Advice for people buying shares in a company

Perhaps there’s a company that you’ve always wanted to be part of, or own, but you don’t have enough money to buy the company or the owner is not selling. Buying shares is one way you can ensure you’re a step closer to your dream. This will not only allow you to share in the successes and failures of the company, but also help you make money in the future. But what factors do you need to consider before taking this leap?

JustMoney asked industry experts for guidance on buying shares.

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Before you buy

According to Donald Rogan, head of investment management at Nedbank Private Wealth, the most important questions to ask before buying shares relate to your timeline and objectives.

“Money that you can’t afford to lose or that you plan to use in the next two to three years should not be invested in anything other than cash-type investments. Anything less than a three-year horizon is speculation,” he says.

Once you have a clear long-term objective, you need to ask yourself if you have the knowledge and time to research the market. Rogan says you need to be able to answer the following questions:

• Do you have enough money to invest in shares?
• If you lose money will it have a material impact on your financial wellbeing?
• Do you understand what you’re buying?
• Do you understand the costs associated with buying shares?
• Are prepared for short-term volatility?
• What are you expecting as a return?
• Are you prepared to wait for performance over medium to long term?

What you should buy?

Rogan says you should only buy shares that align to your risk profile. If you have a high risk, then you can buy shares that offer a high return.

“If you’re looking for dividends (income) then you should buy only those shares that pay dividends.

Craig Turton, business development manager at EasyEquities, recommends investing in brands that you are familiar with if you’re a new investor.

“If you shop at a specific supermarket chain, bank with a certain bank, or use a certain type of phone, for example, investing in those brands is a good place to start,” he says.

He says once you start getting familiar with the markets, you can do your own research into companies that may be unfamiliar to you and make your decision from there.

There is also the option of buying into exchange-traded funds (ETFs). These are similar to unit trusts in that each ETF is made up of a selection of shares chosen by experienced asset managers. This helps to take the anxiety out of choosing a particular share and helps with the diversity of your portfolio, says Turton.

READ MORE: Are unit trusts a good investment?

He recommends that you buy a diverse range of shares and/or ETFs.

“Explore shares in South Africa, the USA, and even Australia. Make sure you have at least 10 shares or ETFs in your portfolio to start with. You can grow that number once you start feeling comfortable,” he says.

“Warren Buffett recommends that all non-professional investors wanting to buy shares should simply buy the cheapest index fund they can find, preferably for the S&P500,” says Shane Curran, co-founder of InvestSure.

His thesis is that over the long run equities will outperform cash, and minimising fees is the best way to maximise your returns over the long run. While this is not that exciting, over the long term it can produce spectacular results, adds Curran.

The right time

As an investor, the time is always right to buy shares. Look for stable, high-quality shares that are priced well. You don’t want to be buying anything too expensive, says Turton.

Remember, you are in this for the long run. The stock market will always go up over the long term, although you might see some volatility in the short or medium term. The trick is to be patient and not to panic. Weather any storms and just keep plugging away. The sooner you start, the better, he adds.

Rogan agrees that there’s no right way to go into the market.

“We have all heard the Warren Buffet quote about ‘buying when others are fearful’, but it sounds easier in theory,” he says.

Experience has taught us that it’s not about timing the market, but rather making sure you are buying a good company at a fair price, whenever that may be. If you pick the bottom of the market, it’s purely luck.

Curran also agrees that timing the market is a bad idea.

“Common theory says don't try to time the markets, but rather keep investing regularly every month (dollar cost averaging). The younger you start the better,” he says.

The time is right when all risks have been taken into account. The best time is when you can commit your money to the investment for a long period of time, preferably 10 years and more, says Curran.

Where to buy shares?

Advisers agree that you should speak to a financial adviser or to your bank if you don’t feel comfortable making the decisions yourself.

Curran says you can also head to a low-cost DIY platform such as EasyEquities, where you can invest as little as R5 in the brands that you know and love.

“Nowadays there are extremely efficient and competitive stockbroking websites that give you direct online access to manage your share portfolios such as the Nedbank Private Wealth online share trading website,” says Rogan.

There is a price to pay

If you work through a traditional stockbroker you will need to pay full price for a share, plus commission, says Turton.

He says some shares are priced low, at less than R1 each, while others can cost you upward of R2,000 for one share.

“Check to see if your stockbroker offers fractional share rights, which allow you to buy a portion of a share at a time. This means you can invest, say, R100 a month in a R2,000 share until you have bought an entire share,” says Turton. 

Rogan provides the following insight:

You can currently pay R3,100 for one Naspers share or 95 cents for one Steinhoff share. This is the market price at which it trades which you will be able to view once you have opened an online investments account. Given market conditions and expected earnings and risks of the two companies, Naspers at R3,100 a share could be a cheaper share than buying Steinhoff at 95 cents a share. This is where your knowledge and homework, or speaking to a stockbroker, will help you determine the price you should be prepared to pay for a company. Always bear in mind that your goal is to buy a wonderful company at a fair price rather than a fair company at a wonderful price.

Curran says share prices themselves can range from 1 cent to R4,000 (in America some shares trade for the equivalent of around R5 million per share).

He agrees with Rogan that the share price by itself tells you nothing about the quality of a company.

“Be careful thinking that 1 cent a share is cheap, or R850 a share is expensive - if that concept isn't clear to you, you need to do more research and learning before you start investing in individual shares - low-cost index funds are possibly more appropriate for you,” says Curran.

Life is unpredictable and expensive but making a commitment to invest is the best gift you can give yourself and your family. Fill in this form for more information on how unit trusts work.