Want to make money by buying shares? Here are 5 lessons on investing

South Africans are always looking for ways to make more money, and one of the easiest ways is investing in shares. Many people think investing in shares is for people who already have a lot of money, but that is not true.

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Simply put, investing in shares as an ordinary person means buying tiny pieces of ownership called stocks or equities in publicly listed companies. Individuals can do so through a stockbroker or an online trading app such as EasyEquities, Standard Online Share Trading via Standard Bank, Brokstock, and Clarity.

As the company grows or makes money, your shares can increase in value, and you may receive cash payouts called dividends.

How to choose a trading platform

As there are multiple trading platforms one can choose from, Wendy Myers, head of securities at PSG Wealth, told The Citizen that when choosing a platform, individuals should consider those that offer not only easy execution across local and offshore exchanges, but also access to a financial adviser if their investments become material and they choose to seek guidance and holistic financial planning.

Another consideration is that moving investments, especially shares, is costly, as platforms charge a per-counter fee when transferring to another platform.

“This is why young investors should choose a platform that meets their current and future investment needs.”

Five tips for when investing

1. Starting your investment journey to capitalise over the long term

“When I started my investment journey, the first share I purchased was FirstRand – the bank my employer deposited my salary into,” said Myers, recalling starting her investment journey when she was 25 years old.

“My logic was that if I trust them to look after my salary, I should consider benefiting from their growth strategy by being a shareholder.”

Some guidelines Myers would recommend following when choosing your first listed instrument:

• Understand the type of listed instrument you want to invest in. This could be direct exposure to a single share or an exchange-traded fund (ETF) that tracks an index (such as the JSE Top 40), or a specific sector (if you aren’t comfortable choosing a single share).
• Do your research by checking the basics: Is the company growing revenue and is it profitable? Focus on businesses with strong balance sheets, low debt-to-equity ratios, and healthy cash reserves. “Blue-chip shares are typically large, well-established companies with a track record of financial stability and consistent performance. They often pay regular dividends, supported by a stable payout ratio, providing a potential income stream even when share prices fluctuate.”
• Does the company have a competitive advantage or moat?
• Assess the quality of the company’s management and track record.
• Finally, consider key valuation metrics like the price-to-earnings ratio to assess whether a stock is overvalued or undervalued.

2. The power of passive income

She noted that many investors overlook the power of dividends in generating long-term passive income. Once you are invested, it’s important to understand the different forms of passive income provided by listed instruments.

“Depending on whether you invest in an ETF or a single share, you will earn either a distribution or a dividend. ETFs pay distributions, which represent a collection of different types of income such as dividends, interest and capital gains – generated by the underlying holdings of the fund.”

An investment in a share differs in that it delivers dividend income, a direct profit payout from a single company.

Myers said ETF distributions and dividends have different tax implications, but both count as regular income in your investment portfolio and complement capital growth. Unlike capital gains, which remain unrealised until an asset is sold, dividends represent cash in hand, offering stability, income and the power of compounding – especially if dividends are reinvested into the market.

3. How to leverage volatility

“When the markets experience downturns, the inexperienced investor can easily panic as they watch their share returns deplete,” she said.

“My first experience of significant price volatility was the global financial crisis of 2008. My share portfolio went into the red almost overnight and it was very difficult not to react emotionally by panic selling. When markets experience these types of pullbacks, it’s the perfect time to apply a deliberate strategy to set your portfolio up for the long term.”

Ways to leverage volatility:

• Rand cost averaging: This is a deliberate strategy to consistently invest money into the market, regardless of share prices. This ensures you buy more shares when prices are low.
• Rebalancing your portfolio: When volatility drives certain assets down, use cash to buy more of these shares. If you don’t have funds available to invest, consider rebalancing by selling high-performing assets and reallocating capital to underperforming ones to align your portfolio with your target allocation.
• Tax-loss harvesting: There is absolutely nothing wrong with selling a losing investment during a downturn to realise a capital loss, as this can be used to offset future capital gains tax. This can improve after-tax returns and support stronger long-term portfolio performance.

4. Diversification – the unsung hero of investing for the long term

Myers said diversification smooths returns as it reduces volatility, leading to less dramatic ups and downs over time.

“As a young investor with enough time ahead of you to recover from any market shock, you might structure your portfolio as a higher-risk portfolio. However, diversification remains a necessary strategy to ensure capital preservation.

“While growth-oriented assets build wealth, diversifying to ensure you are invested in a balanced portfolio of shares helps you avoid emotional, reactionary decisions, allowing for disciplined, long-term growth.

“Diversification across sectors as well as geographies is a necessary step to achieve long-term portfolio returns. Young investors starting an offshore portfolio should have the primary goal of leveraging time to build long-term wealth, hedge against currency volatility, and gain exposure to industries not prevalent in our smaller, local market.”

5. Common mistakes and how to avoid them

Myers also gave some mistakes young investors make and how to avoid them.

“If I could tell my 25-year-old self something about investing, it would be to avoid the following mistakes:

• Not having a long-term investment mindset from the outset.
• Not having sufficient exposure to high-quality companies with strong balance sheets and consistent dividend payouts.
• Not having adequate portfolio diversification to ensure a balanced return, leading to heightened volatility and a greater risk of panic selling.

“To avoid these pitfalls, ensure that you define your risk profile upfront, understand and accept a certain level of volatility, invest consistently, conduct thorough research, and diversify across sectors and geographies.”

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