Share the wealth
How to make sense of the stock market
New to the sharemarket? You’re not alone. Opportunities that arose when Covid-19 hit, and the rise of more userfriendly trading platforms like Sharesies and Hatch, have seen many investors leap into the sharemarket recently.
As a result, more people are doing their homework and coming across some occasionally eye-crossing announcements.
Experienced investors know the meaning of these terms, and what they may or may not signal for the company – here’s a quick outline to get you up to speed.
Investment strategy
When selecting a company, it’s hard to go past the classic advice of United States uber-investor Warren Buffett: never invest in a business you do not understand.
‘‘It’s worth understanding where a company gets its money from and what it spends it on – no different to a household budget,’’ Oliver Mander, chief executive of the New Zealand Shareholders’ Association, says.
But even before this, Mander believes the first place to begin is understanding what you, the investor, want to achieve. In other words, your medium and long-term goals.
‘‘For example, if you need cashflow to fund your immediate needs, that will result in a different type of investment strategy than if you don’t need access to your capital for a few years.’’
Next, he says, consider how diversified your portfolio of investments is.
Have you included companies that are likely to weather shocks along the way, and not just the latest, hottest idea? Have you got a good spread of regions and industries?
Sharesies co-chief executive Leighton Roberts says 15 to 20 companies is the ideal and there’s always the option to buy into funds as well.
There’s another old saying: ‘‘You make your money with risk and keep it with diversification.’’
Roberts believes in cautious risk – what you can afford, ‘‘not what you’re prepared to lose’’.
‘‘It’s not gambling if you follow some of the other principles, like, hold for a long period of time. You should be able to envisage this company in 10 years’ time.’’
Index Funds
Many experienced investors favour index and exchange traded funds (ETFs).
Index funds passively follow a wide group of companies. NZX’s Smartshares US 500, for example, reflects the fortunes of the 500 largest US listed companies.
Buying into these funds is easy, and they are a good way to get diversity and spread your exposure to risk without having to spend hours on research.
They also usually outperform an individual’s own efforts, so Buffett is a big fan.
However, that’s not to say you shouldn’t put some of your money directly into individual companies, which is where annual reports, financial results and sharemarket news can all help.
Earnings
One of the key signposts to look out for is the earnings, or profit, guidance, which listed companies give when there’s a material change in outlook.
‘‘The share price simply reflects the market’s expectations of future earnings (including growth) and company stability as reflected on its balance sheet,’’ Mander says.
‘‘So any guidance or future outlook issued by a company is critical.’’
Knowing a few basic ratios can also go a long way. ‘‘A ratio like the price/earnings ratio is a good way to assess just how much you are paying for the underlying profit of the company,’’ he adds.
Shareholding changes
On the NZX, a change in shareholding worth more than 5 per cent has to be flagged on the exchange, and this can give you an insight on how institutions, directors and executives regard the company. Mander says reading substantial shareholding notices are a habit of experienced investors. ‘‘Company insiders are usually limited as to when they can trade their shares, but whether those insiders are accumulating or decreasing their shareholding may give a clue as to company outlook.
‘‘Still important to remember, though, is that those insiders are people too, with their own financial strategies unique to them. For example, it might just be they need cash to build a new house or fund a child’s university fees.’’
Capital raisings
Many companies raised capital after Covid emerged last year, either by taking on more debt or creating more shares – which can dilute the value of everyone’s stakes.
However, it might also be an opportunity. Although the new shares may be offered only to private buyers (usually big players or institutional investors), they may be opened up to existing shareholders.
Because there are a variety of reasons why capital raisings occur, Mander says there is ‘‘no easy answer as to what investors should do in each case’’.
However, in May last year the Financial Markets Authority produced a helpful guide to capital raising.
Dividends
Dividends are the icing on top of a company’s share price.
A good dividend payer may not be flashy and its share price may not be stellar, but they offer a regular income. There’s even an index fund based on New Zealand dividends.
The bugbear is, companies can cancel or defer this payment, as many did under Covid last year to retain cash in the company.
Investing ahead of dividends
Share prices often rise ahead of a dividend payout. They may be sold ‘‘cum dividend’’ (with the dividend included) or ‘‘ex dividend’’.
‘‘In theory, the shares will be more expensive cum dividend, but you will then receive the dividend,’’ says Mander.
‘‘If you buy ex dividend, the shares will reduce in value according to the dividend that has just been paid.
‘‘So it’s a zero-sum game. If you’re making investment decisions for the long-term, you shouldn’t be worried about this.’’
Voting rights
When you buy shares, you have a right to vote on important company matters from time to time, particularly at annual meetings.
While shareholders don’t always exercise this right, the Shareholders’ Association has at times been able to enact change by encouraging shareholders to vote strategically.
However, if you’ve invested in a middle man like Sharesies, you may be surprised to find you don’t have direct voting rights.
This is because they hold the shares ‘‘in custody’’ and the custodial holder will vote on your behalf.
Sharesies’ Roberts says the platform is increasingly asking its investors what they think on important issues, using online polls.
‘‘We’re not like the Shareholders’ Association, who take a stance on behalf of shareholders . . . but we do want our investors to have the option.’’
Hostile takeovers
This is as it sounds: one entity trying to take over another without its blessing, by offering shareholders a lucrative price. Hostile bids often trigger a big jump in share price, as seen with the recent battle over Infratil.
However, Mander says that it’s not worth trying to guess which companies are takeover targets.
‘‘Just invest in decent companies.’’