What is JSE and how does it work?

The Johannesburg Stock Exchange (JSE) is one of the most sophisticated in the world, where investors can scoop up deals with the click of their mouse. The accessibility and convenience make it an ideal place for new Africa investors to get their feet wet.

The JSE provides a market where securities can be traded freely under a regulated procedure. It not only channels funds into the economy, but also provides investors with returns on investments in the form of dividends.

Indices: FTSE/JSE All Share Index; FTSE/JSE .

Location: Sandton, Johannesburg, South Africa.

Here’s how to get started.

Find a Stockbroker

Your first step is to open an account with a South African stockbroker.

Dozens of stockbrokers facilitate trades on the JSE, but only 12 offer online share trading to individual investors.

Online trading platforms are still relatively new to Africa and they’re not a necessity to invest successfully there, but they are very convenient.

What kind of account to open: Discretionary vs. Non-Discretionary Accounts

Note that some brokers offer discretionary accounts. Discretionary accounts give brokers the authority to make trades in your account without the consent of the account holder. They typically are managed in a way that the broker believes is the best way to achieve the investment objectives and acceptable levels of risk that you specify. It’s like having your own personal portfolio manager. You might want to consider this option if you aren’t interested in doing your own investment research.

If you want to do your own thing, make sure to open a non-discretionary account or an “execution only” account. Then you can make your own investment decisions.

What Documentation Will You Need?

To open an account be prepared to provide the following:

  • Certified copy of your passport (if you are a foreigner)
  • Bank details (i.e. a cancelled check or a certified copy of a recent bank statement)
  • Copy of a recent utility bill showing your physical address (not older than three months)
  • Signed letter to your broker stating that you are not registered with the South African Revenue Service for tax in South Africa (some brokers may require your Social Security number)

You will also need to fill out a form or three for the broker that you’d like to open a trading account with.

How to Fund Your Brokerage Account

After opening your trading account, your broker will provide you with its bank details so that you can fund your account and begin buying shares. The most efficient way to do this is via wire transfer. If you haven’t sent an international wire before, I suggest that you take your broker’s bank details to your local bank branch and ask them to walk you through the process. They’ll make sure that your funds arrive securely. Note that most US banks charge about $25 for outgoing international wires.

Making a Trade

The actual process of making a trade varies depending on the broker you use, but from what I’ve seen their trading platforms look pretty intuitive. You simply buy and sell shares in a similar way that you would through an ETrade or TDAmeritrade account.

Collecting Dividends

Collecting dividends paid by the South African stocks is a piece of cake. If you bought the shares through an online broker, your dividends will deposited directly into your trading account. You can then decide whether to bring the cash back home or to reinvest them in the market.

Let’s spend some time with the vocabularly you will have to get use to when trading on the JSE.

What is a share?  If you own a Share, you own a portion of a company. Imagine the company as a pie. You own a slice of the pie. You can also call a share equity or stock.

Why do companies list on the JSE?  Listing enables a company to raise capital (the funds it needs to operate and grow) and thus promotes improvements in a company. Listing generally heightens a company’s public profile with customers, suppliers, the media and investors. As a result, more business opportunities become available to the company.

What is the minimum amount I can invest on the JSE?  The minimum amount varies depending on the share or asset class you want to buy. For some Exchange Traded Funds (ETFs), the minimum is R300 a month or a one-off amount of R1 000.

The minimum amount also depends on who your stockbroker or stockbroker firm is.  When you invest in Allan Gray Unit Trusts, there are no ‘premiums’ and there is no commitment to a set investment period. It’s your investment – you decide how much, when and how you want to invest.

  • You can add lump sums to your investment at any time. When starting your investment with a lump sum the minimum is R20 000, but after that it’s just R500.
  • You can set up a debit order, minimum R500 at any time, which you can change, pause or cancel as your needs change.
  • You can do these transactions, at no extra cost, conveniently online, or you can complete and submit a form.

I live outside South Africa and would like to start trading on the JSE.  Can I?  There are three ways to invest on the JSE from outside SA: through your local stockbroker, through your bank or through a South African stockbroker.

Why do share prices plunge below average every time there is a wage strike or unrest in the country? Generally, the price of a stock is determined by supply and demand. For example, if there are more people wanting to buy a stock than to sell it, the price will be driven up because those shares are rarer and people will pay a higher price for them. If there are a lot of shares for sale and no one is interested in buying them, the price will fall quickly. Labour unrest is one of the factors that can affect the demand for companies’ Shares.

What is preference shares: Preference shares consist of a company stock with dividends that are paid to shareholders before common stock dividends are paid out. Preference shares typically pay a fixed dividend. It normally holds priority over common shares (ordinary shares). Preference shares are used by professional and private investors who prefer a medium risk and return. Preference shares carry a higher risk than debt instruments, but lower risk than Ordinary Shares. Preference shares, also referred to as preferred shares, are equity shares that give the shareholders certain rights ahead of common shareholders. For instance, when the corporation declares a dividend, preference shareholders receive dividend payments before common shareholders.

Best shares:  The top four shares on the JSE has not changed in the past year.  Sasol 1st, Anglo American 2nd  and MTN Group 3rd and 4th BHP Billiton. As far as fund managers are concerned, those remain the JSE’s four top blue chip stocks.

Shares to watch: The PowerStocks Research JSE Share Watchlist (JSW) is a powerfull quantitative tool for subscribers to analyse share action on – the JSE and identify investing as well as short-term trading opportunities. It is based on end-of-day-data

FROM: The Essays of Warren Buffett: Lessons for Corporate America by Lawrence Cunningham:

On declining share prices“Long-term shareholders benefit from a sinking stock market as much as a regular purchaser of food benefits from declining food prices. So when the market plummets, neither panic nor mourn. It’s good news.”

On efficient markets: “Most institutional investors in the early 1970s regarded business value as of only minor relevance when they were deciding prices at which they would buy or sell. They were under the spell of academics at business schools who were preaching a new theory: the stock market was totally efficient, and therefore calculations of business value were of no importance in investment activities.”

On earnings before interest, tax, depreciation and amortisation (Ebitda): “Trumpeting Ebitda is a pernicious practice. Doing so implies that depreciation is not truly an expense. That’s nonsense. In truth, depreciation is a particularly unattractive expense because the cash outlay it represents is paid up-front, before the asset acquired has delivered any benefits. Imagine that at the start of this year a company paid all its staff for the next 10 years. In the following nine years, compensation would be a reduction of a compensation asset established this year. Would anyone argue that the recording of the expense in years two through 10 would be a bookkeeping formality?”

On management: “We want managers that think about what counts, not how it will be counted.”

On share options“If options aren’t compensation, what are they? If compensation isn’t an expense, what is it? And, if expenses shouldn’t go into the calculation of earnings, where should they go?”

How is an investment account different from a bank account:  Unit trusts which give you the opportunity to grow your money more than you would in a bank account. However, your investment value and return are not fixed and may go up or down. At Allan Gray you make the decisions and you have the flexibility to change your mind as you need to. Many people are also familiar with investment policies that lock you into set premiums and investment periods.  You own your investment, there are no set investment amounts or periods. While a basic unit trust investment has no restrictions, if you invest via retirement annuity, living annuity, endowment or preservation funds, there are some legal restrictions.

How difficult is it to earn a return on my investment of 10% a day through daily trading on the JSE? What are the key indicators to identify the potential of such a return and what market segments should I look at? Trading is difficult and requires skill and patience. A steady performance of 10% a day is not really possible. To generate returns of 10% you would have to risk a significant amount of your capital each day. You would also use instruments such as Futures, which provide leverage.

Trading is like most things: the more effort you put in and the better you plan, the higher your chances of success.

Let’s have a quick look at the maths. If you started with R10 000, then by making 10% a day and compounding this over the year of about 250 trading days, you would have R222 trillion and change by the end of the year. This would be much bigger than the entire stock market.

If you started with R10 000 and made just 1% on your capital every day, which is much closer to being possible, your R10 000 would be about R120 000 by the end of the year. That is the incredible power of compounding interest which makes stock market investing so appealing. This is a more feasible return but would still make you one of the best-performing traders in history.

The Johannesburg Stock Exchange is based in South Africa where it has operated as a market place for the trading of financial products for 125 years. It connects buyers and sellers in equity, derivative and debt markets. The JSE is one of the top 20 exchanges in the world in terms of market capitalisation and is a member of the World Federation of Exchanges (WFE). The JSE offers a fully electronic, efficient, secure market with world class regulation, trading and clearing systems, settlement assurance and risk management.