Getting the private investor on to the JSE
South Africans are lagging far behind the Australians when it comes to investing directly into shares on the JSE. In South Africa about 200 000 private investors invest directly into shares rather than through mutual funds or pension funds.
That figure for Australia is 5,7-million.
Commsec, Australia’s largest online stockbroker, executes 28 000 trades a day for its private clients compared to the JSE, which executes 20 000 trades a day for the entire market, including institutions.
Standard Bank looked at the Australian market as it is the biggest private client market in the world on a per capita basis with 34% of the population of 17-million investing directly on the ASX. Even if one assumes that only 10% of South Africans have the finances and literacy levels to invest on the JSE, and of that only 34% of them invested there would be more than one million private investors.
Richard Seddon, manager of discount broking services at Standard Bank Online Share Trading, says there are many lessons South Africa can learn from the Australian market.
Most important is education. In Australia there is a major focus on educating the public on how to invest in shares as well as a plethora of magazines and newspapers that focus on share investing. For example, a magazine called Shares has a circulation of more than 105 000 copies a month.
Seddon says the Australian Stock Exchange (ASX) has been following a massive education drive over the past five years to get private investors into the market. “They realised that they needed higher numbers of trades rather than just high value trades.” However, it took an online stock broker to kickstart the education drive. Commsec started a nationwide education drive that saw its number of clients jump from 670 000 to more than 1,1-million in two years and today are responsible for a quarter of all trades on the ASX. “They literally embarrassed the Australian Stock Exchange to start educating the public and that is the role we see ourselves playing here in South Africa”, says Seddon.
ASX has also addressed the issue of costs, which remain relatively high in South Africa. Although Standard Bank Online’s brokerage charge of a minimum fee of R99 per transaction is comparable to Commsec’s minimum brokerage of $20 (R100), the private investor in South Africa has to pay additional mandatory fees. For example, in South Africa each trade carries a R12,45 cost for STRATE, the JSE’s electronic settlement system. Added to that, an uncertified securities tax (UST) of 0,25% is also levied on each trade. In Australia the government has removed the UST and the listed company the person is investing in carries the cost of the settlement.
“At the end of the day there is still a negative impact because it will come out of the company’s earnings, but it does make the cost of trading lower and therefore more attractive,” says Seddon. There is no monthly fee for online trading with Commsec — and this is the one that really bites. Standard Bank Online charges R54 a month on your trading account, although this is waived if you make more than three trades a month. If, for example, you have a R10 000 investment you are looking at a 6% per annum fee if you do not trade actively. Seddon says the bulk of the monthly costs incurred come from JSE fees for live share prices, STRATE and the Central Securities Depository Participants (CSDPs) who hold the shares. In Australia all of these costs are absorbed by the listed companies.
Seddon says the high number of privatisations and demutualisations in Australia also increased participation in the ASX. “The government took the view that any privatisation had to be done at a discount so that people made money out of it, which encouraged them to participate more fully”. The Australian government also allowed people to invest their compulsory self-funded pension fund (which is 9% of their salary) into their own share portfolio.
Know when to cut your losses
Online trading is a way of purchasing shares directly on the JSE, backed by a broking service. By using the Internet or telephone you make your own investment decisions and place your own orders. Through not having that person-to-person contact, the broking house is able to cut costs making direct investing far cheaper.
Although you do not have access to a broker to discuss your investment decisions, online services like Standard Bank Online Share Trading provide you with analysts’ reports as well as education on how to invest online and how to select a share. They also run courses, usually without any fees, to educate customers on how to start their own trading portfolio.
Seddon says they recommend that people take an active interest in researching the companies they want to invest in by reading newspapers and analysts’ reports. They do not encourage a gambling attitude but rather a strategy of selecting a share that is likely to perform well over time based on its financials, business case and long-term trends. A solid company is most likely to make money over the longer term. If you look at companies such as Edgars, Pick’n Pay and Standard Bank, all of these blue chip shares have performed extremely well over the past 12 months and just by selecting one of these you would have substantially out-performed the market and any unit trust fund at a far lower cost. Even with a minimum fee of R99 plus statutary costs, a R5 000 investment directly into shares costs less than half the 5,7% charged by unit trusts.
Research conducted by Standard Bank showed that one of the main reasons people do not invest directly in the share market is the fear of losing money. Many investors or potential investors are well aware of the horror stories that came out of the dotcom bubble, which saw companies like Dimension Data fall from R75 to just under R3, wiping out 97% of their investment. A dramatic fall in one share can wipe out gains you have made in the rest of your portfolio.
For this reason Seddon strongly recommends using stop losses. This can easily be implemented when trading online. You decide how much risk you can take, in other words how much you are prepared to lose on a share before you cut your losses. “Generally people put stop losses in at around 10% to 20% below the price they paid for the share. If the share falls dramatically the stop loss kicks in automatically and the share is sold.” This is a good way to protect against heavy losses if the market goes into free fall.
Seddon says it is important not to become too emotionally attached to your shares. “People have no problem selling a share when they have made a profit but they find it very difficult to sell when it is losing money. It takes discipline to follow a stop-loss strategy.” — Maya Fisher-French