Well, before we go into more detail about how investing works, let’s first talk about the why.

Why do we invest?

The main reason why we invest is to ensure that when the time comes, we can purchase the things we really want, live comfortably when we retire, and make our money work for us. By investing your money, you’re getting your money to generate more money. You do this by earning interest on the money you invest, or by buying and selling assets that increase in value.

Now that we know why we invest, let’s discuss how to get started with investing.

Step one: Set your investment goals

Before you’re ready to start investing, you may want to first figure out why you’re investing. List all your goals, i.e. the things that you want to do in your life, focusing on those big moments that come with a price tag. Try using a timeline to help you organise your goals and future plans.

Step two: What type of investment would you need?

Knowledge is power. It helps to know the difference between the most common types of investment instruments: shares, bonds, and unit trusts.

What are shares?

When you invest in shares, you are essentially loaning money to a company to expand, grow, or invest in research. Provided that nothing bad happens, like bankruptcy, you sell the shares at a higher price than what you purchased them and receive cash (what you invested and the growth of that share) in return.

How does investing in shares work?

As an example, you might purchase shares in Company X where the share price is R100. Six months later you may sell those same shares at R125 per share as the share has increased in value. On conclusion of the sale you should get your R100 per share plus the R25 per share “growth”. Remember there are certain costs that may be incurred in the trade, for example trading fees and tax.

What are bonds?

A bond represents money loaned to the bond issuer. Typically, the bond issuer promises to repay the entire principal loan amount on a future day, known as the maturity date, and pay interest income in the meantime based upon a coupon rate.

What are unit trusts?

In layman's terms, money from investors is combined and used by portfolio managers to buy shares and other assets. A unit trust can hold a variety of shares (which reduces risk) or shares relating to a specific industry, for example, property. These unit trust funds are managed by portfolio managers.

Investing is different to saving. Listen to a podcast where we discuss why saving without investing can be a problem.

Step three: Learn the investment strategies

Get knowledgeable on the stock market and the strategies. Often, you’ll get told to put most of your money in shares. But if you read the financial page, you know that the stock market can take big dips and unpredictable jumps.

Investing directly in shares can be risky. So, choose what you feel is best for you and remember your financial adviser will be able to guide you. 

Step four: Time to build your portfolio

Your investment portfolio consists of all your individual investments in shares, bonds, unit trusts, and other instruments. Diversity is key. The idea is to invest in enough different sectors of the economy so that if one investment does poorly, your other investments will make up the difference. If you have too many eggs in one basket, you could end up increasing your risk. A diversified portfolio spreads the risk evenly so that no single mistake will ruin everything.

Step five: Happy investing

If you’ve done your homework and are keen to start investing online, then Old Mutual has that option available to you. You can start investing for your future for as little as R500 per month. It’s really that simple or, if you prefer professional assistance, chat to one of our friendly financial advisers before taking the first step.

Did you know?

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