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FULL STORY: ratios
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ratios
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Personal Finance
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9 November 2010
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Bruce Cameron
How to assess an investment - Part I
Investors want to know if an investment has real value � will it provide growth now and into
the future? Financial ratios enable you to assess the value of a market, a market sector or a
share. Personal Finance shows how you can put the most important ratios to work for you.
One of the best signs that an investment market is about to collapse is when it is overvalued.
However, many people incorrectly assume that rapid growth in the value of a market, a market
sector or a share automatically means it is overvalued.
The FTSE/JSE All Share index (Alsi) rose from 18 121 on March 3, 2009 to 29 565 on April 15,
2010. Old Mutual�s share price went from R4.80 at its lowest level on March 9, 2009 to R14.01
on March 19, 2010. But this rapid growth in values did not mean that the JSE or Old Mutual had
suddenly become overvalued. Values can improve for sound reasons, in particular if they start
to increase after having fallen dramatically in an overreaction to previous events.
When you buy or sell shares, or even collective investments � such as unit trust funds and
exchange traded funds � that invest across market sectors, you need to be able to distinguish
between a rapid growth in values and an overvaluation.
The clearest sign that a market, a market sector or a share is overvalued is when its price
outstrips the profits being made.
Using the price-to-earnings (PE) ratio is an easy way for you to judge whether or not a market,
a market sector or a share is overvalued. To take a simple example, if you invest in a company
that has a PE ratio of 15, it means you are willing to earn one rand for every R15 you invest. So
it will take you 15 years to recover your initial investment from the profits declared by the
company (assuming that the price of the share and the profits remain the same).
The higher its PE ratio, the more likely it is that a market, a market sector or a share is
overvalued, as happened with the technology, media and telecommunication (TMT) bubble in
the 1990s, when some TMT stocks hit dizzy PEs of more than 30.
In the 2009 to 2010 period mentioned above, the Alsi rose by 63.1 percent and its PE ratio
moved from 8.06 to 18.16. Likewise, while Old Mutual�s share price rose by 19 percent, its PE
ratio moved from 2.59 to 29.56. These low and high PEs should be judged against the Alsi�s
historic average PE of 14.4 (over the past 10 years) and Old Mutual�s average PE of 10 (since
it listed).
Financial ratios, such as the PE ratio, are essential tools for assessing whether or not to make
an investment. And what is great about these ratios is that they are very simple to use if you
apply them properly.
People and institutions use hundreds of different financial ratios for different reasons: investors
and asset managers in an attempt to ensure they will make reasonable medium- to long-term
returns; market traders (gamblers) in an attempt to find short-term profits; businesses to
assess themselves and their competitors; bankers to assess the sustainability of a company
before they lend it money.
Some financial ratios are specific to certain types of companies or market sectors, while others
have a wider application.
This article looks at the most important ratios you need to understand when making investment
decisions for the medium to long term.
Be warned that ratios do not provide infallible information. The main limitations of ratios are:
• Ratios are specific to the time at which they were calculated. What is true now can be false
tomorrow. For example, a PE ratio for the JSE will differ completely if it were calculated when
stock markets peaked before they crashed in 2008 and if it were calculated at the bottom of the
crash. For this reason, it is best to record ratios and compare them over time to detect trends.
• Ratios can be misleading, because a ratio may be favourable or unfavourable for valid
reasons. The simple calculation is not good enough; you need to understand the factors that can
affect a ratio for good or bad. For example, a company with a high PE ratio may not, in fact, be
overvalued (because it is a fast-growing company with excellent prospects for future profits),
whereas a company with a much lower PE may be overvalued (because it has not adapted to
new technology and is on the way out. Remember Remington, which used to dominate the
typewriter market?)
• A single ratio in itself does not convey sufficient information. It is dangerous to rely on one
ratio. You must consider a number of ratios in combination in order to obtain a better
understanding of what may be happening. To this end, there are ratios that are a blend of other
ratios.
• The information required to calculate a ratio can be massaged to make, say, a share appear
more attractive than it actually is. The information required for calculating ratios is normally
available freely in the business pages of newspapers, in company reports and on the internet.
Some information may be a little harder to come by. But more often than not, the ratio has
been calculated for you.
A ratio is calculated by dividing one figure or one set of figures by another figure or set of
figures. A ratio is normally expressed as a percentage.
A number of the ratios, such as the PE ratio, can be used to judge an entire market, such as the
JSE, or a sector of a market, such as mining.
Even if you are not an active investor, you will find that an understanding of ratios will give you
a far better idea of what asset managers are trying to achieve when they invest your money
and the factors they must consider when they do so.
And then you can awe your dinner party guests by referring to the ratios by their acronyms
rather than in full. For example, it sounds impressive to say that "a company�s PE is offering
good value considering the EPS, but the RoE seems to be a problem, impacting on the div yield"
(all these terms will be explained in this article). But you also need to know how to respond if
one of your guests says: "But surely only on an historical basis?"
For investment purposes, ratios are grouped into four main categories. Essentially, you need to
know whether or not a company is sustainable in that it has sound cash flows, and low and
responsible levels of debt, and uses its assets efficiently; whether or not a company will make
profits into the future; and that when you purchase a share you are receiving fair or good value
so that your investment will grow in value in future years. And if you are investing to earn an
income, rather than simply for capital growth, you want to know whether or not the dividends
paid by a company will be sustainable and will beat inflation and bank deposit interest rates in
the longer term.
The categories, including the main ratios, are:
Liquidity ratios
Liquidity ratios tell you whether or not a company has sufficient cash in the bank to fund its
operations and to stay in business.
Many start-up businesses fail because they do not have enough cash to fund their operations.
The recent recession exposed how many (mainly foreign) businesses, including banks, were
paying out too much in bonuses to executives and in dividends to shareholders (often while
borrowing excessively). When the crunch came, they did not have enough money in their piggy
banks to survive.
The five main liquidity ratios are:
1. Current ratio
The current ratio is also known as the liquidity, cash asset or cash ratio.
Calculation: current assets divided by current liabilities = current ratio
What it means to you: Current assets, which include cash in the bank and other short-term
investments, are liquid assets that can be made available quickly as cash to meet a company�s
current liabilities � namely, the money that is needed to pay for day-to-day operations,
expenses and debt obligations due over the next 12 months.
The difference between current assets and liabilities is called a company�s working capital,
which is used to pay for things such as raw materials, salaries and the maintenance required to
keep the company in operation.
The main purpose of a current ratio is to give you an indication of whether or not a company
can meet its short-term obligations.
A current ratio of less than one indicates that a company would not be able to pay off its shortterm liabilities if they became due immediately.
Although a ratio of less than one means that a company is not financially healthy, it does not
necessarily mean that it will go bankrupt, because the company�s total assets may exceed its
total liabilities, enabling it to borrow cash to meet its short-term commitments. But borrowing
will result in the company having a higher interest bill, which will mean lower profits for
shareholders.
Things such as the size of a company�s inventory (stock) and the turnover rate of the stock
(which provides cash flow) will affect its current ratio. So you need to look at other similar
companies in the same sector to decide how good or bad the current ratio of a particular
company is.
2. Quick ratio (acid test)
The quick ratio is similar to the current ratio, but it is stricter, because it excludes inventory
from the current assets.
Calculation: current assets less inventory divided by current liabilities = quick ratio
What it means to you: This more strenuous test tells you whether or not a company holds
sufficient short-term assets to cover its immediate liabilities without having to sell its inventory.
The inventory is excluded because, for example, during a recession or when a company faces
increased competition, it may be difficult for the company to sell off its inventory in order to
generate immediate access to cash.
Again, companies with quick ratios of less than one cannot pay their current liabilities and
should be treated with caution. If the quick ratio is much lower than the current ratio, it means
current assets are highly dependent on the sale of the inventory.
Retailers, such as Woolworths and Pick n Pay, are good examples of companies that hold high
inventories and depend on quick sales, whereas service companies, such as insurers, do not
have large inventories, in which case their current ratio and their quick ratio will be similar.
Incidentally, the term "acid test" comes from the way early gold miners would test for real gold.
Unlike other metals, gold does not corrode in acid. If a gold nugget did not dissolve when it was
subjected to acid, it passed the acid test. So if a company passes the quick ratio test, it has
passed the acid test of whether or not it is sound.
Solvency ratios
These ratios are all about debt and the management of debt. Debt is not necessarily a bad
thing, because companies can use debt to fund increased output and sales, particularly when
financing things such as plant and equipment.
But too much debt can be a bad thing, particularly if you cannot identify what the debt is used
for, and even more so if the debt is staying at the same level or is increasing while dividends
are being paid to shareholders. If effect, this means dividends are coming from debt and not
from production and real profits.
It is important to remember that if a company over-borrows, cannot pay back the debt and goes
belly-up, you, as a shareholder, will be the last in line for any payout.
So when you are looking at company borrowings, you need to take a view on:
• The type of debt raised by a company. Debt can be short term and long term. Short-term
debt is usually money raised from a bank and is used typically to finance cash flow
requirements. Long-term debt is raised from investors, via corporate bonds, and should be used
to finance long-term production, such as plant and equipment.
Ratios are tools to judge the acceptability of the debt held by a company and should be used
alongside other indicators. For example:
* Excess short-term debt can place unwanted pressure on the cash flow of a company,
particularly if the borrowings are used to finance more than erratic dips in cash flow. The
acceptability of short-term debt can be detected by using the current or quick ratios.
* Most corporate bonds are traded on the bond market. You should be concerned if the bonds
have a low credit rating, particularly if they are below what is called an investment grade rating.
A bond without an investment grade rating is called a junk bond. A low credit rating means that
there is concern about the ability of a company to repay the bond. If a bond has a low credit
rating, a company will have to pay more in interest to induce investors to invest, and this will
translate into lower profits for the company.
• The reason for the debt. There must be a valid reason for the debt, such as building up
inventory in the short term or buying a new factory, outlets or plant. If the debt is simply to
refinance or roll over existing debt, you should be concerned, unless, of course, if it is done to
obtain a lower interest rate.
• The affordability of the debt. You must be able to assess whether or not a company can
service the debt if its plans for expansion fail. The type of thing you need to consider is whether
or not the profits made by the company are derived from one source, such as the production of
B-type widgets. If the company makes and sells a range of widely differentiated A- to Z-type
widgets, it is likely that a failure to expand one line of its products will have only a minimal
effect on the company�s profits. This also illustrates the advantages of diversification.
• Conditions on the debt. Many banks place fairly stringent conditions on debt, and a debt recall
is allowed under certain conditions. The recall could tip a company into liquidation.
So you need a quick way to measure whether or not a company is over-indebted.
1. Debt-to-equity ratio
This ratio tells you the proportion of money owed to shareholders (your invested capital) and
money borrowed.
Calculation: total debt divided by owners� equity (or shareholder capital) = debtto=equity ratio
What it means to you: You can use the debt-to-equity ratio to calculate whether or not a
company has an acceptable level of debt relative to the money invested by shareholders. The
higher the ratio, the more you or the company is dependent on debt. The greater the reliance
on debt, the lower the returns for shareholders, because the debt plus the interest must be paid
first and the dividends last.
You should be concerned if the debt-to-equity ratio is more than one. But you must also take
into account that some companies by nature are more reliant on debt than others. Capitalintensive companies, such as mining companies, have high levels of debt, particularly when
they are starting new mines, whereas service companies (such as software developer
Microsoft), which are more reliant on intellectual capital, should not have high levels of debt.
So companies face a balancing act: they should use debt judiciously to expand the business and
generate greater profits, while avoiding a debt trap that will see an ever-increasing proportion
of profits going to finance the debt with little being returned to shareholders, or, in a worst-case
scenario, in the company defaulting and shareholders losing their shirts.
2. Debt-to-assets ratio (debt ratio)
Simply, this ratio tells you how close a company may be to bankruptcy � namely, the point at
which total debt exceeds total assets.
Calculation: total debt divided by total assets = debt-to-assets ratio
What it means to you: A debt-to-assets ratio of more than one tells you that a company has
more debt than assets. In effect, it is bankrupt. A debt ratio of less than one indicates that a
company has more assets than debt. It is a going concern.
You must always compare a company�s debt ratio with those of other companies in the same
market sector, as well as study the historical track record of the ratio. If the ratio is
deteriorating steadily, you should place your investment in safer havens.
Operating (efficiency) ratios
The operating ratios tell you whether or not a company is using its assets efficiently to maximise
profits.
There is little point in investing in the shares of a company if it is not achieving a decent return
on the assets it uses, because the company has minimal potential to produce returns that are
better than those paid on a low-risk bank deposit.
There are three ratios you should consider.
1. Operational ratio
This ratio indicates how efficiently a company is being managed by comparing operating
expenses with net sales.
Calculation: operating expenses divided by net sales = operational ratio
What it means to you: The smaller the ratio, the greater the company�s ability to generate
profits when sales, and therefore gross income, decrease.
2. Return on equity (RoE)
This ratio tells you the return a company is generating on shareholder capital (the money you
and others have invested in the company).
Calculation: net profits divided by shareholders� equity = RoE
What it means to you: The higher the ratio, the better off you are. It means that your
investment is being used to generate sound profits. If the figure is low, it means the
company�s managers are not using your money efficiently to produce profits.
RoE is also a useful tool for making comparisons with other companies in the same sector. The
ratio can be modified in various ways, such as the exclusion of preference shares, to provide a
more accurate or narrowly defined view.
Diane Laas, the retail analyst at Investec Asset Management (IAM), says that Truworths is an
example of a company with a consistently superior RoE, which suggests it is a good-quality
share that you could hold over the long term.
3. Return on assets (RoA)
This ratio is broader than the RoE, because the assets are not limited to shareholder capital but
include all sources of capital available to a company.
Calculation: net profits divided by total assets = RoA
What it means to you: The assets of a company comprise mainly shareholder capital and
debt, both of which should be used efficiently to generate profits. RoA shows the return on total
investment or assets. The higher the percentage, the more efficient the use of capital.
What you are looking for is a company that uses the least amount of capital, whether from
shareholders or from loans, to generate the maximum amount in profits. For this reason, you
should use the RoA to compare one company with another in the same sector to establish which
company is likely to be managed more efficiently and, ultimately, which will give you a better
return on your money.
If the ratio is low, it may indicate that a company has retained too much in assets and should
either pay some of the money back to its shareholders in the form of dividends or repay debt.
Valuation ratios
Once a company has passed the survivability and efficiency tests, you need to consider whether
you are actually getting any bang for your buck.
The bang may be in the form of either capital growth (via an improvement in the value of the
share) or income (via dividends or interest on corporate bonds). Once again, ratios provide you
with the answers. Some ratios, such as earnings per share (EPS), can provide an indication of
both capital growth and income, whereas others, such as those that analyse dividends (the
proportion of profits actually paid to shareholders), are limited to the income flow you can
expect from your investment.
The most important valuation ratios are:
1. Earnings per share (EPS)
The most important thing you need to find out about any company in which you wish to invest
is: how much profit does it make and, in particular, how much profit does it make on a single
share.
If a listed company is not going to make sound profits relative to the cost of a share, you will be
better off putting your money in RSA Retail Bonds, which in June this year paid nine percent a
year over five years on a fixed-rate bond at virtually zero risk to your capital.
Calculation: net profit less dividends paid on preference shares divided by average
number of issued ordinary shares = EPS
What it means to you: EPS is considered to be one of the most important investment ratios. It
tells you how much profit you can expect a company to make from one share in the year in
which you purchase it.
Obviously, a standard EPS is based on historical data, so it is no guarantee of future
performance.
Dividends paid on preference, or preferred, shares must be deducted from the calculation,
because these dividends must be paid at a predetermined rate that is usually unaffected by the
profits of the company. (As their name implies, preference shares take precedence over
ordinary shares, because they have first call on the profits made by a company.)
The calculation must also exclude any one-off or extraordinary events, such as the profit or loss
from the sale of an asset owned by a company.
What you want to know is how much profit a company can ordinarily be expected to make for
every ordinary share owned by investors.
As with every ratio, EPS is not a perfect judgment. Next year�s profits are unlikely to be the
same as this year�s. So the EPS that most companies report when they announce their results
will be different from the profits in the future or even at the time of reporting. So you should
also consider what is called the forward EPS, which is based on assumed results.
An EPS ratio can be calculated in numerous ways, by changing the definition of profits and/or
the number of shares included in the calculation. Most companies announce their EPS when they
announce their results based on what are called headline earnings (profits), so it is called the
headline EPS. Simplistically, headline earnings are the profits generated by normal business
activities and do not include extraordinary one-off profits or losses.
Another approach is a diluted EPS, where the calculation includes convertible shares (for
example, preference shares or corporate bonds that can be converted to ordinary shares) and
outstanding warrants (a listed instrument that allows for the future purchase of ordinary shares
at a fixed price). The EPS is diluted because more shares are brought into the calculation,
reducing the proportion of the total profit of each share issued.
An EPS ratio that is used increasingly by analysts is the cash EPS. It is calculated by dividing the
cash flow of the company by the number of diluted shares. Analysts consider this a safer
number, because cash flow cannot be manipulated as easily as other EPS numbers, where
management decides what to include or exclude from the calculations. A company with cash is
also normally in a better condition than one without cash.
So when you compare the EPS of one company with another, or the EPS of the same company
over different years, you must make sure that the ratios are based on the same method of
calculation.
But be warned: even when you compare like calculation with like, the EPS of one company may
be the same as the other, but one company may still be performing better than the other. The
reason is that EPS does not tell you how the profits are being made. So while the EPS of two
companies may be equal, the RoA may not. An EPS is only an indicator of the profitability of a
company. This illustrates why you should never look at ratios in isolation.
2. Price-to-earnings (PE) ratio
EPS is considered to be one of the most important indicators for valuing a share, followed very
closely by the PE ratio. Before you can calculate the PE ratio, you need to know the EPS.
Calculation: price of a share divided by EPS = PE ratio
What it means to you: The higher the PE ratio, the longer it will take you to make a return on
your investment through capital gains.
The PE ratio is also known as the price or earnings multiple ratio, because the ratio tells you
how much investors are prepared to spend for each rand of profits they expect to earn.
The higher the PE, the more a share costs relative to the returns it will make calculated on the
EPS.
Because the PE is very much a moment-in-time ratio, it is considered one of the better
indicators of when to buy or sell a share.
The PE can also be described as a trailing 12- month ratio, because it is based on profits made
over the past year and not the profits that will be made.
Be warned: the honesty of a PE ratio depends on how the EPS is calculated. You should also be
careful not to compare the PE ratios of one market sector with another, because market sectors
have different growth prospects.
A low PE does not necessarily mean you are staring a bargain in the face. A low PE could be
caused by a company facing problems, such as increasing debt or operating in a market that is
mature and fading.
Neither is a high PE necessarily a reason to flee for safety, although in the late 1990s many
might have wished they had. At the end of the 20th century, the PE ratios of TMT stocks went
sky-high, leaving the stodgy old companies that year on year produced consistent profits and
paid consistent dividends floundering. Their prices fell as adventurous investors poured their
money into what they thought was a brave new world of business.
Asset managers who kept faith with the old faithfuls were considered out of step and out of line.
Adherents of the brave new world of investing argued that the extraordinarily high PEs of
technology shares were justified, because the companies represented the future and were about
to make enormous profits.
What were called value shares fell into disfavour, with the new-wave investors plumbing for
(high) growth (in future profits) shares. Then reality struck. The bubble burst. Investors fled to
safety � the safety of value shares, which all the while had reflected real value in their low PEs.
John Biccard, the portfolio manager of the Investec Value Fund, says you need to be cautious
even when you assess great companies, such as Naspers, which was recently trading on a PE of
23. He says the outcome needs to be extremely favourable to come close to justifying its
current rating.
3. PE-to-growth (PEG) ratio
Growth stocks are a reality despite the bad name they received when the TMT stock bubble
burst in 2000. There will always be companies that will grow rapidly, particularly in new
industries, such as technology.
But after the TMT bubble burst, a different approach had to be found to assess growth stocks. A
new phrase entered the investment markets dictionary: "growth at reasonable price" (Garp). In
other words, it was no longer a case of investing in growth shares at any PE. Garp in turn led to
the use of a derivative of the PE ratio, called the price-earnings-to-growth (PEG) ratio.
The essential difference between the PE ratio of a value share and a growth share is that the
former is based on the certainty of historical profits, and therefore has lower risk, whereas the
PE ratio of a growth stock is based on anticipated profits, which means higher risk. For example,
the share of a company that cost you R20 to get R1 in profit today would be considered a
growth company if it doubled its profits. The PE at the price you paid for the share would have
halved from 20 to 10. A good deal if you could predict the future.
The very reason you buy a share is because of the future profits of a company and therefore its
capital growth or the share of the profits it pays to shareholders as dividends.
The PEG ratio is a better guide to profit growth than the vanilla PE ratio.
Calculation: PE ratio divided by annual EPS growth = PEG ratio
What it means to you: The PEG ratio calculates the share value taking into account the
growth in company profits. As with a PE ratio, the lower the PEG ratio, the greater the indication
� repeat, the indication � that the share is undervalued. However, the PEG tells you a more
complete story than the PE.
Take two fictitious companies: Website Solutions and Plastic Mouldings. Website Solutions,
which makes its profits from intellectual capital, has an annual growth of 10 percent in net
profits and a PE ratio of 25. Then apply the PEG ratio of growth in net profits and you have a
PEG of 2.5. Plastic Mouldings, which competes mainly on price, has an annual growth of five
percent in net profits and a PE of 10. The PEG, however, is lower, at two. In other words, the
company with the boring commoditised product is a better investment bet, whereas Website
Solutions is comparatively overvalued.
Richard Middleton, the portfolio manager of the Investec Growth Fund, says that, at the time
this article was written, IAM bought African Rainbow Minerals on a one-year forward PEG ratio
of 0.2, which is exceptionally cheap, which meant that IAM was paying very little for earnings
growth over the next year. Richemont, on the other hand, had a PEG ratio of 1.2, which IAM
believed was very expensive relative to its forecast earnings growth.
4. Price-to-book ratio
This ratio tells you how much money you would receive if the company closed down today and
sold all its assets.
Calculation: market capitalisation divided by book value = price-to-book value
What it means to you: The market capitalisation of a company is the total number of shares in
issue multiplied by the share price.
The book value of the company is what the accountants think the actual value of the company is
based on the value of its assets, less its liabilities and things such as brand value. The difference
between book value and market capitalisation is what investors believe the company will or will
not make in future profits.
5. Dividend yield (DY)
In the days before pension funds became generally available, the better-off tended to choose
property or dividend-paying shares as savings vehicles to provide an income in retirement.
It has long been considered that paying dividends is not a key factor in valuing a share. What
really counts is the profits that a company makes and how it uses these profits to make even
greater profits. This is what pushes up the share price.
The payment of dividends is sometimes criticised as being an easy way out for a management
that does not know how to expand the business further.
But dividends are important for people who want an income. They need to find companies that
pay relatively high and sustainable dividends. So they will look to the grandees of the stock
market, such as financial services companies, mining finance companies and large established
retailers. Excluded from their list will be companies that need every bit of capital to finance
rapid growth.
The dividend yield (DY) is the standard ratio for calculating whether or not you are getting value
for money when it comes to dividends.
Calculation: annual dividends per share divided by price per share = DY
What it means for you: The higher the DY, the better the value of the dividend relative to
what you paid for the share.
It works like this: both Company A and Company B pay you a dividend of R10 a share. But if
the share of Company A cost you R100, your DY is 10 percent, and if the share of Company B
cost you R200, your DY is five percent. So Company A is by far the better bet. This calculation is
based on the historical dividend payment, or trailing dividend. You can also calculate a forward
DY based on predicted profits for the next 12 months.
Middleton says that IAM is invested in Telkom, which, while not a very good company, has a
dividend yield of over seven percent, which is almost as high as bond yields.
In conclusion, financial ratios are a far better way to assess shares and their value than listening
to a proverbial hot tip from your hairdresser or doctor. Or at least you should apply the ratios to
the hot tip before you invest all your money.
Simpler way to select shares
Many people who would like to invest in shares but who are intimidated by the jargon and
seeming complexity do not know where to start and do not have the time to narrow down the
plethora of shares on offer, even when they have grasped the basics of how to identify a sound
share.
First National Bank (FNB) came up with a solution to this problem in 2008 by narrowing down
the choice to 20 blue-chip shares (shares of established big companies that make consistent
profits) diversified across most market sectors and two exchange traded funds (ETFs):
NewGold, a commodity fund that invests in bullion, and Satrix 40, which tracks the fortunes of
the top 40 companies by market capitalisation (number of shares multiplied by the share price)
listed on the JSE.
FNB�s Noelle Conway says FNB is trying to encourage long-term investment using the stock
market to improve wealth, rather than short-term speculative trading.
Useful things about FNB�s solution, the Share Builder platform, are:
• You can invest relatively small amounts of money quite cheaply. Normally, the costs are
relatively high if you invest anything less than about R100 000 in a share portfolio. You can
open a FNB share-trading account with R100. There is a monthly fee of R17 and a trading fee of
two percent every time you buy or sell a share, with a minimum of R50. If you adopt a buy-andhold strategy (you buy a share, based on sound reasons, to hold for the longer term), your
costs become even more affordable.
• There are educational guides on various issues, including how to understand the jargon, how
to analyse, select and track shares, and how to understand market forces.
• You are provided with various tools, such as calculators. The latest innovation is called Share
Swarm, which is an interactive online tool that, among other things, illustrates how often a
share is traded (the liquidity of the share) and the price of the share, showing how it has risen
or fallen, while providing other information, such as share prices (there is a 15-minute delay).