon," says Ledwaba.