Also read the following related article:
This is the fifth article in Shaun Latter's 15 part series on the fundamentals of investing. Also read the other articles in this series:
Shares, equities, stock market — call it what you like; this asset class has its fair share of media attention for its seemingly erratic behaviour and boom/bust outlook. If I had R1 for every time I heard someone tell me that "you will lose your money on the stock market" I could be a lot wealthier (and not because I took their "advice"!).
So what is this mysterious creature called the "stock market"?
In short, it is a "market" where ordinary investors like you and I can go and purchase a very small (relatively speaking) stake in some of the largest and most successful businesses in the country. Imagine it as an ordinary trip to the store where the Johannesburg Stock Exchange (JSE) is the shop with their shelves packed with all the "listed" companies ready for purchase. You can pick and choose which of the goods (shares) you would like to purchase and head off to the counter and pay (invest) for your selection.
In exchange for your purchase, and for providing capital to those companies of which you now hold shares, you expect a return. However, this return is determined by the performance of the company(ies) and is influenced by economic and business cycles, the political environment and market sentiment. The better the company performs, the better the dividend you are likely to enjoy and the better the company is likely to perform in the future, the more capital appreciation you’ll enjoy on the price of the shares you hold.
Of course, most people prefer to outsource the selection and management of the shares to professional asset managers in the hope of maximising their potential of robust and reliable returns.
If the mechanics of this is so simple, why is it that so many people lose their money?
Simple — they enter the market where returns have been fantastic (after a bull run) and exit when the market is doing "badly" (bear market). This pattern of buying high and selling low is a sure recipe of disaster.
You may have heard the saying "it’s not timing the market that’s important but time in the market". Although this is a very broad statement it does hold truth.