The Investment Education before the Investment Education

Afrika Kesho_ The Investment Education

NOTE FOR THE READER:

Please note that this article contains stock exchange jargon/concepts that were deliberately included to give you a realistic picture of the terminology and concepts that are typically used. So, we urge you to read the article in full as the concepts are the cornerstone of the stock exchange, particularly for people wishing to invest in JSE-listed companies. Please click the button at the bottom of the page for the full presentation and basic explanations of these concepts, created by Rose Garden Consulting.

Let’s get into it

You are probably wondering what is meant by “The investment education before the investment education” right? Don’t worry, it will all make sense in a moment.

Also, I suspect that as you read the next two paragraphs, you’ll probably be asking yourself “Wait, what?” along the way, but don’t worry too much about it, everything will make sense soon enough.

Let’s take a typical real-world situation to illustrate the meaning of the title: You read somewhere online or heard from a close friend that you can make money by investing in the stock market. After which, you swiftly chose a stockbroker, signed up with them, and bought 1000 shares in a company that is listed on the Johannesburg Stock Exchange (JSE). And as easy as that, you’ve now became a shareholder of a listed company. This experience of owning shares is exciting because what it means is that you are now well on your way to earning yourself some money, as told by your close friend. This is awesome, right? Is it still awesome even though your shareholding of 1 000 shares constitutes approximately only 0.00008% of the company’s entire Issued Share Capital of Shares?

Just as you are still wondering what issued share capital is, the company that you bought shares in announces that the board of directors and the shareholders of the company have resolved to increase the Authorised Share Capital of the company, which results in an amendment to the Capital Structure of the Company. Your head is probably spinning by now.

Some clarity

What we are essentially trying to demonstrate with the above situation, as confusing as it sounds, is that we are often too quick to learn how to buy shares before we learn what they truly are, as well as other significant details involved in buying shares. This is comparable to learning how to sprint before learning how to walk. As you well know, you will not do well running if you haven’t taken the necessary first steps of learning how to walk.

Not having enough knowledge about shares and how they work is also arguably the exact reason why we constantly become victims of one investment scam after another. We simply forsake the discipline and patience to equip ourselves with enough accurate information before we commit to any type of investment, because we think that we can make lots of money quickly.

Now, onto the starting blocks

Now that we have addressed the importance of education when it comes to buying shares, let us unpack at a very basic level the meaning of “Issued Share Capital”, “Authorised Share Capital” and “Capital Structure”. It is important to know what these concepts mean as they form the basis of how shares are created and issued, as well as how shareholders can calculate their percentage shareholding in a listed company at any point in time.

1. Authorised Share Capital

The authorised share capital is the total number of shares that the directors of a listed company (the people who are responsible for running a company on a day-to-day basis) can issue to shareholders. The authorised share capital is in accordance with the following:

●Companies that are listed on the JSE have a document called a Memorandum of Incorporation (MOI).

●The MOI contains a set of rules that the company and its directors must comply with and it is approved by shareholders of the company.

●The MOI also contains rules regarding the number of shares that the directors are authorised to issue to investors (shareholders) at any point in time.

●For example, the directors can decide that they want to issue up to 1 000 000 000 (1 billion) shares, meaning that the authorised share capital of the company is 1 000 000 000 shares.

2. Issued Share Capital

The issued share capital is the total number of shares that are already issued to shareholders. This number allows a shareholder to calculate their percentage shareholding at any point in time as illustrated below:

●Company ABC Limited has an Issued Share Capital of 100 million shares.

●If you own 10 million shares in ABC Limited, your percentage shareholding will be 10% of the issued share capital – assuming that the issued share capital is equal to the outstanding shares. (10 million shares divided by 100 million shares)

●The remaining 90 million shares, being 90%, are owned by all other shareholders of ABC Limited.

3. Capital Structure

The capital structure of the company is how a company is financed. A company can choose to be financed through debt or though equity. In the case that the company is financed entirely through equity, the equity portion of the financing will be composed of both Authorised Share Capital and Issued Share Capital. Given the ABC Limited illustration above, the capital structure will be recorded as follows in the company’s financial statements:

2019
Authorised Share Capital 1000 000 000
Issued Share Capital 100 000 000

And there you go. You are now equipped with some of the basic knowledge that will help you a little when navigate the world of buying shares.

Final Words

Seasoned and successful investors who put their money on the JSE have typically taken their time to understand the basics of the stock market and the bigger economy of the country (Yes, understanding the economy does come into the picture when you are dealing with investing in companies). These seasoned individuals understand the relationships between different factors that drive the economy and share price of a company. They have also spent time studying market trends of different companies and sectors to enable them to know which companies to buy in the short and/or long term. They gather enough information well in advance about companies in which they wish to buy shares.

Why do they go through all this trouble? In the likely event that they company they have bought shares in does not perform as expected, they will be in a position to take measures to reduce risk in order to protect their money. This is as opposed to someone who does not know where to begin to protect their money when company’s performance does not go as expected.

So be open to learning also, so that you can also be in a position to be a successful investor.

This article was written by Rose Garden Consulting. You can find them at www.therosegardensa.co.za.

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