the JSE

What is the JSE?

The Johannesburg Securities Exchange (www.jse.co.za) is a controlled and regulated platform for the trading of shares in companies that have listed on the JSE. It enables ease of trade in the companies listed on the JSE and ensures that these companies operate within certain rules and regulations. In short it offers and easy route for trading the top companies within South Africa with protection for the investor.

Why list on the JSE?

When a company needs money to grow or pay off debt they list on the JSE.

Example:A
company sells cars and is valued at R1million. They issue a pre-
listing saying that they will sell 2million shares at R1 each. So they list on the exchange and receive R2million for the company and the buyers of the shares receive the 2million shares. Because the company was initially worth R1million the previous owners receive 1million shares to split up between them.The end result is 3million shares to trade on the JSE. This means the company is worth R3million now (previous R1million value + R2million cash received for shares). Previous owners no longer have the majority of shares in the company.The R2million paid by the new shareowners goes into the company’s bank account enabling them to build a new car dealership, purchase new cars or any other use they may have for the cash. So now the shares will trade on the JSE and anybody can buy and sell them. If investors believe that car dealerships are the future and sales will increase they will be prepared to pay more than R1 per share and so over time the price will increase.Let’s say after a year sales in the dealership have doubled and the share price is nowR2.50. Importantly the share price is not linked directly to the value of the company anymore; rather the share price reflects the perceived future value of the company. This is the crux of the price of a share trading on the JSE, the value of that share is not directly related to the value of the company. Rather it is linked to perceptions about the value (and future value) of the company and even more importantly the price is set by what a person is prepared to pay.

Why trade on the JSE?

Better returns.But like I said earlier higher returns always result in higher risk, you cannot increase returns without increasing risk. It is also important to know that many people who actively trade on the JSE lose money.

What drives a share price?

Simplest answer would be PSYCHOLOGY. For a share to trade we have an agreement on price and a disagreement on value. This is a very important concept. There has to be an asymmetry of information to a certain degree. The seller thinks the share is expensive whilst the buyer thinks it is cheap.

Markets work in an integrated global effect such that what happens in Asia or America will affect the markets in South Africa. As Standard bank puts it Markets respond with speed and no predictability to rumours of war, slips of the tongue, Presidential aches and pains, the vagaries of El Nino, and the almost mystical sway of public sentiment and opinion.

Something to remember and what makes the JSE so exciting is prices can rise as quickly as they fall, destroying some industries while rescuing others from the brink of disaster.These random forces - the "Great Unknowns" - combine with the everyday laws of supply and demand, and the cyclical nature of business itself, to shape the peaks and valleys of a dynamically shifting market.These forces cannot be empirically predicted, but by analysis of them we separate ourselves from lucky to great investors.

The rules of supply and demand apply here, if there are more buyers than sellers then the price goes up, and vice versa. Whether there are more buyers than sellers all depends on the perception of the company’s future, NOT ITS ASSET VALUE per say.

Risks

1. Companies fail
2. markets collapse
3. Prices plummet
4. Liquidity problems
5. volatility

The best known strategy to prevent these from becoming a headache to you is invest only that which you are willing to lose in the beginning.There are many different ways to reduce the risks of trading on the JSE:
• Trade only large cap companies
• Trade blue chip companies
• Trade for the long term
• Reduce the number of trades in any given year
• Buy the index (via ETF)
• Buy blue chip companies when they have high dividend yields

More on all of this later

Where does a broker come in?

In simple terms the broker is the middle man. He/she is a licensed trader with the JSE. In the past they used to stand on the floor of the JSE and scream out prices but now south Africa and pretty much the rest of the world has gone electronic. Deals are made electronically.

Something important to remember is you need a broker to trade in shares. There are different kind of brokers for different kinds of investors, we’lll go through the details of the broker at a later stage, all you need to know for now is they all charge a fee for trading on your behalf, like a sales man does. Its like his commission.

Liquidity

In the stock market, this describes how readily a particular share could be traded. This is how many people are trading in that share. This problem has been mostly solved by market makers who will always have a price offer and bid to allow the market to, like the word liquid suggests, flow! This is not really a risk on single stocks anymore but could be a serious risk for derivatives. More on derivatives later. Now it should make sense why people are trying to educate more people about the JSE, unlike most businesses, the more people get involved the safer and better it is for all. There is also a mathematical relation between volatility and liquidity, but all those technicalities later.

How profits are made on the JSE

There are two primary ways money is made on the JSE
1. Share appreciation; this is the increase in the price of the share
2. Dividends; this is the profits which the directors feel need to be paid to shareholders.
*note: there other ways that make money on the JSE based primarily on the share appreciation and this is the exciting world of derivatives. This will be dealt with at a much later date

Jargon

Like all professions the stocks market has a language of its own. Here are few important words.
• Stock or share – a part of the company, when you buy a share you have become part owner to a company
• Bull or bear – A bear market is a falling market whilst a bull market is a rising Market (more on this later)
• Short, medium & long term - These phrases are also bandied around but what is long or short? Well the bottom line is the answer is different for everybody. An aggressive option trader would consider a couple of hours as short term and a few weeks as long term. That said the general view is that short term is anything less than one year. Medium term is one to three (or five) years whilst long term is anything longer.
•Trader or investor - A trader takes short-term positions and can be considered to be trading for income. An investor generally takes medium to long-term position and generally is investing for capital growth.
Share, stock, equity, script - same thing.
•Dividend - cash paid out from the company profits and paid every six months from profits – if at all. More of this later in the notes. Note that dividends are tax free.
•Initial Public Offering (IPO) - This is the process that a company under goes when it wants to list on the JSE and will lead to the eventual listing.
•Trading statement - When profits are expected to be better or worse than expected or the previous period the company will issue one via SENS (more on SENS later).
•Broker - the person who you will call to do a trade for you
•Brokerage - what you pay to the broker when you buy or sell shares
•Interim results - the half year results
•Final results, end of the financial year results
•Bid = a bid to buy share
•Offer = an offer to sell shares
•Best offer/bid. The best price that you can buy or sell a share at.
•Mandate – instructions for money that is to be managed. If you give a broker money to invest on your behalf you will give them a mandate as to what style of investing you want (high risk, income, growth etc.).
•Blue chip, the best quality companies
•Market cap, the value of the company on the JSE. Numbers of shares multiplied by the current share price.
•Volatility – how much a share price changes or by how much in a short time. South Africa is considered a very volatile market.

A lot has been said in today’s blog so let’s sum up what was said:

1. JSE allows companies to acquire capital by diluting its ownership and selling shares

2. A share is part ownership in a company, entitles owner to voting right and company profits

3. JSE has better returns than most investment vehicles, but also greater losses

4.The price of the share is determined by the universal concept of supply and demand, the supply and demand is determined by investor sentiments and future expectations of the company value.

5. Can be very risky

6. Brokers are there to facilitate the trading in the market

7.Liquidity determines how well a market works

8. Profits in the market are made by the change in the price of a share or dividends paid by a company.

Thank you, I am hoping that I’ll be able to add details if there is something you do not understand. Please feel free to comment and ask questions…to infinity and beyond…watch this space

A special thanks to Standard Bank Online Share Trading guide for their contribution in todays blog.