Investment opportunities galore

Highlights in this issue:

*** Financial instruments uncovered...
*** What are share instalments...?
*** Why ETFs deserve a place in your portfolio... and more...

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From the overworked laptop of Julie Brownlee...

Dear Investment Academy Reader,

Over the last few weeks and months, we've concentrated on all the different trading strategies available to you to trade. But, let's take a step back and look at the bigger picture. Let's have a look at the different financial instruments available that you can add to your portfolio, and we're not just restricting ourselves to just trading instruments here.

There are many methods you can use to create a properly balanced portfolio. We're going to look at a brief description of the various equity based financial instruments available for you to invest in.

Definition: What is a financial instrument?

A financial instrument is an easily tradable package of capital. Each financial instrument has its own unique character and structure. There's a wide array of instruments in today’s marketplace to facilitate the efficient flow of capital amongst investors. Financial instruments can be equity based, debt based or based on foreign exchange. The financial instruments discussed in thisn issue are mostly equity based.

This definition is really flexible and there are a number of financial instruments created within its broad context.

Remember, each of these investment types has a place in a properly diversified investment portfolio. What this means is your investment portfolio can’t just consist of JSE listed shares. You’ll have to diversify your portfolio by including other categories of asset and investment types as well.

The first few financial instruments we'll discuss can be traded on the Johannesburg Stock Exchange (JSE). As your skill and knowledge of investing increase, you’ll be able to venture into the more exciting (and of course riskier) realm of geared trading offered by some of these instruments we'll look at in the coming weeks.

Shares (of course)

The easiest financial instrument to understand is ordinary equities. And, they're the most widely understood instrument.

Share instalments

Share instalments are a special form of financial instrument. They were created by some of the big banks in South Africa to help small investor take slightly bigger positions in the stock market without having to put in additional money. This is the first class of asset that allows you to take advantage of the concept of gearing, though the ratio of between 1.6 times and 2 times your initial capital outlay is nothing to write home about!

Essentially, a share instalment is an agreement you enter into with a bank. The bank will offer to sell you a share at half its current price – and loan you the balance for a period of around one year. Of course, you pay for this privilege by way of an interest rate built into the transaction at the outset...

At the end of the period, you have to stump up the remaining cash and take delivery of the shares. You also have the option to simply renegotiate the loan portion of the deal with your bank. The major benefit with the share instalment is you benefit from twice the dividend you'd normally have been able to afford. If the share is paying a R2 dividend, you’ll now receive R4 because you (essentially) have two shares for every one you paid for.

If you’re keen to find out more about share instalments, I suggest you ask your stockbroker. He should be able to fill you in on the workings of the product.

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Exchange traded funds (ETFs)

If you’re ever looking for an easy way to diversify your equity exposure, then you’ve found it in ETFs. These are passive investment funds designed to track the performance of an entire index by investing directly in the underlying constituent shares.

The magic of ETFs is you can buy exposure to a complete basket of blue chip shares with a single trade.

This type of financial instrument is huge in the United States, where you can find ETFs to suit any requirement. In South Africa we’re far behind the US in this regard. Thankfully there are now 27 ETFs listed on the JSE, where the private investor can trade them in much the same way as he would ordinary listed shares.

ETFs available on the JSE include New Gold, Satrix Fini and DBX FT100.

Many analysts rave about ETFs. In fact, they claim ETF stands for "efficient", "transparent" and "flexible".

If you’re keen to get relatively cheap exposure to an index of shares, then this is probably a very good option for you to consider.

Tune in next Friday where we'll looks at the role of warrants and single stock futures in your portfolio, as well as what bonds and cash can do for you.
 

Happy trading!

Julie Brownlee
for the Investment Academy

* This article was adapted from a chapter of Fear, Greed and the Stock Market.

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