Investor Training Stock Market Course
Please take note:
The stock markets offer numerous opportunities for investors to obtain a stake in any
company listed on the Johannesburg Stock Exchange. No matter how old you are, how
much money you have, how knowledgeable you are and how much time you have on
hand to devote to the market. As long as you adopt a realistic view, have ingenuity, a taste
for calculated risk, have an adventurous streak and don’t accept the norm of medico, then
this may just be the experience you have been waiting for.
It is easy to assess the intrinsic value of a company because it is determined by calculated
facts. To determine the value of a share is an entirely different matter. The market value of
a share is determined solely by the interaction between supply and demand, which in turn
is controlled by numerous factors, both rational and irrational. The market is continuously
directed by moods, opinions, guesses, and, thank goodness, also by underlying
fundamental values. It therefore stands to reason that we should always be aware of the
risk factor, which is an integral part of the stock market. As a matter of fact, life in general
offers very few guarantees, so why search for guarantees in an environment where you
will find it least of all. Traits such as perseverance, dedication, good judgment, experience,
confidence, and last, but not least, a sound underlying gut feeling, are some vital
requirements if you intend to stay the distance.
OBJECTIVE
The more familiar you are with the basics of investing, the better you will understand your
investment results. There is no easy recipe for instant results, but the fundamental
concepts are universal, almost like an A B C of investing.
Assess the Financial Markets for reasons why your selections should perform. Refer to
Chapter Six - Market Sentiments.
Be selective! Choose shares with value and growth potential. Refer to Chapter Four Fundamental Analysis.
Charts, Trends, Patterns and formations and Indicators! Determine the turning points of
a share through Technical Analysis. Refer to Chapter Five.
Determine the overall trends of world markets with special reference to the American
Markets for that day determine the spot on trend of our markets and determine the trend
of the sector of your share, Check on the bids and offers of the share under discussion.
All of the above is pointless if you do not conclude the deal!
TABLE OF CONTENT
Stock Market Training
Chapter One: The Stock Market
Page 5
The Stock Market is a science, and although we unfortunately do not have the time nor
the space to address all the aspects of the Stock Exchange, we will Endeavour to
highlight the specifics that will assist you to make meaningful investment decisions. An
interesting feature of the Stock Exchange is that it gives any person, even those with
limited capital, the opportunity to be part owner of any company that is listed on the
Johannesburg Stock Exchange, with clearly specified rights, under the watchful eye of the
JSE Board.
Chapter Two: The Human Element on the Stock Market
Page 10
To determine your abilities to invest on the markets, it is necessary to do an objective and
honest self-appraisal based on knowledge, available time, funds and dedication. Although
the Stock Market will accommodate anyone, the undisciplined investor won’t have much
fun. A well formulated strategy supplemented by stringent discipline is a definite
prerequisite.
Chapter Three: Procedures
Page 19
As mentioned previously, discipline is the cornerstone of any successful well- structured
venture. Discipline leans heavily on procedures and the maintaining of such guidelines set
out by these procedures. This chapter informs the investor of the steps to follow - from
registration, the structuring of a meaningful watch list to the strategies to identify shares
with value and growth potential. All the vital information you may require to guide you
along the decision-making process is dealt with.
Chapter Four: Fundamental Analysis
Page 32
Traders are continuously on the lookout for shares that offer value and that have
growth potential. This scientific approach is called fundamental analysis. The term
describes it so accurately: The basic values of shares are analyzed and the results
are compared to other shares in the market, as well as the overall performance of
the sector concerned and the results of previous financial periods.
Chapter Five - Part Three: Patterns and Formations
Page 52
Buyers and sellers are involved in a continuous battle, and it is usually the group with the
most drive and enthusiasm which determines the direction of the trend. This questions the
‘more buyers than sellers theory’ and suggests that the strength in either buyer or seller
enthusiasm can manipulate stock market direction. These so called battles are reflected
in the charts by clearly identifiable patterns or formations.
Chapter Five - Part Four: Indicators
Page 63
An indicator is a mathematical calculation that can be applied to a securities price field,
resulting in a value that will anticipate future changes in a share prices. Analysts are
applying numerous indicators to determine turning points in shares, to denote buy and sell
signals. We are only discussing the four major categories, and we are also applying them
in a practical sequence. We firstly apply trend indicators to confirm the trend of a share.
Momentum indicators then show the rate of change in the price whereas volume
indicators provide clues as to the intensity of a given price movement and lastly, volatility
indicators will confirm the price behavior of the share under investigation.
Chapter Six: Market Sentiments
Page 106
No matter how well we have selected our stocks, if the markets globally are not conducive
for growth; our jewels are not going play ball with us. It therefore stands to reason that we
should keep a watchful eye on market sentiments, locally as well as abroad. All in a tall
order, that is why one should read the markets selectively and also do so in networks.
Venturing the Stock Markets is a lonely game. One needs companions to go along: A
knowledgeable broker, “buddies”, investment clubs and never go anywhere without the
awareness of the presence of your Partner.
Chapter Seven: Income Tax
Page 110
Government is like a well-run household. Every member of the family will contribute
towards the wellbeing of this small entity, according to their abilities of course. This is
done voluntary for the sake of mutual care, love, and the sense of belonging. Each
member of the bigger family is called upon, to contribute handsomely towards the running
of the country by means of various revenues. Hard to believe, our association with
government is also voluntary and therefore our monetary contribution towards running this
concern should also be regarded as a gleeful event, so let us investigate the pleasures of
paying INCOME TAX.
Glossary
Page 112
Stock Market Industry jargon and much more.
References
Self Explanatory
Page 127
CHAPTER ONE
THE STOCK MARKET
Page
1
The origin of the stock Johannesburg Stock Exchange
6
2
The function of the Johannesburg Stock Exchange
7
2.1
A company goes public
7
2.2
The public invest capital
7
3
Types of shares
7
3.1
Ordinary shares
7
3.2
Preference shares
7
3.2.1 Participating preference shares
8
3.2.2 Convertible preference shares
8
3.2.3 Redeemable preference shares
8
3.2.4 Bearer shares
8
3.2.5 A combination of preference shares
8
3.3
Debentures
8
3.4
“N” shares
8
4
The advantages of investing on the stock market
9
4.1
The disadvantages of owning shares
9
CHAPTER ONE
The Stock Market
In order to be a successful investor on the stock exchange, a few basic stock market
principles have to be acknowledged:
We must realize that the stock exchange is a science. Therefore we must at the very least
understand the basic principles of the market
1
THE ORIGIN OF THE JSE
Shareholding represents ownership in a company. A shareholder benefits
financially in two ways:
The shareholder is entitled to receive his share of the dividends should company
directors decide to distribute some of the profits made during a financial year, to its
shareholders. These dividends are usually declared and distributed bi-annually.
The primary financial gain and main motivation for investors to buy and sell shares, is
when share prices appreciate.
The first recorded trade in shares in South Africa took place by public auction in Cape
Town in 1838. After the discovery of gold in Barberton, in the then Eastern Transvaal,
speculations with shares took place from 1884 and 1890. The discovery of diamonds
promoted Kimberley to the financial center of South Africa and led to the founding of a
stock exchange. Following earlier trade exchanges, which were regulated by common law,
a committee was established and proper rules and regulations of conduct for business
dealings were formulated.
The discovery of Gold in the Witwatersrand altered the face of the financial order in South
Africa. The Witwatersrand Club Exchange Company Limited was formed in February 1886
and in November 1887 led to the founding of the Johannesburg Stock Exchange.
The Johannesburg Stock Exchange has, during its history, changed address on several
occasions, but is currently based in Sandton, Johannesburg. During 1996 the traditional
trading method of open outcry floor-based trading had to make way for a computerized
interface, therewith ending a culture that had been in use for over 100 years.
2
THE FUNCTIONS OF THE J.S.E
The J.S.E. has two primary functions:
2.1
A COMPANY GOES PUBLIC
Companies list on the stock exchange and issue shares to raise capital for expansion.
This is called an initial public offering, the so-called primary market. This offering is made
available to the general public. Companies do not trade in their own shares. Directors
may decide to buy back all the shares issued in order to de-list a company. Directors may
deal in their own company’s shares, but all dealings have to be declared and made
available for the public to scrutinize. This information is usually made available on a
company’s website, which is readily accessible to all.
2.2
THE PUBLIC INVEST CAPITAL
The general public can trade, through regulated procedures, in the shares of any company
listed on the JSE. Ordinary shares are issued mainly for this purpose and dealings are
facilitated through a brokerage house.
3
TYPES OF SHARES
Four main categories of shares exist for investors to invest in. Companies create these
categories to provide for the different demand / result objectives that investors have.
These categories are usually determined by:
the amount of risk the investor is prepared to take
the extent of the investor’s ability to be involved in the management of his portfolio
Although most investors trade in ordinary shares, the other categories are mentioned
below to provide a complete overview.
3.1
ORDINARY SHARES
These shareholders are entitled to:
Attend and vote at general meetings of the company they hold shares in.
Receive annual reports.
Share in the profits of the company through dividends, should the directors decide to
distribute some of the profits to the shareholders.
If a company should cease to exist, the shareholders are entitled to a return on his
share of the underlying assets, however, holders of ordinary shares have only a
residual claim against the assets of the company after the settlement of all prior claims.
Even their claim against earnings is residual in the sense that all prior charges such as
interest, debenture payments, and arrear dividends on preference shares must be
settled first.
3.2
PREFERENCE SHARES
Holders of preference shares are entitled to the following:
They stand first in line to profit from dividend payments.
These dividends are a routine occurrence – more regular and stable.
A share of the profit a company has made during a financial year.
Preferential treatment in the event of a liquidation claim.
Preference shares have fewer price fluctuations and are less volatile than ordinary
shares.
Preference shareholders cannot vote at general meetings.
3.2.1 PARTICIPATING PREFERENCE SHARES
These shares are more expensive than Preference Shares, share in the profits of the
company based on predetermined formulae and receive dividends similar to ordinary
share holders.
3.2.2 CONVERTIBLE PREFERENCE SHARES
These shares are flexible in that the holder receives a fixed annual dividend and that he
may exchange all or part of his holdings in the company for other securities usually on a
previous specified term.
3.2.3 REDEEMABLE PREFERENCE SHARES
The redeemable clause assists the company in the structuring of its capital requirements.
The shareholder receives a fixed annual rate of dividend that is redeemable at the option
of the company at a specific price on a specific date over a specified period.
3.2.4 BEARER SHARES
Bearer Shares are not popular and the number of old Bearer Shares has dwindled to
almost nothing in most of the companies.
3.2.5 A COMBINATION OF PREFERENCE SHARES
It is possible to have non-cumulative convertible participating preference shares. This
implies that such shares are fixed interest-bearing securities that also share in profits, but
in a non-cumulative way. They are also convertible into ordinary shares on previously
specified terms on specific future dates.
3.3
DEBENTURES
Debentures are fixed interest-bearing securities issued by a company as a loan contract.
They represent a promise by the issuer to pay a regular fixed interest. The capital amount
being invested is to be realized on a fixed date stipulated in a contract made on the day of
investment. Capital growth is possible if the selling of shares is at a higher price than the
initial purchase price.
3.4
“N” SHARES
“N” Shares are similar to Ordinary shares except for the fact that the holders of these
shares have no voting power. Companies issue these shares as a mechanism for raising
capital, without diluting the voting powers of the founding shareholders.
4
THE MARKET PARTICIPANTS.
4.1
THE INVESTORS PUBLIC
These investors have various reasons for investing in the markets. Other than to practice
it as a career, it could be to enjoy a higher return on their funds, for diversification, to
practice it as a hobby, to keep track of the whims of the economy or it can even be to
satisfy the urge to gamble, at least this way it can be done in a calculated manner.
4.2
PROFESSIONAL INVESTORS
For these investors it is not a pastime, but a career. They are in the minority, but some of
them have a vast amount of capital exposed to the markets. Many of these professionals
started out as passive investors, but have honed their skills to such a degree that
investing has developed into a fulltime profession.
4.3
FUND MANAGERS
Financial institutions, banks and pension administrators invest the majority of their clients’
money on the stock market. Professional fund managers select shares from the broad
spectrum available in order to compile funds that suit the requirements of all their clients.
5
THE ADVANTAGES OF INVESTING ON THE STOCK MARKET
Although we regard the cost of trading as being excessively high, in comparison to
most other investment vehicles it is actually relatively low.
Your investment can be valued at any time, by simply accessing your holdings via the
internet, or checking in any business news paper.
It is easy to trade on the Stock Market – all it takes is a phone call.
Shares can be sold instantaneously. There are always buyers.
If traded correctly, shares will produce a better return than any other type of
investment.
Carefully selected shares pay regular, tax-free dividends.
Shares grow in value as time goes by. Carefully selected companies always produce
satisfactory results.
The strict rules and regulations of the JSE safeguard your investment against fraud.
Unlike property, anyone can invest on the Stock Market with a limited amount of
capital.
A shareholder owns part of the company, and with certain rights, but will not be held
accountable for any losses incurred.
Although you own part of the company, you are exempt from the responsibilities
associated with the management of the company.
Risk is mainly minimized by exercising discipline and following a sound investment
strategy.
6
THE DISADVANTAGES OF OWNING SHARES
It is always possible to sell a share, but, you won’t always get the price you are
quoting, especially not during a bearish spell in the market.
Dedication is a prerequisite to be a successful trader on the Stock Exchange.
If a company in which you own shares goes belly-up, your share holdings follow suit.
CHAPTER TWO
THE HUMAN ELEMENT ON THE STOCK MARKET
Page
1
Self appraisal
11
1.1
Age
11
1.2
Available funds
11
1.3
Time
11
1.4
Knowledge
11
1.5
Aptitude
11
1.6
Financial position
11
2
Investors spectrum
12
2.1
The conservative investor
12
2.1.1
Method of investing
12
2.1.2
Investors strategy
13
2.1.3
Motivation
13
2.2
The medium term investor
13
2.2.1
Methods of investing
13
2.2.2
Strategy of the medium term investor
14
2.2.3
Motivation
14
2.3
The aggressive approach
14
2.3.1
Method of investing
15
2.3.2
Investors strategy
15
2.3.3
Motivation
15
3.
The beginner
15
4.
Emotions
18
1
SELF APPRAISAL
The Stock Market accommodates all kinds of investors, except one variety, the
undisciplined investor. It is vital to have an easy-to-understand strategy and it is equally
important to adhere to this. In order to formulate a strategy, one will first of all have to
assess ones abilities, and that is done by an honest self- investigation, following these
guidelines:
1.1
AGE
In terms of risk assessment, the financial world dictates that anyone above the age of 55
should be risk averse. At this age one cannot afford to make mistakes with his/her money
as there will not be adequate time to recoup these losses. The younger generation on the
other hand has ample time to regain losses should any mishaps occur.
1.2
AVAILABLE LIQUID FUNDS
The term ‘funds’ is a relative concept and every investor will have a unique understanding
of this. Whatever one regards as a lot of money should be invested securely and
conservatively, whereas a smaller amount can be invested more aggressively.
1.3
TIME
The amount of time that an investor will allocate for market participation will determine his
activities on the market. If a person has random access to stock market information at
various intervals during the day and is furthermore able to devote a substantial amount of
quality time for this purpose, then an aggressive investment style may very well be
applied. The opposite is recommend for a person who has only limited time available for
making or monitoring dealings on the stock market, and a steadier and conservative
approach is appropriate.
1.4
KNOWLEDGE
The saying “Knowledge is power” applies. An aggressive investment style demands that
an investor is well-informed about the workings of the stock markets and the economy.
The conservative approach is less demanding in this regard as a conservative investor will
focus more on information supplied by financial advisors/ brokers etc, and will rely greatly
on their expertise.
1.5
APTITUDES
The money or the box concept. If you don’t enjoy what you are doing then stop doing it
and find something else of interest. If you have a taste for taking calculated risks - the
rewards can be handsome if on target - then do it. The conservative investor would rather
forfeit high returns in exchange for a degree of certainty.
1.6
FINANCIAL POSITION
Your financial position is another deciding factor of your investment approach. If you are
financially sound then you are in a position to venture into the more aggressive investment
spectrum. The following areas will determine your stance on the market place:
Debt
Assets
Employment
Retirement planning. ( Retirement Annuities and Pension Schemes)
Assurances. (Medical Aids and Risk Assurances)
2
THE INVESTORS SPECTRUM
The three major allocations on the spectrum will apply:
2.1
THE CONSERVATIVE INVESTOR
An investor in this category is profiled as the older person who is nearing the end of his
career and ought to have a higher level of available capital. Even though this person may
have more time on hand, a lack of skill and interest may prevent him from being intimately
involved with the day-to-day decision-making.
This investor has a conservative point of view. He is not willing to take risk and he is
content with lower returns in exchange for security.
2.1.1 METHODS OF INVESTING
The conservative investor will usually invest in funds compiled by fund managers.
Financial institutions have fund managers that compile and manage funds that represent
the entire financial spectrum, both locally and abroad. These fund managers are
competent in their field and offer a wide range of funds ranging from specialist funds,
general funds and global funds to money market funds, where one can seek shelter in
trying times.
The investor can manage these funds by switching between funds, in order to either ride
the wave in positive markets or to park his funds in the money market during negative
spells. The trading in funds is done through a financial advisor and not a stockbroker.
There are basically two types of funds under discussion:
COMPULSORY FUNDS
Whilst contributing to these funds certain tax concessions were granted, with the result
that these funds are now subject to certain legislative restraints.
These funds are originated by pension schemes and or retirement annuities. On
retirement date the money within these funds may be transferred to an underwritten life
annuity investment at an institution of your choice. The recipient, if he is able to, can
manage this investment by switching between multitudes of funds to ensure that the
investment conforms to the current market condition.
Another benefit available is that the pensioner may decide on his monthly pension
receivable. Any amount between 5% and 20% based on the total investment. The balance
of the funds at death will be passed onto his beneficiaries.
DISCRETIONARY MONEY
Discretionary money is any other money that an investor may want to invest. Most
Investment Service Providers i.e. Sanlam, Old Mutual, Momentum etc, have no
regulations on discretionary money investments.
2.1.2 INVESTMENT STRATEGIES
Decide on:
Return
Stop loss
Spread
Whether you have the knowledge and discipline to manage the
Investment, or have it managed by experts.
2.1.3 MOTIVATION
To preserve his capital
To beat inflation
2.2
THE MEDIUM TERM INVESTOR
This investor spends much time in shopping for shares with value and with growth
potential. He will determine the turning points of these shares and attempt to buy them at
the lowest possible point. He has a longer-term view, utilizes the long-term cycles and will
stay invested in a share for as long as the share offers growth potential. His profit
expectations will be moderate.
2.2.1 METHODS OF INVESTING
The medium-term investor will select his stocks on account of their fundamental strength
(See also Chapter Four). His sources would be recommendations obtained from:
A broker
Friends
Association with other investors via Clubs, workshops and discussion groups
Publication
Heat Maps on the Quack Chart software program
Useful hints: (refer chapter three, 7.2 other methods)
Select via Unit Trust Funds
Year-end results and Dividend payments
Hot tips
Seasonal trends
Directors dealings
Ex dividend
The medium-term investor spends a considerable amount of time on his or her
investment(s) and will attempt to buy shares at the lowest possible point. He will stay
invested in a share for as long as the share offers value.
2.2.2 STRATEGY OF THE MEDIUM-TERM INVESTOR
Will only buy shares with value and growth potential
Is satisfied with a moderate gain
Spends a good deal of time selecting the right shares
Will invest his money in different shares and also in different sectors
Will apply his stop-loss meticulously
Will not only concentrate on the creation of wealth but also on preserving his capital in
trying times
Will stay abreast of financial whims by extensive communication
2.2.3 MOTIVATION
To create wealth and to preserve his capital
To keep abreast of the ever changing economic environment
2.3 THE AGGRESSIVE APPROACH
Investors who resort in this category are active speculators. They are of the younger
generation, knowledgeable, competent, devote quality time to their investments and have
high expectations.
2.3.1 METHODS OF INVESTING
The speculator usually selects shares that oscillate greatly. They have a short-term view
with smaller but frequent gains. Attention is given to cheaper shares for higher volatility.
Speculators devote a great deal of time, if not all their time to the stock market. They will
invest in limited amounts at any one time. They will concentrate only on two or three
shares at a time and they expect high returns. They will make use of support and
resistance lines to guide them in buying and selling and they will trade intra day and
usually on line.
2.3.2 INVESTMENT STRATEGIES
The profits will be set aside with the purpose of being invested more securely.
2.3.3 MOTIVATION
To practice a career
To supplement his income
3. THE BEGINNER
INTRODUCTION
If knowledge is a prerequisite for starting to invest on the stock market then no one will
ever venture on the markets. There is such a vast amount of information and furthermore,
the stock market is a dynamic industry characterized by perpetual changes. The only way
to get started is to go ahead and do it! Knowledge, confidence and expertise will be
acquired along the way. There is no better learning school than practical experience.
STEP ONE
Decide on the amount to be invested on your very first share. The minimum
recommended amount to be invested is R10 000-00. The cost of buying and selling
shares comprises a fixed amount plus a small percentage. If an investor trades with less
than the minimum of R 10 000-00, there will be a cost-ratio imbalance, meaning that the
cost in relation to profit made will be too high. It would also not be wise for a beginner to
enter into the market with more than R10 000-00 at any one time. If you decide to start
investing with less than the mentioned amount, you need to be aware of the cost factor
and how it may affect your anticipated results.
STEP TWO
Before any person can trade shares, one has to register as an investor with a reputable
Stock Market Brokerage, preferably one that is registered with the Financial Services
Board (FSB). Check on the FSB website, www.FSB.co.za, whether a brokerage is
registered or not. Inform the broker of your intentions, and do mention that you are a
beginner. Your broker will supply you with the necessary registration forms, which must be
completed and returned to him/her. Upon completion of registration, a unique reference
number will be allocated to the investor, which will be used in all future transactions.
A broker should not only be able to advise you on your proposed investment strategies,
but also provide the necessary factual information to either support or oppose your
intentions. It is advisable to select your broker with care, as this person will play an
important role in your investment career.
STEP THREE
Transfer your funds into the brokerage’s trust account. Clearly state your reference
number as this is used to identify you as the investor.
STEP FOUR
Start shopping for shares with value and growth potential. The following resources
are at your disposal:
Your broker
Your Buddies
Publications
Heat Map on the Quick Chart programme
STEP FIVE
Determine the turning point of the selected share. Even an impeccable share has its ups
and downs, and one of the golden rules of investing must be applied: attempt to buy the
share at its lowest point. Although there are many indicators to assist with the selection
process, as beginners we are only going to utilize two of them, namely:
The MACD which is a trend indicator.
The OBOS indicator, a momentum indicator.
Should the MACD advise an up-trend and the OBOS indicator an oversold situation, then
once again consult your broker, and, if he is in agreement then you buy the share.
STEP SIX
Keep record of the name of the share, the price of entry, the number of shares bought and
the date.
STEP SEVEN
To track the progress of the share/s that you have bought, it is crucial to make use of the
daily download. Sell at turning points as advised by your indicators, MACD and OBOS. It
is also advisable to sell at the point considered enough is enough. Remember your main
objective at this stage is not so much to make exceptional profits, but to get acquainted
with the Stock Market. Get in and out of the market, at a profit of course, as often as
possible.
STEP EIGHT
When you have become comfortable with the process of trading on the Stock Market, and
you are beginning to enjoy this venture, then attempt to spend even more time in selecting
shares with growth potential. Also utilize more of the software’s functions, like filters,
advisors, indicators and accounting systems. If you comply with the basic rules as set out
in the training manual and you adhere to your trading strategies, you will very soon be
trading to your full potential as prescribed by your unique investor’s profile. Be a champion
in your own league.
4. EMOTIONS
Manage your emotions and remain in charge. A well-planned strategy with concrete
guidelines is your safeguard against small mistakes that may cause endless trouble.
You must know when to take profit. Accept your decision. What you have lost, another
person has won. You must live and let live. Do not be greedy
Fear is a far stronger emotion than greed. Fear is the reason why the rate of decline of
the stock market is generally much faster than the rate of advance
An over abundance of enthusiasm can lead to emotional decisions, which in turn could
cost you dearly
There is no such thing as an “easy market” and if you do not manage your stress it
could lead to fear, with dire consequences
Never buy shares on hot tips alone. It is your money, first substantiate advice that is
usually so freely offered
Justify each purchase by backing it with sound reasons
Do not marry your shares. If things go sour, it is difficult to get out of it unhurt
Stay within your risk parameters
Stick to your stop-loss policy, and apply it rigorously
If you have missed out on an opportunity, remain calm and wait patiently. There will be
many more
You don’t have to be fully invested at all times. While you are bargain hunting your
money is earning interest in the suspense account
Don’t let your emotions get the better of you by getting too excited when you make
money or too depressed when a wheel comes off
Never invest on the Stock Market with borrowed money
Always shop for quality (beware of the opportunity that sounds too good to be true, it
probably is!)
Invest in shares that are traded
Time your purchases carefully. You have all the resources at hand
Invest in reputable shares
Set concrete and realistic goals and stick to them.
CHAPTER THREE
PROCEDURES
Page
1
Registration
20
1.1
Through a broker by telephone
20
1.2
Managed accounts or trusts
21
2
The amount to be invested
22
3
Decide on the distribution
22
4
Determine the price range
22
5
Test the cost ratio
22
6
Cost implication
22
6.1
Financial institution
22
6.2
A stock broker
22
6.3
The on-line method
22
7
Selecting-methods for compiling a “watch list”
23
7.1
The filter tool
23
7.2
Unit trust funds
23
7.3
7.4
Year-end results and dividend payments
26
Hot tips
28
7.5
Seasonal trends
29
7.6
Directors dealings
30
7.7
Ex dividend
31
7.8
Selecting funds for the Long term Investor
31
An investment club
Having ‘fresh’ access to information can assist an investor in making timeous decisions,
be it to buy or to sell a certain share etc. It is virtually impossible for a single investor to
ingest the massive amount of economic and business related information available on a
daily basis, but, because all people have different views, perspectives and interests, the
benefits of partaking in an information-sharing network can be immense.
Someone is bound to have some information that you don’t have, and wouldn’t it be great
if you could have the latest updates on variables that affect a share’s price, such as for
example:
New contracts awarded
Expiring contracts
Special dividend declarations
Financial year-end results forecasts
Unbundling
Pending legal or civil actions, irregularities
Profit warnings
Mergers / Acquisitions
The sharing of information is not “Insider Information’ and thus ethically and legally
recognized and accepted.
7.4 SEASONAL TRENDS
There are numerous shares that are seasonal. The retail sector for one annually
shows a revival during the run-up to the Festive Season.
The Beverages sector bloom during summer and the holiday season.
South African Breweries
South African Breweries is a typical example of a share that responds to seasonal
changes year after year.
Time frame
Profit
Nov– March 1997
24,16%
Sept – Jan 1996
43.15%%
Sept – Dec 1995
48.80%
Sept – Jan 1994
54.19%
The graph of SAB below demonstrates how an investor can invest in the same share
year after year with great success.
7.5 DIRECTORS DEALINGS
Directors must declare all dealings in shares of the companies they represent. The
dealings of directors are an informative tool to determine the price behavior of a
company’s share.
Access the web page of a particular company. Call up SENS releases. The following
information is published:
Director’s Name
Date of transaction
Type of Share
Price at which Share is traded
Volume traded
Total value
7.7
EX-DIVIDEND
A share is ex-dividend once the last day to register has passed. When a company
declares a high dividend, buyers usually chase the price of the particular share up. After
the Last Day of Trade the share usually drops with the same percentage as the %
dividend declared.
In certain instances the sellers may overreact, causing the share price to drop more than
the % dividend, thus offering an excellent buying opportunity for the long-term investor.
But only if you are certain that there is growth potential and that the share will pick up
again.
7.8
SELECTING FUNDS FOR THE LONG TERM INVESTOR
Most funds have solid track records and it is a good idea to concentrate on funds that
have proven themselves.
Determine which sector is leading the market movement. Do bear market sentiment in
mind as well as forecast growth potential. There are various methods to determine which
funds performed well in the past, but always remember that past performance is no
indication of future performance but it certainly highlights a fund managers’ efficiency and
reputability.
When selecting funds to invest in, it is vital to determine which fund has the fastest growth
rate. Calculate and compare the % growth rate for the selected funds over a specified
period, for example a month.
Use the merge function to compare sectors. Select funds from the top-performing sectors.
Apply this method to specialist funds such as Gold, Banks and Industrials. “
CHAPTER FOUR
FUNDAMENTAL ANALYSIS
Page
1 Earnings per share (EPS)
33
2 The price earnings ratio (PE)
34
3 Earnings yield (EY)
35
4 Dividend yield (DY)
36
5 Net asset value (NAV)
36
6 Financial statements
36
A share is assessed on the ratio between the share price – which is
Determined by demand and supply – and returns, which is profit after tax.
1
EARNINGS PER SHARE (EPS)
The earnings of a company is its profit, and if we change the wording of earnings per
share to
Profit per share, the meaning would become a lot clearer. In its simplest form, earnings
Per share is the net profit of the company, divided by the number of ordinary shares in
issue.
Earnings per share is calculated on the income of a company for a predetermined period,
called
A financial year and it is based on the net income, in other words the after-tax income.
If the net profit in one financial year is R50 million, and there are 55 500 000 shares in
issue, then the earnings per share is:
R50 000 000 divided by R55 500 000 is equal to 90 cents
Although this calculation is an easy method to determine the real value of any share there
are many factors that can distort this figure:
DIVIDENDS PAYABLE TO PREFERENCE SHAREHOLDERS
Dividends payable to these shareholders should be excluded from the net profit of the
company being analyzed.
EXTRAORDINARY ITEMS
Items that are not part of the normal operations of a company are listed on the
Income statement of the company. If land is sold for a profit, it stands to reason that it will
not be repeated in future years and should thus be excluded from the net profit for the
purpose of calculating earnings per share.
OUTSIDE SHAREHOLDERS INTERESTS
A parent company is compelled to add the balance sheets of its subsidiaries to its own
balance Sheet, in order to arrive at consolidated balance sheets and income statements
for the group in its Entirety.
It stands to reason that the contributions rendered by these subsidiary companies, should
be excluded when calculating the earnings per share because these profits are not
attributable to the parent company’s ordinary shareholders.
The term subsidiary is defined as a company in which the parent company owns more
Than 50% of the ordinary shares. Minority or outside shareholding occurs when a
Parent company owns less than 100% in one or more of its subsidiary companies.
NEW ISSUES
When a company issues new shares during a financial year, the earnings per share for
that period can be affected. To overcome this problem, one must use the average number
of shares in issue during that period.
If a company begins the financial year with 3 million shares, and then issues 2 million
Shares after 9 months of the same year, the earnings per share is calculated by
Using the average number of shares, i.e. 3, 5 million shares, for the year:
3 million (x 9 months) + 5 million (x 3 months)
---------------------------------------------------------------12 months
=
3, 5 million
CHANGED FINANCIAL YEAR END
Companies occasionally amend their financial book years, and this causes an
Irregular time period for calculations. One of the reasons for this is when companies need
to adapt to the financial book years of parent companies in order to consolidate
Financial statements. When faced with an irregular time period, it is very difficult for
Investors to compare profits from one year to the other.
To overcome this problem and to make earnings per share comparable, the company’s
earnings figures have to be annualized in profit periods spanning more than 12 months.
Where a company has, for instance, earned 50 million over a 15-month period, we
calculate what the profit would have been on a monthly basis and then multiply this
figure by 12 to reflect an annual profit.
50 million
----------------------15 months
X 12
Earnings per share is also used in calculating other ratios for the purpose of in-depth
Analysis of the financial status of a company.
There are three earnings ratios that are constantly being determined by the current market
prices.
These are published on a daily basis together with share prices and are
necessary tools to assess a company.
2
THE PRICE EARNINGS RATIO (PE)
We can only calculate the PE ratio once we have established the earnings per share.
The PE ratio is calculated by expressing the earnings per share as a ratio of the
current share price.
Market price per share
Price Earnings ratio (PE) = --------------------------------Earnings per share
If the share price is 100 cents and the earnings per share was 20 cents
for the previous financial year, then the PE ratio is 100:20 or 5:1, often just referred to as
5. This would represent good value on the market since the company’s profits last year
were one-fifth of the share price. The PE ratio therefore tells you what kind of value you
are acquiring should you decide to buy a particular share.
In a rising market one often sees share prices soaring out of line with their ability to make
profits. Let us assume that investor sentiment is extremely bullish and investors are willing
to pay 250 cents for the same share. The PE ratio is now 250:20 or 12,5 :1 or just 12,5.
This is still acceptable. If the share price has to climb to 1000 cents, the PE ratio will be
1000:20 or 50:1 or just 50.
This is extremely high and indicates that the company’s ability to make profits is one onefiftieth of the share price. This would represent bad value. In early 1988, certain shares on
the Tokyo Stock Market were on PE ratios of 60. In any stock market this should send
alarm bells ringing.
Bullish sentiment is taken to such an extreme that investors are prepared to buy shares
that are already discounting earnings several years into the future, whereas the company
may not be able to deliver the profits.
The PE ratio is a measure of the value of a share.
3
EARNINGS YIELD (EY)
This is the reciprocal of the price earnings ratio. EY is the ratio of earnings to the current
share price, expressed as a percentage:
Earnings per share
Earnings Yield (EY) =
--------------------------------Market price per share
x 100
Taking the abovementioned example where the share price increased to 1000 cents, and
the previous years’ earnings were 20 cents, the PE ratio was 1000:20 but the earnings
yield is 20:1000 x 100 = 2%.
A share with an earning yield of 2% means that the earnings or net profit of the company
is only 2% of the share price. Where earnings yields are as low as 2%, it could mean one
of two things: 1) that the share is either highly sought after in anticipation of strong
improvement in earnings or 2) that warnings bells should be ringing.
Earnings yield results can be utilized to determine the true value of the share being
analyzed.
Determine the average EY of the relevant sector. Select only results of shares with the
same year-end dates, and discard those who don’t coincide.
In order to bring the share price in line with the average value of its sector, the following
formula applies:
EY of the same share
Current Share Price x
---------------------------------
Average EY of the sector
The answer reflects the true value of the share analyzed.
4
DIVIDEND YIELD (DY)
Dividends are paid to shareholders at the discretion of the company’s directors. Company
policy dictates how much retained capital is ploughed back into the business to guarantee
a sustained future growth. Many companies don’t declare dividends and this doesn’t
necessarily imply a bad financial year. These companies rather use the profits of the
company to enhance the business and finish off projects.
The DY is calculated by expressing the declared dividend as a percentage of the share
price.
Interim plus final div. per share
Dividend Yield =
--------------------------------------------- x 100
Market price per share
Companies usually only distribute a portion of their earnings. The rest is ploughed back
into the company for further expansion or development.
5
NET ASSET VALUE (NAV)
Net assets are total assets less total liabilities divided by the number of ordinary shares in
issue and are expressed in cents.
Total Assets – Total Liabilities
---------------------------------------------------Number of Ordinary Shares issued
6
FINANCIAL STATEMENTS
A simplified method of assessing a company’s growth potential is to investigate the
company’s financial statements for at least 3 consecutive years.
The following subdivisions of a company’s financial statements should be examined for
substantial, progressive growth, over at least a three-year period:
1.
2.
3.
4.
5.
6.
Turnover
Cash flow from Earnings
Attributable Earnings
DPS normal dividends
Return on average capital employed %
NAV
CHAPTER FIVE
TECHNICAL ANALYSIS
PART ONE: CHARTS
1
Page
Charts
38
1.1
Line charts
38
1.3
Bar charts
39
1.3.1
Closing price
40
1.3.2
Opening price
40
1.3.3
Range
40
1.3.4
Control
40
1.3.5
Commitment
42
1.4
Volume charts
43
1.4.1
Volume patterns
43
1.4.2
Trading signals
44
1.4.2.1 Sustainability in a trending market
44
1.4.2.2 Anticipated changes in trends
44
1.4.2.3 Breakouts
45
1.4.2.4 Trend climaxes
45
1.4.2.5 Low volume in down-trend
45
1.5
46
Candle sticks
1.
CHARTS
Charts are very useful tools to assist with the decision making process. In order to
demonstrate the movement of a share price by using a chart, one would record a share’s
daily closing price on the vertical axis, and time on the horizontal axis. The patterns which
emerge from plotting this information graphically will enable you to predict future
movements with more accuracy.
The movement of share prices can tell you a great deal, if you know how to interpret the
signals, and by plotting this information over a set time frame, certain trends will emerge. It
is important to remember that a trend mainly reflects two things, 1) market sentiment and
2) the demand for the share
When you use charts to assist you in the management of your investment you are able to
reduce the risk of missing opportunities and have the benefit of making vital buy and sell
decisions which are based on facts and not rumours.
1.1
LINE CHARTS
A Line chart consists of a single line that plots a share’s closing price on a daily basis.
The dates are displayed on the horizontal axis at the bottom of the chart, and the prices
are plotted on the vertical axis. The Line Chart is the most simple chart type and gives us
a clear overall picture of the state of a specific share. This type of chart is worth a
thousand words.
1.3
BAR CHARTS
The bar chart is a very popular method to present the movement of a stock. Every bar
interprets the price behavior of a share for a specific time period. In this instance, for a
single day.
A bar chart consists of a single vertical bar, which displays the highest and lowest prices
for a particular share during one day. The top of each vertical bar represents the highest
price that the security traded during the day, and the bottom of the bar indicates the lowest
price reached. This is called the range. A horizontal tick to the left of the bar denotes the
opening price, whereas a tick to the right side of the bar represents the closing price. The
four elements in one days’ trade which are of interest are clearly displayed by the bar
chart, namely:
the highest price traded and
the lowest price traded
opening prices
closing prices
Volume traded is also an important element and is usually displayed as a bar graph at the
bottom of the chart.
Highest price for the
day
Closing price
Opening price
Lowest price for the day
1.3.1 CLOSING PRICE
The closing price in relation to the range confirms which of the bulls or the bears were
dominant during the day’s trade. A tick near the top of the range gives the bulls credit,
whereas a tick lower down the range confirms the dominance of the bears.
1.3.2 OPENING PRICE
This is the price of the first trade of the day. A somewhat emotional response of the
smaller traders to the previous day’s close, whereas the closing price represents a more
reasoned view.
Closing price at top end is
Bullish
Closing price at bottom end is
Bearish
Opening
price
1.3.3 RANGE
The highest and the lowest prices traded during that period is called the range.
1.3.4 CONTROL
Although there will always be equal buyers and sellers for any transaction, it is important
to know that if there are more potential buyers than sellers at the current price, buying
pressure will force the price upwards. The opposite is also true. If there is a higher
offering, then prices will be forced downwards. Should the price be forced downwards,
then the sellers have control. Buyers exercise control when the prices are pushed
upwards.
Control can therefore be identified by the position of the closing price in relation to:
The previous days’ closing price
The range; and
The opening price.
Buyers
strongly
committed
Sellers strongly
committed
1.3.5 COMMITMENT
In order to assess the commitment of buyers and sellers, the following aspects may assist:
The position of closing price relative to the previous close.
The position of closing price relative to the range.
Expanding and contracting ranges.
Gaps between consecutive ranges; and
Volume traded.
Commitment is the eagerness of the buyers and/or the sellers – the rate of
withdrawal/entry in response to changing prices.
If buyers are strongly committed, they will not be discouraged by rising prices, and will
continue to bid-up the price with little profit taking. Likewise, if sellers are committed, they
will not be deterred by lower prices and will continue to sell the stock down.
Bullish
Bearish
1.4
VOLUME CHARTS
(Read in Conjunction with volume indicators)
1.4.1 VOLUME PATTERNS
Volume is the total amount of trading in a share for a given period. Although volume can
be plotted over any given time period, we will concentrate on volume in one day’s trade.
Volume is associated with price movement and must thus be analyzed accordingly. For
this purpose we will apply the closing price line chart.
High volume in an up-trend supports the bullish trend, and high volume on a down-trend
predicts a bearish onslaught.
Line chart closing price superimposed on volume bar chart
1.4.2 TRADING SIGNALS
Although price is the most vital data charted, volume is an important aspect in a share’s
technical analysis and can indicate the way in which a price move arose i.e. the market’s
sentiment, unusually large deals etc. There are two methods in which to ascertain volume:
1.4.2.1 SUSTAINABILITY IN A TRENDING MARKET
It is common knowledge that investors want confirmation that buyers or sellers are
committed, and thus supporting the prevailing trend.
General guidelines (short-term) in the assessment of volume are:
Rising prices together with rising volume signals a healthy up-trend.
Declining prices and rising volume confirm a down-trend.
Rising prices and falling volume signals trend weakness.
A mutual decline in price and volume signifies trend weakness.
A large range with low volume at peaks indicates a lack of interest from sellers
(if price is rising) or buyers (if price is falling).
General guidelines (long-term) in the assessment of volume are:
Higher peaks with higher volume at peaks, signals a healthy up-trend.
Lower troughs with higher volume at troughs, signals a healthy down-trend.
Higher peaks with lower volume at peaks, confirms that the up-trend is weakening.
1.4.2.2 ANTICIPATED CHANGES IN TRENDS
Accumulation:
This is when the market is controlled by buyers.
A down trend that slows down while volume remains high, signals that accumulation is
taking place. Buying enthusiasm is increasing and buyers are now outnumbering
sellers.
Accumulation also occurs when volume expands and closing prices rise.
Distribution:
This is when the market is controlled by sellers.
An up trend that stalls on expanding volume is a sign that distribution is taking place.
Buying enthusiasm is tailing off and sellers are now outnumbering the buyers.
1.4.2.3 BREAKOUTS
When price is trading in a range, volume may indicate in which direction a breakout is
likely to occur.
Higher volumes at peaks suggest an upward breakout.
Higher volumes at troughs, indicate that a downward breakout is more likely.
The higher the volume, the stronger the breakout, upwards or downwards. The lower the
volume, the weaker the breakout, up or down.
1.4.2.4 TREND CLIMAXES
After a prolonged trend, there is often a surge in price and volume, which may signal that
the trend is about to reverse.
1.4.2.5 LOW VOLUME IN DOWN-TRENDS
Low volumes in down-trends do not necessarily indicate the end of a down-trend. It can
simply indicate that both buyers and sellers have lost interest.
1. 5 CANDLE STICKS
Candle sticks reflect similar data than bar charts. Some technicians prefer to use candle
sticks over bar charts.
Candle sticks involves no calculation, it merely reflects the data for a single days’ trade,
such as:
the highest;
the lowest;
opening, and ;
Closing prices.
Normally, if the body of the centre section is shaded, it reflects a bearish onslaught and
conversely, an empty body reflect a bullish trend for that period.
Candle sticks are termed Japanese candle sticks, because the Asians have been using
this technique as far back as the 1700’s, to keep track of rice contracts.
The Doji is the most common and also the most important candlestick to recognize, and is
widely used by analysts. The Doji implies indecision and often indicates the beginning of a
minor or intermediate trend reversal.
The Following candles - whether positive or negative - mark turning points.
The Long Legged Doji:
The opening and closing prices are the same and with a close at the midpoint of a fairly
long range. Neither here nor there.
The Dragonfly Doji:
The opening and the closing prices are the same and it lies at the top end of a fairly long
range. Dragonflies are fairly unusual and when they do occur they often resolve bullishly.
The Gravestone Doji:
As the name indicates, this is probably the most ominous candle of all and a negative
sign. The opening and closing prices are at the same level and it lies at the bottom end of
a fairly long range
The Doji Star:
The opening and closing prices are the same and it lies in the middle of a short range. If a
bullish candle is followed by a Star, it indicates the end of the bullish spell, and in contrast,
when a bearish candle is followed by a Star, it indicates the end of the bearish trend.
CHAPTER FIVE
TECHNICAL ANALYSIS
PART THREE: PATTERNS AND FORMATIONS
Page
1
Formations and patterns
53
1.1
Continuation patterns
53
1.1.1
Triangle formations
53
1.1.2
Symmetrical triangles
53
1.1.3
Ascending triangles
55
1.1.4
Descending triangles
56
1.1.5
Flags
57
1.1.5.1 Descending flags
57
1.1.5.2 Ascending flags
58
1.2
Reversal patterns
59
1.2.1
The double top formation
59
1.2.2
The double bottom formation
60
1.2.3
The head and shoulders formation
61
1.2.4
The inverted head and shoulders formation
62
1.
PATTERNS AND FORMATIONS
Formations and Patterns fall under two main categories:
Continuation patterns: and Reversal patterns.
1.1
CONTINUATION PATTERNS
Technicians are continuously seeking for patterns such as Triangles pennants and Flags
because these formations indicate a consolidation in the prevailing trend.
1.1.1 TRIANGLE FORMATION
Triangles are generally regarded as continuation patterns, because the price is likely to
continue in the same direction it moved in before forming the triangle.
1.1.2 SYMMETRICAL TRIANGLES
A symmetrical triangle does not lean either up or down. The price fluctuations or the socalled trading range moves progressively narrower to form a triangle, and the
breakthrough occurs usually in the same direction as the prevailing trend.
The prevailing trend is bearish, as indicated by the perfect symmetrical triangle formed by
the price fluctuations. The prevailing downward trend is continued after breaking through
the support side of the triangle.
The prevailing trend is undoubtedly bullish. This share’s solid run is followed by what
seems like a minor hesitation, before breaking through the top line of the symmetrical
triangle, to continue the up-trend.
1.1.3 ASCENDING TRIANGLES
Its flat or horizontal top identifies an ascending triangle. The top line indicates the supply
of the share and the bottom line the demand. If the demand is on the increase, and the
supply remains constant then it stands to reason that the price should break through the
resistance line of the triangle sooner or later. Ascending triangles are therefore interpreted
to be a bullish guide.
1.1.4 DESCENDING TRIANGLES
A descending triangle formation is the opposite of the ascending triangle. It is identified by
a flat or horizontal bottom line. The so-called support line. The bottom line represents the
supply and the top line the demand. Descending Triangles indicate that the share price
will continue its bearish trend and that eventually the price line will break through the
support line to continue its downward trend.
1.1.5 FLAGS
A flag is preceded by a sharp fall or rise in the price of the share. This represents the
flagpole. The price line will consolidate by oscillating between a narrow band, forming the
flag. If it finally breaks through, it will follow the prescribed trend of the preceding pole. It is
therefore also regarded as a continuation pattern.
1.1.5.1 DESCENDING FLAGS
Prevailing trend is bearish, and after forming a perfect flag formation, the trend continues
downwards.
1.1.5.2 ASCENDING FLAGS
The prevailing trend is Bullish. The flag formation is preceded by a sharp rise in the price
of TRANSHEX, in support of the continuation pattern as described above.
1.2
REVERSAL PATTERNS
The reversal pattern marks the dividing line between the rising and falling trends.
1.2.1 THE DOUBLE TOP FORMATION
A double top is formed when the price line tests the resistance line twice in succession
and then drops back to signify a reversal in the trend. A build up of volume usually
accompanies it. This indicates a strong sell signal.
1.2.2 THE DOUBLE BOTTOM FORMATION
The double bottom reacts similar but is the reversal of the double top. The price line
bounces against the support line twice to then start rising, indicating a strong buy signal.
Multiple tops and bottoms are regarded as much stronger signals than the double tops
and double bottoms.
1.2.3 HEAD AND SHOULDERS FORMATION
The head and shoulders pattern announces the end of a bullish trend. This pattern
consists of three well-defined peaks. The middle peak is more pronounced than the two
outside shoulders. It is possible to construct a trend line by connecting the low of the left
shoulder with the lows of the head. This is known as the neckline. The Head and
Shoulders pattern signifies the end of a bull phase and thus the beginning of a bear
phase.
1.2.4 INVERTED HEAD AND SHOULDERS FORMATION
The Inverted Head and shoulders points to a bullish reversal and heralds the end of a
bear phase.
.
\
CHAPTER FIVE
TECHNICAL ANALYSIS
PART FOUR: INDICATORS
Page
1.
Indicators
1.1
64
Trend indicators
64
1.1.1
Moving averages
64
1.1.2
Macd indicators
69
1.1.2.1
Macd bullish signals
71
1.1.2.2
Macd bearish signals
75
1.2
Momentum indicators
79
1.2.1
The relative strength index
79
1.2.1.1
The formula
80
1.2.1.2
Interpretation
81
1.2.2
Overbought-Oversold
86
1.2.2.1
The formula
86
1.2.2.2
Application
86
1.3
Volume indicators
90
1.3.1
The volume oscillator
91
1.4
Volatility indicators
96
1.4.1
Bollinger bands
96
1.4.1.1
Application
96
1.4.1.2
Applying the RSI indicator
96
1.4.1.3 Interpretation
1
INDICATORS
100
Indicators are signals used by financial analysts to forecast the direction of the financial
markets. These are used to determine turning points of securities and denote buy and sell
signals. There are various types of indicators but for the purpose of this course we will be
concentrating on four types only.
1.1
TREND INDICATORS
These indicators identify patterns on charts.
1.1.1 MOVING AVERAGE
The purpose of a moving average is to present data in a smooth style to indicate a trend.
Moving Averages is a highly useful tool when determining a specific security’s trends. It is
easy to use and therefore very popular with analysts.
There are various types of Moving Averages:
Simple Moving Average – equal weighted
Exponential Moving Average – more weight is placed on recent prices.
Triangular Moving Averages – weighted more to the middle of the time period
Variable Moving Average – changed to the volatility
Weighted Moving Average – also weighted to recent prices
Each of these Moving Averages has a specific function, but we will only deal with the most
popular and widely-used, the Simple Moving Average
A Moving Average can be calculated on any data series of a security:
Opening price;
Closing price;
Highest price;
Lowest price;
Volume; and on
Another indicator
For the purpose of this discussion we are only going to deal with the Moving Averages
which are calculated on the closing prices of a share.
A buy signal is generated when the security’s price rises above its moving average. A sell
signal, on the other hand, is generated when the security’s price falls below its moving
average. Moving Averages are however, not so much designed for buying and selling
signals, but more so to identify changes in a security’s trend.
The critical element on which to base a Moving Average is in determining the right number
of time periods for making this calculation. The time period of a Moving Average should fit
the market cycle you’re following. The ideal Moving Average length is calculated by
dividing the cycle length by two and to add one.
The following table may be helpful in selecting moving averages that would suit most
securities.
TERM
Short term Fast
Medium term Med.
Long term Slow
MOVING AVERAGE
20 days
60 days
100 days
The trial and error method works well for me and I have found that practice makes perfect.
After a while one will acquire a gut-feeling which can assist immensely.
The crossover Moving Average is quite popular in determining trend behaviors, and is
even used when identifying buying and selling signals.
A Moving Average with few days is termed a fast M.A., whereas a Moving Average based
on many days is termed a slow M.A.
A fast Moving Average and a slow Moving Average are plotted on a price line of a
security. A sell signal would be given when the fast Moving Average crosses below the
slow Moving Average, and a buy signal is given when the slow Moving Average advances
above the fast Moving Average.
As with all trend-following indicators, the signals work well when the security develops a
strong trend. They are however ineffective when prices are not trending.
1.1.2 MACD INDICATOR
Moving Average Convergence Divergence is one of the simplest and most reliable
indicators available. MACD is a centered oscillator and the guidelines for using centered
oscillators apply.
THE FORMULA
MACD is constructed by the use of moving averages and as we know, moving averages
are lagging indicators and they have trend following characteristics. The MACD is
calculated by subtracting a security’s 12-day exponential moving average from the same
security’s 26-day exponential moving average, turning these lagging indicators into a
momentum oscillator. The resulting plot forms a line that oscillates above and below zero,
without any upper or lower limits. Furthermore a 9-day exponential moving average of the
MACD is plotted alongside to act as a trigger line.
HOW DOES THE MACD WORK
MACD measures the difference between two moving averages.
A positive MACD indicates that the 12-day exponential moving average (the green line) is
trading above the 26-day exponential moving average (the red line), and if the gap
between the green and red lines widens it indicates that the rate-of-change of the faster
moving average (the green line) is higher than the rate-of-change for the slower moving
average (the red line). Positive momentum is increasing and this would be considered
bullish. This is clearly evident in our example below (the bottom halve of picture) where
the green line crosses the red line upwards and where the MACD at the same point in
time crosses the zero line also upwards (top halve of picture).
A negative MACD on the other hand indicates that the 12-day exponential moving
average (the green line) is trading below the 26-day exponential moving average (the red
line), and if the gap between the green and red lines widens it indicates that the rate-ofchange of the faster moving average (the green line) is lower than the rate-of-change for
the slower moving average (the red line). Negative momentum is increasing and this
would be considered bearish. This is also clearly evident in our example below (the
bottom halve of picture) where the green line crosses the red line downwards and where
the MACD at the same point in time crosses the zero line also downwards (top halve of
picture).
Please note: This is not an indicator but a schematic illustration of the formulae of MACD.
1.1.2.1 MACD BULLISH SIGNALS
MACD generates bullish signals from three main sources:
POSITIVE DIVERGENCE
Positive divergences are probably the least common of the three signals, but are usually
the most reliable and lead to the biggest moves. A positive divergence occurs when
MACD begins to advance forming lows followed by higher lows and the security is still in a
downtrend with lows followed by lower lows on its way downwards. The MACD therefore
predicts a bullish reversal well in advance
BULLISH MOVING AVERAGE CROSSOVER
A bullish moving average crossover occurs when MACD moves above its 9-day trigger
line. Bullish moving average crossovers are probably the most common signals and as
such are the least reliable. If not used in conjunction with other technical analysis tools,
these crossovers can lead to whipsaws and many false signals. Moving average
crossovers are sometimes used to confirm a positive divergence. The second low or
higher low of a positive divergence can be considered valid when it is followed by a bullish
moving average crossover. .
BULLISH CENTRELINE CROSSOVER
A bullish centerline crossover occurs when MACD moves above the zero line and into
overbought territory. This is a clear indication that momentum has changed from negative
to positive or from bearish to bullish. It can also be expressed as to have moved from
oversold territory to overbought territory.
After a positive divergence signal (page 71), followed by a bullish moving average
crossover signal (page 72), the centerline crossover can act as a confirmation signal. Of
the three signals, MACD zero line crossovers are probably the second most common
signal in MACD.
USING A COMBINATION OF SIGNALS
Even though some traders may use only one of the above signals to form a buy or sell
signal, using a combination can generate more robust and reliable signals.
In the following example, all three bullish signals are present:
During May the security formed a lower low but the MACD formed a higher low, thus
creating a potential positive divergence.
MACD then formed a bullish crossover by moving above its 9-day exponential moving
average.
Following on, MACD traded above the zero line to form a bullish centerline crossover.
1.1.2.2 MACD BEARISH SIGNALS
MACD also generates bearish signals from three main sources. These signals are mirror
reflections of the bullish signals.
NEGATIVE DIVERGENCE
A negative divergence forms when the security advances or moves sideways and the
MACD declines. The negative divergence in MACD can take the form of either a lower low
or a straight decline. Negative divergences are probably the least common of the three
signals, but are usually the most reliable and can warn of an impending peak in the
securities price. In our example below, MACD predicted a reversal in the securities price
well in advance
There are two possible means of confirming a negative convergence.
Firstly, the 9 day trigger line crossover and secondly the zero line crossover.
BEARISH MOVING AVERAGE CROSSOVER.
The most common signal for MACD is the moving average crossover. A bearish moving
average crossover occurs when MACD declines below its 9-day exponential moving
average. These signals occur more frequently than any of he other MACD pointers. They
are also less reliable and should therefore, be confirmed with other signals to avoid
whipsaws and false readings.
BEARISH CENTERLINE CROSSOVER
A bearish centerline crossover occurs when MACD moves below zero and into negative
territory. This is a clear indication that momentum has changed from positive to negative
or from bullish to bearish. The centerline crossover can act as an independent signal, or to
confirm a prior signal such as a moving average crossover or a negative divergence.
Once MACD crosses into negative territory, momentum, at least for the short term, has
turned bearish.
The significance of the centerline crossover will depend on the previous movements of
MACD as well. If MACD is in positive area for many weeks, begins to trend down forming
lower highs and then crosses into negative territory, by crossing the zero line it would be
a strong conformation signal that the trend has turned bearish.
COMBINING SIGNALS
MACD bearish signals can also be combined to create more robust signals. The MACD
firstly indicated weakness by forming lower highs which was followed by a moving
average crossover and then finally confirmed by the zero line crossover. .Warning of a
pending reversal was given well in advance.
1.2
MOMENTUM INDICATORS
The momentum indicator shows the rate of acceleration or deceleration in a share price
over a pre-selected period.
1.2.1 THE RELATIVE STRENGTH INDEX.
The Relative Strength Index is a Momentum Indicator and it:
measures an equity’s price relative to itself
is a price-following oscillator ranging between 0 and 100
measures an equity’s price relative to its past performance
is front weighed and gives a better velocity reading than other indicators
is less affected by volatile movements in an equity’s price performance
filters out some of the “noise” in a security’s price performance
measures the internal strength of a single security
The absolute levels of the Relative Strength Index range between 0 and 100 and in most
stocks buy signals are triggered at 30 and sell signals at 70. Some stocks deviate from the
general rule and it is therefore necessary to determine the signals that best suit the
individual stock.
The same applies to the 50 centre oscillating line that fits most shares. Some shares also
deviate from the general rule and the centre oscillating line should be determined
individually.
Buy signals for this specific share triggers at 40, the centre oscillating line falls on 60, and
the sell signal triggers at 80.
1.2.1.1 THE FORMULA
A 14-day period is used in the formula to calculate the ratio between the averages of
upward and the averages of downward price movements.
The 14-day RSI is calculated as follows:
-
To determine the average, divide the sum of the closing values for 14 up days by 14.
Apply the same formula to the values of 14 down-days.
In order to determine the RSI factor, divide the up day average by the down day
average.
Add 1 to the RSI factor
Divide the above result by 100
Subtract the above from 100
The 14-day RSI is the most widely used time period. Should it be changed to a 9-day time
period, it will add volatility to the indicator and therefore increase front weighing. It
therefore increases foresight to the RSI.
1.2.1.2
INTERPRETATION
SUPPORT AND RESISTANCE
The RSI shows, sometimes more clearly than the price, levels of support
and resistance
CHART FORMATIONS
Look out for chart patterns that might be more visible in the RSI than in
the price line.
The 14-day RSI forms multiple tops, indicating a major drop in the price of
the security. These tops were not evident in the price-line of the security.
TOPS AND BOTTOMS
Tops and bottoms on the RSI may precede the tops and bottoms of the
Price line
DIVERGENCES
Divergences occur when the price of a security reaches a new high or a new low that is
not confirmed by the RSI. Prices usually correct to follow the direction of the RSI.
FAILURE SWINGS
This is where the RSI surpasses a previous peak or falls below a recent
low, as in the example above. The failure swing was completed, and a healthy downswing in the price of the security followed. The RSI therefore, predicted well in advance a
reversal in the price of the security.
CENTRELINE CROSSOVER
Most stocks respond to a 50 centerline. Readings above and below can
give the indicator a bullish or bearish tilt. A reading above 50 indicate that
Average gains are higher than average losses, and a reading below 50
indicates that losses are winning the battle. Some traders look for a
move above 50 to confirm bullish signals or a move below 50 to confirm
bearish signals.
1.2.2 OVERBOUGHT-OVERSOLD (OB-OS)
The OB-OS indicator is a momentum indicator and is therefore meant to predict the rate of
change in a specific share’s price. Although it has a limited application in determining
when the share price will change direction, it undeniably indicates if a share price is
overbought or oversold.
1.2.2.1 THE FORMULA
The OB-OS indicator is designed as a tool to determine whether the price of a share has
moved too rapidly, too far in either direction, and is therefore due for a correction. It is
based on a 10-day exponential moving average, calculated on the difference between the
advancing and the declining issues of a share for a predetermined period:
10-day period exponential moving average of (Advancing issues - Declining issues)
That means, for each day the number of shares for a specific stock being traded below the
opening price is subtracted from the number of shares traded during the same day at
levels higher than the opening price. The figure obtained is then used in plotting the 10
day exponential moving average.
1.2.2.2 APPLICATION
This exponential moving average oscillates around a zero timeline. Readings above
the plus 200 line are regarded as bearish, indicating an overbought situation and suggest
a decline in the price of the share. On the contrary, readings below the minus 200 line
indicate an oversold situation, which is bullish, and therefore suggest a buying opportunity.
The Overbought-Oversold indicator is more effective if applied to a trading range. This
is where a share’s price moves sideways.
Extreme Overbought-Oversold readings may not always be followed by the expected
correction, but could also be an indication of a change in investor’s expectations. Markets
that appear to be extremely overbought or oversold may therefore stay that way for some
time. It is suggested that one should wait for the share price to confirm the
recommendations of the indicator, before buying or selling.
The Overbought-Oversold indicator is of limited use for traders in general, although
experienced day traders regard the Overbought-Oversold indicator as a useful tool.
In the graph below, OB-OS indicated an overbought situation for quite some time, yet the
share price didn’t turn back for a considerable time.
The price of this security was dominantly bearish for quite some time in
spite of the strong oversold indications of the indicator.
The OB-OS indicator can successfully be utilized in a trending range, as is clearly
illustrated by the example below. The price line has responded to the suggestions made
by the OB-OS indicator.
1.3
VOLUME INDICATORS
Volume indicators confirm the strength of the trend.
Volume is the number of shares traded during a specified timeframe. It can be
depicted in hours, days, weeks or months. We usually make use of the day timeframe.
Volume offers a complete picture of the market and / or a security being analyzed.
Volume determines the health of a trend.
Volume is the indication of supply and demand and it supports the prevailing price
trend.
The analysis of volume is a basic and very important element of technical analysis. It
provides information as to the intensity of a certain price move.
There are many ways to interpret changes in volume trends. One common belief is that
rising prices coupled with increased volume, and falling prices, coupled with decreased
volume, is bullish. Conversely, if volume increases when prices fall, and volume
decreases when prices rise the market is showing signs of underlying weakness.
Low volume occurs during indecisive periods of market bottoms and during periods when
prices move sideways in a trading range.
A healthy down-ward trend should have higher volume on the down-ward trend and lower
volume on the up-ward trend. A sign of weakness.
A healthy up-trend should have increased volume on the upward movement and
decreased volume on the downward trend.
Increased volume levels occur when strong consensus prevails that prices will rise, also at
the beginning of new trends and just before market bottoms.
Volume will also increase due to panic-driven selling.
Almost every significant formation like tops, bottoms or break-outs is accompanied by a
sharp increase in volume.
1.4 VOLATILITY INDICATORS
These indicators confirm the price behavior of the share.
1.4.1 BOLLINGER BANDS
Bollinger Bands are plotted at standard deviation levels above and below a moving
average, and it measures volatility.
1.4.1.2 APPLYING THE RSI INDICATOR
Should the price line touch one of the bands, it is unknown whether the price line will
move back or proceed. That is why Bollinger Bands are also used in conjunction with
other indicators, such as Relative Strength Index (RSI).
Apply RSI as follows:
When the price line touches the upper Bollinger Band, and RSI is below 70, we have an
indication that the trend should continue upward.
When price touches the upper Bollinger Band, and RSI is above 70, we have an indication
that the trend may reverse itself and move downwards
When the price line touches the lower Bollinger Band, and the RSI is above 30, we have
an indication that the trend will continue downwards.
When price touches the lower Bollinger Band, and RSI is below 30, we have an indication
that the trend may reverse itself and move upward.
1.4.1.3 INTERPRETATION
The price line is mainly used to plot Bollinger Bands, but an indicator can also be
applied.
Bollinger Bands consists of two bands designed to encompass the majority of a
security's price action. When the bands have tightened it confirms low volatility. The
opposite is also true. When the Bands widen, volatility is higher.
A correction can be expected when the bands have tightened and volatility is low. This
characteristic is aptly termed as a ‘squeeze’.
When prices move against the bands and outside of the bands, the current trend is likely
to continue.
A move that originates at one band, tends to go all the way to the other band. This
observation is useful when projecting price targets.
The longer the price line remains within tight bands, the greater the
correction.
chances of a
When the price line and the lower band subsequently move in opposite
directions, a bullish set-up with sharp price moves can be expected.
CHAPTER SIX
MARKET SENTIMENTS
Page
1
The perfect formula
107
2
Factors determining the course of the markets
107
2.1
Interest rates
107
2.2
The price of precious metals
107
2.3
Other commodities
107
2.4
The inflation rate
107
2.5
Balance of payment
107
2.6
Labor problems
107
2.7
Political uncertainty
107
2.8
The exchange rate
108
2.9
The oil price
108
2.10
The American stock markets
108
2.11
War and rumors of war
108
3
Resources
108
3.1
Publications
108
3.2
The radio
108
3.3
The television
108
3.4
The internet
109
1
THE PERFECT FORMULA
As intelligent investors, our goal should be to:
Buy at the bottom
Sell at the top
Be on the alert for shares that violate the general direction of the market
Determine whether the JSE is in a Bull or Bear phase
Determine in which Index the action is taking place
2
FACTORS DETERMINING THE COURSE OF THE MARKETS
Determine the direction and strength of the long-term cycle with reference to:
2.1
INTEREST RATES
Low interest rates stimulate inflation, and, during these times investors usually seek
investment vehicles with more attractive returns than what Banks and Money Markets
offer. The Stock Market has a history of delivering attractive dividends. On the contrary,
during spells of high interest rates, investors, instead of taking on any additional risk,
usually opt for a safe-haven in fixed deposits, bonds, money markets etc. Interest rates
also have a direct influence on the stance of the Rand.
2.2
THE PRICE OF PRECIOUS METALS
The South African economy is commodity driven. The prices of Gold, Platinum, Palladium
and Silver have a significant influence on the Johannesburg Stock Market.
2.3 OTHER COMMODITIES
The recent global economical revival has benefited the South African economy. During
such favorable times the JSE benefits greatly from exports to industrial countries such as
Japan and China.
2.4
THE INFLATION RATE
A high inflation rate is bad news for an investor’s capital, and
investors that are in tune with their money matters generally seek
alternative strategies to counter the effect of inflation. The JSE is the
only alternative and if approached wisely, can offer lucrative rewards
during such times.
2.5
BALANCE OF PAYMENTS
A surplus in a country’s balance of payment means that more funds are entering the
economy - a positive effect on investment.
2.6
LABOUR PROBLEMS
Labor unrest undoubtedly has a detrimental effect on the results of companies involved.
Much-needed foreign investments are undoubtedly at risk in a climate with unstable
human resources.
2.7
POLITICAL UNCERTAINTY
Foreign investors seek a stable political environment and avoid politically challenged
countries.
2.8
THE EXCHANGE RATE
South Africa is a major exporter of resources. Companies in this sector benefit greatly
from a weak Rand, whereas companies such as retailers, who are greatly dependent on
imports, benefit from a stronger rand.
2.9
THE OIL PRICE
Escalating oil prices usually have a negative effect on stock markets and share prices
because they flow through most sectors of the economy, raising the cost of transportation,
electricity and materials and squeezing companies' profit margins. Consumers tend to
curb their spending on other items to make provision for higher fuel prices and utility bills.
2.10 THE AMERICAN STOCK MARKETS
One of the many clichés in the investment world is that “When America sneezes, the rest
of world catches a cold.” This is hardly comforting, but it underlines the close links
between all the major world economies - if one region goes into freefall, the effects are felt
around the globe.
2.11 WAR AND RUMORS OF WAR
The prevailing question that investors ask during such times is - what effect will a war
have on my portfolio? There is always uncertainty about the outcome of war, and
uncertainty is more than often accompanied by increased volatility. Investors usually seek
some form of safe haven during volatile times.
3.
RESOURCES
3.1
PUBLICATIONS
Consult the following publications regularly:
South African Reserve Bank Bulletin
Finance Week
Financial Mail
Business Day
Personal Finance
Beeld
Rapport
3.2
THE RADIO
Tune into Radio RSG and Radio 2000 for regular:
Talk shows
Market overviews
Economic reviews
3.3
THE TELEVISION
DSTV broadcasts a range of useful and informative economic programs.
Watch the South African market daily between 19:00 and 23:00 on Summit, Channel
55.
C.N.B.C is an excellent choice for world markets on Channel 54
Bloomberg (Channel 56) broadcasts daily discussions on the European and English
markets.
The Top 40 shares on the JSE can also be watched on Channel 56.
3.4
THE INTERNET
If you have access to the Internet, we recommend the following sites:
www.kitco.com
kitco.com offers comprehensive information on all precious metals such as Gold, Silver,
Platinum, Palladium and Rhodium. Charts and data displays life prices on metals by chart
style. Prices for three consecutive days are displayed on one chart, offering a birds-eye
view on trends.
www.sawarrants.co.za
This website tells us all about warrants. It also offers detailed information on gold shares.
Click ‘Gold’
Go to ‘Hot features’
Open ‘Gold action’ for detailed comments on gold shares by Dr Clive Roffey
www.efgroup.co.za
For an all-encompassing range of financial services, including the active management of
Linked Unit Trust Fund Investments. Not only does this website offer useful links to a host
of South African and International financial websites, it also offers vital information on a
large spectrum of financial products and services.
www.moneymax.co.za
Information at your fingertips! Shares and investments, warrants, currencies, markets,
online trading and much more.
Other sites worth browsing:
www.sharenet.co.za
www.financialsense.com ;
www.Bloomberg.com ;
www.Stockcharts.com ;
www.safehaven.com ;
www.Money.cnn.com ;
CHAPTER SEVEN
GENERAL
Page
1
Income tax
111
2
Capital gains tax
111
CHAPTER SEVEN
GENERAL
1
INCOME TAX
It is recognized that the receiver of Revenue has wide discretionary powers regarding
the classification of certain persons as share dealers, and in the event of disclosure to or
the classification by the SARS, the full net profit will be taxed at the individuals’ marginal
tax rate.
The Trader is regarded as an individual who deals regularly for profit. Costs incurred
whilst dealing on the stock exchange during the tax year can be deducted as an expense
against the profits made. It is also possible to carry losses over to the following years.
Profits made from funds invested over a five year period, are subject to CGT. The first
R10 000 profit made is exempt from CGT.
2
CAPITAL GAINS TAX
A simple example.
Mr. X purchases shares to the value of R20 000. Five years later he sells these shares
for R60 000.
Purchase Cost
Profit
R20 000
R40 000
Capital Gains
Primary exclusion
Amount subject to CGT
R30 000
R10 000
R 7 500
In the case of individuals, twenty five percent (25%) of the gain, i.e. 25% of R30 000 =
R7 500, will be added to the persons’ annual taxable income and taxed at his/her marginal
tax rate.
Let’s assume the marginal rate is 42%. This translates into R 3 150 payable towards
CGT.
This profit is regarded as an increase in capital and no running costs may be deducted
from this.
GLOSSARY
A.
ABNORMAL EXPENSES: Expenses that are not part of the normal running of the business. For example,
a stationary shop might incur legal costs as a result of a dispute concerning the lease agreement of its
premises.
ACCOUNTANCY: A discipline of highly developed conventions for recording and gathering of the
transactional data of a person or organization.
ACCOUNTING CONVENTIONS: A body of rules designed to accumulate and offset transactions data to
give a true and fair picture of an organization’s performance during a specific period, and its position at the
end of at period. These conventions are set out in an extensive document, known as Generally Accepted
Accounting Practice.
ACCOUNTING PERIOD: The period over that the affairs of a company are being accounted for. The
matching principle ensures that the incomes for the accounting period are offset against the expenses of
that period to arrive at the profit. The balance sheet shows the asset and liability position at the end of the
accounting period. Companies are required to have an annual accounting period, but this may vary if they
have elected to change their financial year-end.
ACCUMULATION AREA: A period on a chart where the share is moving sideways at the bottom of a
downward move. It is said that the “smart” money is accumulating the share. See also "distribution area".
ACID TEST RATIO: A ratio used to determine the liquidity of a company's current assets in elation to its
current liabilities. The ratio is calculated by taking the current assets less stock divided by current liabilities.
This is more conservative than the normal current conservative than the normal current ration, because
stock may be difficult to sell in a liquidity crisis.
ACQUISITION: Where one company "Acquires" more than 50% of the shares of another. The acquiring
company then becomes the "holding company" and the acquired company becomes a "subsidiary".
ACTS OF GOD: An event that was not and could not have been predicted by most investors. Therefore at
the time that it occurs it has not been "discounted" into the share's price at all
B.
BAD DEBTS: A debt that cannot be recovered - thus forcing the company to write it off against profits. Most
companies make a provision for bad debts, which is adjusted annually. When the economy is in recession,
such provisions will tend to be higher, especially amongst banks. A provision for bad debts is a current
liability.
BALANCE OF PAYMENTS: The combined net position on the capital and current accounts of the country.
The current account indicates whether South Africa is spending more foreign currency on imports than it is
receiving for its exports, while the capital account shows how many foreigners are investing in South Africa.
BALANCE-SHEET: A list of all balances taken from a company's ledger after incomes and expenses have
been off-set to arrive at a profit or loss. These balances are combined in carefully prescribed ways. The
objective of the balance sheet is to give a picture of the company at a moment in time that shows where the
company obtained its money from (liabilities) and how it has allocated that money (assets) so as to generate
profits. Obviously, the sources of money must be totally accounted for in assets of one sort or another and
therefore the two "sides" of the balance sheet must always balance.
BAR CHART: A chart that shows the daily or weekly movement of a share's price by connecting the high
and low for each day with a vertical line known as a bar. This bar is then marked with a "tick" to indicate
where the share closed within that range. Chartists often add a small volume graph immediately below to
show the number of shares traded on each day. This type of chart is widely used as the starting point for a
more in-depth technical analysis.
BASIC CHARGE: A charge of R30 per transaction of purchase and sale of shares
BASIS POINT: A basis point is equal to one hundredth of one per cent. A move from 17,25% to 17,26% in
the quoted YTM for Eskom 168 for example, is a one basis point move. A change in the quotation from
17,250% to 17,255% is half a basis point move.
BEAR: An investor who believes that the market or a particular share is going to decline from its current
position.
BEAR MARKET: Describes a situation where the majority of shares are dropping and the market generally
is declining.
BEAR RAID: Where investors who have sold short (made bear sales) attempt to force the price of a share
down by making further bear sales so that they can cover their positions profitably at lower prices.
BEAR SALE: A sale of shares before they are purchased. In reality, a bear sale (or short sale) is the sale of
an UNDERTAKING to supply a certain number of shares at a specified future date. The Eskimos who use to
sell polar bear skins to European traders originated bear selling. Like all markets, the demand for polar bear
skins varied depending, in this case, on whether they were fashionable or not. The Eskimos, realizing this,
took the opportunity when demand for skins was strong to sell not only their current stock of skins, but also
their next hunting trip's skins. In this way they actually sold the skins of polar bears that they had not yet
killed to take advantage of the higher prices. If the demand (and therefore the price) had dropped by the
time of their next visit to the trading post they would have made a wise decision. The term was adopted by
share markets to describe a situation where someone who felt strongly that the price of a share was about to
fall could in fact take advantage of his foresight by selling the shares at current prices for delivery in a few
months time when he could buy them much more cheaply. Bear sales on the J.S.E. must be done at a price
that is higher than that of the last transaction in that share. Only about 1% of deals on the J.S.E. must be
done at a price that is higher than that of the last transaction in that share. Only about 1% of deals on the
J.S.E. are bear because of the high risks involved - if the shares go up instead of down then there is no
theoretical limit to the extent of your loss.
BEAR SQUEEZE: This occurs when a share has been heavily short sold on a strong expectation that it will
fall, but instead of falling, it rises. Investors, who have bear sold, hasten to buy the share to cover their bear
sales. If the share is in short supply then the price rises quickly to absorb levels in what is called a bear
squeeze.
BEAR TREND: A long downward trend in a share's price, a sector's index, the all-market index or other
indicator.
BETA: The second letter of the Greek alphabet, used by Wall Street to describe the volatility of a stock
relative to a stock market index.
BID PRICE: The price offered by a buyer for a share
BLOCK: A large amount of stock sold as a single unit. The term is most often used to describe a unit of
1000 shares or more.
BLOCKED RAND: Shortly after the Sharpsville riots in 1960, a great number of people wanted to take their
money out of South Africa, and the gold an foreign exchange reserves were insufficient to allow this to
occur. As a result, the authorities blocked further outflows, by introducing what was known as the "blocked"
rand. Blocked rands arose when non-residents or emigrants sold assets - shares, furniture, property, etc. in
South Africa. The proceeds from these sales were deposited in special accounts known as blocked rand
accounts, and could only be used to buy listed securities, and certain other limited applications such as to
provide holiday allowances. Blocked rand holdings could not be directly transferred, even between nonresidents.
BLUE CHIP: A very safe share that has a history of sound management and steady dividends. Examples of
such shares are SASOL, S.A. Breweries, First National Bank, Pick 'n Pay and Gencor. Investors buy these
shares for security rather than quick capital gains.
BOARD: Usually the board of directors of a company - people appointed by the shareholders to direct the
operations of the company and having a fiduciary duty to act in the best interests of the company as a
whole.
BOND: An American term for a negotiable security with a fixed percentage return, usually redeemable at a
specified date. Bonds are often sold by government and quasi-government bodies to raise long-term
finance. Bonds are bought and sold in the bond market with prices varying according to the interest rate. If
the market interest rate rises, bonds trading at the old interest rate will appear unattractive, and will have to
fall in price, because the amount of interest paid per annum is normally fixed, while if interest rates fall, the
same bond will command a higher price. Also known as gilts and semi-gilts.
BOOK LOSS: This occurs when the value of an asset declines faster than it is depreciated in the books of a
company. For example, if a company purchases a computer for R10 000 and depreciates it at 20% per
annum, but within 6 months a more powerful computer of the same make comes onto the market for R6000,
then the company would have sustained a book loss that they may or may not show by revaluing their
computer downwards.
BOOM: This describes a stage in the business cycle when economic activity is increasing.
BORROWING: This is a term used by share market analysts to refer to a company's long-term
indebtedness. It specifically excludes current liabilities that have not been specifically borrowed, but that
arise as the result of normal business practice.
BOTTOM: The lowest point in a share's price cycle.
BOURSE: A European term for an index, but also used to refer to a stock market for the example, the Paris
bourse.
C.
CALL OPTION: A contract giving a right to buy shares from the dealer writing the contract at the price ruling
at the time with in a specified future period, usually 3 months.
CAPITAL: Money that is used to supply “working” capital or for the purchase of capital goods, that are to be
used to generate the income of the company. Capital can also include reserves of undistributed profit kept in
the company. Capital can also include reserves of undistributed profit kept in the company. Share capital
refers to the money raised by the company as a result of the sale of shares. Working capital is used to buy
stock and finance debtors.
CAPITAL GAIN / APPRECIATION: A capital gain is made when an investment is sold for more than its
purchase price, resulting in a capital gain - as opposed to a dividend that is an income gain, being the
natural return for holding the investment. Capital appreciation occurs when shares or other investments are
at a higher market price than they were bought for - until the shares are sold, no capital gain has been
realized.
CAPITAL FLOWS: A term used to describe movements on the capital account of the balance of payments.
These flows are long-term or short-term. Long-term flows amount to long-term loans or direct fixed
investments, either in South Africa leading to a capital inflow, or by South Africans outside the country; in
that case there is a capital outflow. If foreigners disinvest from South Africa, this amounts to an outflow.
Short-term flows consist largely of bank borrowing by companies and, indeed by banks to finance foreign
trade.
CAPITAL STRUCTURE: The way in that a company has raised the capital needed to establish and expand
its business. Specifically, the number of shares and long-term loans of each class that have been authorized
and issued. The McGregor’s, Quick Reference gives the capital structure of each listed company.
CARTEL: A group of companies have a sufficiently large share of a particular product or industry that they
can force prices up by not competing with each other. An agreement is reached not to compete on price and
an effective monopoly exists. For example, the Organization of Petroleum Countries (O.P.E.C) controlled
prices in the oil industry from 1973.
CASH ASSET/SHELL: A company that has cash or near-cash as its only asset. Aside from the income
derived from investing this cash these companies have no-income producing assets and are not conducting
normal business in any industry. They have a separate sub-heading on the price page of your newspaper.
They are often the subjects of take-over bids by companies wishing to obtain a listing. Such take-over is are
usually accompanied by considerable insider trading (that is illegal, but quite common) that shows in their
volume of shares traded before the take-over announced to the general public. These high volumes are a
good indicator of an impending take-over, but sometimes reflect a wild rumour.
CASH FLOW: This is the amount of cash coming into a company less the amount going out. It is important
because a profitable company can easily go bankrupt if its profits are tied up in stock or debtors, leaving it
with insufficient money to pay its creditors on due date. Cash flow can be improved by reducing the “working
capital” of the company.
CATAPULT FORMATION: A technical term that refers to the situation where a market breaks one way from
a formation and then suddenly reverses. If you reacted to the first breakout of the formation, then you should
cut your losses when you are sure of the reversal, and position yourself for a powerful move the other way.
CAUTIONARY ANNOUNCEMENT: A publicly advertised announcement made by a listed company to urge
shareholders to exercise caution when trading its shares. These announcements are advertised in the
Business Day and other leading papers whenever a company is involved in any activity (such as negotiating
a take-over) that will materially affect the price of the shares. The idea is to avoid any insider trading that
might result from the information leaking out.
CENTRAL BANK: Almost all countries have a government-run central bank that acts as a control for other
banks by insisting that they hold a certain percentage of all their clients’ deposits in reserve. This percentage
is known as the “reserve rate”. The objective of this control is to prevent banks from re-lending too high a
proportion of such deposits, leading to bankruptcy. The central bank also acts as a lender of last resort to
any bank that is in trouble. In S.A. the central bank is called the Reserve Bank; in America it is called the
Federal Reserve Bank; and in Britain, The Bank of England.
CHAIRMAN: The chairman of the board of directors of a company is appointed by the shareholders. His
position is in no way different from other directors unless he is given a special mandate in the company’s
articles. Often this position is merged with that of Managing Director. Normally the articles provide that he
should preside at general meetings and give him a casting vote at such meetings. You may find the
chairman’s name in Macgregor’s Quick Reference.
D.
DAILY FLUCTUATIONS: Share price movements from a few minutes long to about two weeks. The word
“daily” is misleading.
DATE ISSUE CLOSES: The date on that a rights issue must be taken up at the take-up price. On this day
the nil paid letters cease to exist and cease to be traded on the share market.
DATE PAYABLE: The date on that an amount owing, usually a dividend, must be paid.
DAY’S MOVE: The extent to that a share moves during the course of one trading day on the Stock Exchange. You will
find the day’s move quoted as a separate column in the better newspapers, both in cents and as a percentage.
Basically, it shows the difference between one day’s closing price and the next.
E.
EARNINGS: Share market terminology for a company’s after-tax profit.
EARNINGS PER SHARE: A company’s earnings (profit) divided by the number of ordinary shares, usually
expressed as a number of cents per share.
EARNINGS YIELD: Earnings per share expressed as a percentage of the current market price of the share,
for example, a company with 25 cents earnings per share and a market price of 250 cents would have an
earnings yield of 10%.
EFFECTIVE RATE OF TAX: The percentage of profits paid by companies after taking into account various
allowances and deductions. Thus the standard rate of tax is 48% while the effective rate could be as low as
30% or less.
ELLIOT WAVE: A wave theory that share and other economic data streams move in a definite 8-stage
cycle. This consists of a bull phase where each successive rise ends higher than the last, and a bear phase
that is shorter and ends higher than the beginning of the total cycle. The phases are labelled q (up), 2
(down), three (up), 4 (down) and 5 (up) that completes the bull cycle, then A (down), B(up) and C(down). It is
suggested that the cycle operates on a larger scale where 1, 2, 3, 4, 5 and A, B, C, are phases 1 and 2 of a
larger Elliot wave. Also, on a smaller scale each, and down movement can be seen as a complete 8-phase
Elliot wave in its own right.
ENTRY THRESHOLD: The degree of resistance to new businesses trying to enter a particular industry.
Usually, a high entry threshold indicates that massive amounts of capital must be committed before any sort
of viability can be expected. This makes entry difficult and risky.
ENTREPRENEUR: A person who runs a business, and shares in the risks and profits.
EQUITY: That portion of share capital that carries risk, and shares in profits through dividends that are
dependent on profitability. Ordinary shares are often called equity shares, and other types of shares that
share in the risk to a lesser extent such as convertible or participating preference shares are known as
“near-equity”. The equity of a company is the share capital and reserves of the company that is the same as
its net assets (net of liabilities). You should be careful because in many instances, the book value of assets
such as stock and
real estate is very different from the market value.
EQUITY: Fixed-return securities issued by Eskom. These are bonds traded on the bond market. The most
widely followed is the E168, but there are 6 others with different expires and coupons. All the Escom bonds
are up-dated daily on Share Friend.
EURODOLLAR: U.S. dollars held outside America and traded freely with other currencies.
EVASION: Escaping tax by illegal means. This is as opposed to tax avoidance that refers to paying the least
amount of tax possible within the tax law.
EX DIV: A share is “ex div” once the last day to register has passed. Any sales after the last day to register
are done on the basis that the dividend accrues to the buyer, even if it has not yet been actually paid out.
EX-DIVIDEND DATE: The next working day after the last day to register for a share. On this day the share’s
market price usually drops by exactly the amount of the dividend, unless there are other influencing factors.
EX-RIGHTS DATE: The day immediately following the last day to register in a rights issue. People buying
on or after this date do not automatically partake in the rights issue. On this day the share price can be
expected to fall, to reflect the greater number of shares issue.
EXCHANGE CONTROL: Control by the Reserve Bank over the flow of money into and out of the country.
The objective is to prevent a flight of money out of South Africa mainly for reasons of political instability.
EXCHANGE RATE: The rate at that one currency may be exchanged for another.
EXPENDITURE: A macroeconomics term that refers to the total amount of money spent on finished goods
and services, including personal consumption expenditure, government purchases of goods and services,
and gross private domestic investment (that is expenditure by business on machinery, tools etc. plus
construction and changes in inventory).
EXPENSES: The on-going costs associated with running a business - as opposed to money that is paid for
assets that are expected to last for a number of years. Expenses in a business are generally dividend into
those that vary directly with sales and those that must be paid even if no sales are made. These are usually
known as variable and fixed, or direct and indirect expenses.
EXPONENTIAL WEIGHTING: A method of smoothing a moving average such at the more recent prices are
given more weight than the older ones. The formula is as follows:
EMAt= Apt + A(1-A)1 Pt-1 + A(1-A)2 Pt-2 + ...A(1-A)n Pt-n +...
Where EMAt = the exponentially smoothed moving average at the time ”t”
A = a weighting factor between 1 and 0
Pt = the share price at the time “t”
EXPOSURE: The degree to that a portfolio or other investment is susceptible to risk from a certain factor.
For example, a share in a company whose main business is importing would be highly “exposed” to the
rand/dollar exchange rate.
EXTERNAL FORCES: Economic and market forces that accumulate to cause a primary trend until they run
out of momentum. For example, the general tendency towards deflationary policies in Western economies
has resulted in a decline in the gold price that has been partly responsible for the reversionary trend in South
Africa.
F.
FAMILY-RUN GROUP: A company or group of companies substantially controlled by members of the same
family.
FEDERAL RESERVE BANK: The central bank of the United States of America sometimes also known
simply as “The Fed”. Like the South African Reserve Bank does here, the Fed controls the momentary policy
of America and acts as a bank to commercial bank.
FLAT MONEY: Money that does not represent any sort of backing by a precious metal such as gold. Almost
all currencies these days is flat money. They are money quite simply because the government says so.
FINAL ACCOUNTS: Accounts prepared in accordance with the requirements of the Companies Act at the
end of a company’s financial year. They consist of a balance sheet, an income statement and a source and
application of funds statement.
FINAL DIVIDEND: The dividend paid when the directors know the final profit for the year. Added to the
interim dividend, this gives the total dividend for the year.
FINANCIAL RAND: Rands belonging to non-residents that are traded against other currencies at a
substantial discount to the commercial rand.
FINANCIAL RATIOS: Measures of creditworthiness such as the current ratio, gearing, dividend, cover,
interest cover and the ratio of long term debt to net tangible assets.
FINANCIAL YEAR: Section 285 of the Companies Act requires that companies must set their financial year
to begin no more than 3 months after the date of incorporation. Companies may change their financial year.
The financial accounts must be presented at the annual general meeting to be held within 6 months of the
end of the financial year (extensions can be obtained). Your McGregor’s Quick Reference will give you the
financial year ends of all the listed companies.
FISCAL: To do with the expenditure and revenue-raising patterns of the treasury (known as the fiscus).
Fiscal policy concerns the level of taxes and government spending.
FISCAL DRAG - see BRACKET CREEP
FISCAL YEAR: The government’s financial year, which runs from April 1st until March 31st.
FISCUS: see TREASURY
FIXED ASSET: An asset that is expected to last and be useful for a number of years, and that cannot be
easily turned into cash (i.e. has a poor liquidity). Such assets are depreciated over their expected lives.
Examples are vehicles, land and buildings, furniture and fittings, office equipment etc.
FIXED INCOME: These are investments that gives a set return, such as preference shares, bonds,
debentures and savings accounts
G.
GAZETTE: A government publication in that legally-required notice is given and statutory amendments are
publicized.
GEARING: The relationship of a company’s borrowing to ordinary shareholders’ funds. Essentially, a
company can obtain the finance it needs to conduct its operations from two sources: issues of its ordinary
shares and borrowing from third parties. The ratio of the one to the other determines the company’s gearing.
This ratio is also sometimes called the debt/equity ratio. We say that a company is “highly geared” if the
outside borrowing exceed the shareholders’ capital by an excessive amount. Acceptable gearing ratios vary
from company to company, but a general rule of thumb is that if the ratio is worse than 1 (i.e. shareholders
have R1 in the company for every R1 owed to outsiders), then the company is “over-geared”. An overgeared company will have trouble in obtaining additional finance to take advantage of opportunities, and if
the over-gearing is excessive it could lead to the company’s liquidation. In America, gearing is sometimes
referred to as leverage.
GENERAL OFFER: An offer made to all shareholders of a company for the purchase of their shares. The
purchase price could be in cash or in shares of a predator company or as a combination of both.
GILT: A unit of government loan stock.
GOING PUBLIC: A term used to describe the sale of shares of a privately-held company to the public for the
first time.
GOODS: An economics term used to describe the manufacturing of mined products of the economy. Goods
are seen as differentiated from “services” where no concrete item is involved.
GOODWILL: Goodwill refers to the fact that a business is very often worth more than the simple difference
between its assets and what it owes, because of the “goodwill” of its clientele and its reputation. When a
company is purchased, the amount paid often exceeds a simple net assets value, for this reason. The
surplus appears in the balance sheet of the acquisition as a “premium arising on acquisition”. This is an
intangible asset. The opposite, i.e. when a company is bought for less than net asset value, appears on the
liabilities side of the balance sheet as a “reserve arising on acquisition”.
GROSS NATIONAL PRODUCT (G.N.P.): The annual total output of goods and services produced in an
economy. A national accounting concept used as a measure of the economy’s performance. Goods and
services are valued at MARKET value.
GROUP: The holding company of a number of subsidiaries. Such companies produce Group Consolidated
accounts per annum showing the consolidated position and performance of all the subsidiaries.
H.
HEAD AND SHOULDERS FORMATION: A standard charting formation in line, bar, and point and figure
charts. The formation looks like a head and shoulders outline. The left shoulder occurs when a sustained
bull trend reached a climax, with large volumes traded. Both price and volume decline to a trough,
completing the left shoulder formation. The head formation begins with a stronger upward trend reaching a
higher peak than the left shoulder before declining into a trough again before a corresponding right shoulder
is traced out. The left and right shoulders normally are about the same height, with the head considerably
higher. A “neckline” may be drawn across as a horizontal line touching the two troughs.
HEAVYWEIGHT: A very sound share - normally used in the gold market to refer to longer-life mines with
low costs of extraction and high grades. Such mines are not as strongly geared to movements in the gold
price as the “marginal”.
HEDGE: Action taken by a buyer or seller to protect his business or assets against a change in prices.
HIGH: The “high” in a trend is its peak - the highest point that a graph has reached within a given period.
HOLDING COMPANY: Any company that owns more than 50 % of the voting capital of another company,
or can be said to have effective control over the appointment of its directors.
HOT MONEY: Short-term money that is moved from one country to another in search of the best returns on
liquid investments. This money is not invested in real estate in long-term bonds, but in call and near-call
investments. Because of this, it can leave the country as quickly as it came, leaving an adverse balance on
the capital account. South Africa is particularly susceptible to this as it offers high returns in world terms, but
is perceived to be politically unstable. Following the Sharpeville riots, so much capital left this country that
the government had to introduce the “blocked rand”. It took around 20 years for the effects of this to be
finally overcome when the “financial rand” was abolished. More recently, the financial rand has been reintroduced for similar reasons.
I.
IN-THE-MONEY: A phrase used to describe the situation where a future or option can be sold for a profit.
INCOME: In accounting terms, this refers to all revenues received by a company, both as a result of its
sales and other sources such as interest, dividends or rent.
INCOME STATEMENT: The Companies Act requires that the directors of a company place the financial
statements before the annual general meeting (Section 286[1]). The income statement is one of the most
important components of the financial statements. It begins with net operating income and shows how this
income has been appropriated to tax, transfers to reserves, dividends (first preference, then ordinary) and
unappropriated or retained income to arrive at net operating income. For example, directors’ fees, audit fees,
depreciation and interest on loans. It is always interesting and informative to look closely at the notes to the
financial statements as they reveal all sorts of detail not shown in the main accounts.
INDEX: A weighted or unweighted average of the prices of a group of shares. There are many types of
indexes (indices) for sectors, sub-sectors and entire markets. There are also a number of ways to weigh the
data, but essentially the idea is to allow the fact that the market capitalisation of shares differ widely within
the same sector, partly because each company has a different number of shares in issue. Over and above
this, shares are always leaving the sector, and new ones joining it. The calculation of indexes is the work of
actuaries and this explains the J.S.E. “Actuaries” indexes. Indexes are useful for determining the general
direction of a sector and perhaps comparing individual shares with the group average. Sectors may also be
compared, and a careful study of index trends will allow you to move you money around the market from
one profitable sector to another. It is useful to keep records of all the sector indexes (there are about 40) on
a weekly basis, taking the data from your Sunday paper and working out a 10-week average.
INDICE: - see INDEX
INFLATION: The decline in the purchasing power of paper currencies. In the long term inflation is caused by
governments increasing the money supply faster than the growth of gross national product. Put another way,
money is simply a symbol of the goods and services produced by and owned by the whole economy. If the
size of the money supply increases by 20%, more money chasing the same goods and services - sooner or
later the prices will rise. It can therefore be seen as a form of subtle taxation, where the government spends
the newly-created money while the rand in our pocket quietly goes down in purchasing power. Equity shares
are a good hedge against inflation because their value lies in the profit-generating power of the company
that they represent.
J
J.S.E. PUBLIC RELATIONS DEPARTMENT: A department of the Johannesburg Stock Exchange devoted
to promoting the image and interests of the stock broking community to the public at large. This department
distributes a number of booklets, some free and some for a nominal charge, that are useful to investors. Two
guided tours to the J.S.E. are conducted by this department each trading day and are open to the public free
of charge.
J.S.E. TRUSTEES (PTY) LTD: A company formed by the J.S.E. to safeguard client’s surplus funds held by
a broker who is operating a managed account on behalf of that client.
J.S.E. MONTHLY BULLETIN: Extremely useful, the bulletin gives details of the month’s trading on the
J.S.E. of all listed securities, including preference shares and other listed instruments. Of particular
importance is the section at the back that gives details of rights issues, cap, issues, share splits,
consolidations and other major changes in share capital.
J.S.E. RULES AND REGULATIONS: A set of rules and directives established by the J.S.E. to govern all the
workings of the exchange in Terms of the stock Exchanges Control Act.
JOBBER: Strictly, this refers to a London stockbroker who only buys and sells shares from other
stockbrokers. In South Africa, the term is used to refer to any broker who buys and sells shares for himself,
and even more broadly, anyone who buys and sells shares quickly, looking for ultra short-term profits.
K.
KEY REVERSAL DAY: An intra-day price formation visible on a bar chart. The formation occurs when a
share trades in an excessively wide range during the day so that the spread between the high and low for
the day is 10 % of the price or more. This indicates considerable uncertainty among investors as to the
future direction of the share. If it occurs after a sustained down- or up-trend it is usually followed by an
immediate change of direction and the beginning of a new trend - hence the name
L.
LAGGING INDICATORS: As opposed to leading indicators. A lagging indicator is any regular time series of
data that reaches peaks and troughs after those of the overall cycle. For example, the building and
construction sector tends to lag behind the rest of the economy because contracts signed at the height of
the boom tend to be completed during the down cycle.
LAST DAY TO REGISTER: (Recorded Date). This phrase is most commonly used in connection with
dividends. When a dividend is declared, the directors of the company fix the last day to register, which
means that all persons holding the shares of the company on that day (even if they bought them the day
before) are entitled to the dividend. The trading day after the L.D.R. usually sees the share's price drop by
exactly the amount of the dividend unless there are other influencing factors. Rights issues and other
mechanics of the market also have a L.D.R.. These can be found at the back of the Stock Exchange Bulletin
(obtainable
on
subscription
from
the
Public
Relations
Office).
LAST TRANSACTION PRICE: The price at that a certain share was last traded. This information is normally
reported on the price page of your newspaper in a column headed ”last”. It is sometimes called the 'closing'
or 'ruling' price. Normally, papers report on the position at the end of the morning or afternoon session.
LEADING INDICATORS: These are indicators that tend to anticipate movements in other indicators. For
example, the paper and packaging industry tends to start experiencing better conditions before the rest of
the economy because almost all products have to be packaged before they can be sold.
LEDGER: An accounting book that shows the debit and credit transactions, and the balances of a
company's individual accounts. Ledger accounts are set up for every asset, liability, income and expense
that the company has. The cash book is also strictly peaking a ledger account, but because of its size, it is
normally separated from the main ledger.
LIABILITY: An accounting term that records money owed by company to outsiders. The most common
forms liabilities are share capital and reserves (that are money 'owed' to the shareholders), long-term loans
such as debentures, and short-term loans (normally called creditors). These amount are added to the
liabilities side of the balance sheet or subtracted from the assets side. They are balances in the ledger, and
essentially they show where the company has obtained its finance from.
LINE CHART: A graph drawn connecting the closing prices of a share. This is the most basic chart used by
technical analysts.
LIQUID ASSETS: Assets that can be readily turned into cash. Normally, these are current assets such as
debtors, stock and, obviously, cash or bank balances. The 'liquidity' of and asset is the speed and ease with
that it can be turned into cash.
LIQUIDATION: The process whereby a company is dissolved. Such a dissolution may be initiated by the
court, the company itself, a shareholder, the Master, the judicial manager, a creditor, or the minister. A
liquidator is appointed, who sets about selling off all the assets of the company and using the proceeds to
pay its creditors (secured and the unsecured). Once the creditors have been paid then the preference
shareholders are paid, and then finally the ordinary shareholders.
LIQUIDITY: The ability of a company (or person) to raise cash on short notice, usually with a view to
meeting debts, unexpected expenses, or to take advantage of opportunities. It is wise to keep a portion of
your wealth in cash so that you will be able to take advance of unforeseen opportunities (or meet unforeseen
expenses) without being forced to sell shares at a time that may not be advantageous. Excessive liquidity
usually means that the company or individual is overly conservative and is not benefiting fully from
investment opportunities.
LISTED INVESTMENT: A security that may be traded on the J.S.E.
LISTING: The right to trade a particular security on the exchange. The J.S.E. has stringent requirements for
companies seeking to have their shares and other instruments listed. Securities may be listed in the
industrial or mining or financial sections or on the Development Capital Market. In the Industrial section, the
company must have a subscribed capital of at least R1 000 000 in the form of at least 1 000 000 shares; it
must have a satisfactory profit history over the last 3 years and audited profit or R500 000 before taxation;
there must be at least 300 shareholders and 30 % of the first million shares must be held by the public. The
requirement for a D.C.M. are less arduous. the company needs to have share capital and reserves of at
least R500 000, a minimum of 1 000 000 shares in issue, an acceptable trading record for the last two years
with a profit of R150 000 before tax in the current year. 10 % of the shares must be held by at least 75
shareholders.
LONG-TERM LIABILITY: A liability that is to be repaid in years rather than months. A good example of this
would be debentures that carry a fixed percentage return and are redeemable by the company at some
future date. L-T Liabilities are found on the liabilities side of the balance sheet immediately below share
capital and reserves (also see the Debt/equity ration).
LONG-TERM STRATEGIC DECISION: A decision concerning an investment for the long-term portion of
your portfolio. Such decisions look ten or fifteen years ahead, and are usually based on fundamental rather
than technical analysis.
M.
MAJOR SHAREHOLDER - see CONTROLLING SHAREHOLDER
MANAGED ACCOUNT: This is an account established with a firm of stockbrokers by an investor. It entitles
the stockbroker to buy and sell shares without permission from the client. Normally, however, if you specify
that you would prefer to make your own decisions in the market, then the broker is more than happy to hand
over this responsibility. One of the benefits of this is that when you want to buy or sell shares there is no
need to transfer funds. When your money is out of shares it immediately begins to earn interest at a
competitive call rate.
MARGIN: Usually, the difference between net sales price and variable costs, another word for this would be
'contribution' because it is the contribution to fixed costs and profit.
MARGINAL COSTS: These are costs that affect the margin - in other words, variable costs. Any costs that
increase or decrease directly with increases and decreases in sales.
MARGINAL PRODUCER: A term usually applied to gold-mining companies that have very high cost of
extraction and therefore a low margin. If their cost of extraction is close to the gold price, then very small
fluctuations in the gold price can easily double or halve their profitability. This is reflected directly in their
share price, which tends to fluctuate widely for relatively small changes in the gold price.
N.
NET ASSET VALUE: The value of a company's assets after subtracting the value of its liabilities. This figure
is effectively the share capital plus reserves or the interest of the ordinary shareholders.
NET CURRENT ASSETS: A balance sheet item showing the difference between current assets and current
liabilities. In most healthy companies, this difference will be positive, so that the company can always meet
its short-term creditors out of its short-term assets.
O.
ODD LOT: A block of shares that is not in round hundreds. The price per share at that you can deal in an
odd lot will be less favorable than if you were dealing in round lots because of the increased administrative
problem. Odd lots often arise as a result of a right issue. Try at all time to deal only in round lots.
ON-BALANCE VOLUME: A technical analysis method developed by Joseph Cranvile, based on the idea
that the volume traded on a share is a key determinant of its future price pattern. The slogan "volume leads
price", best summarizes this approach. In simple terms, an on-balance volume consists of adding the
volume traded to a running total of days when the price rises, and subtracting it when the price falls. The
idea is to pick up small price changes with large volume changes as the first indicator of smart money
getting into or out of a share. The weakness of the idea lies in the fact that it does not distinguish between a
large and a small price change.
ON CALL: An interest-bearing account with a bank that allows immediate withdrawal of the money on
demand. Interest rates vary from bank to bank, but fluctuate with the general level of interest rates.
OPEN-ENDED-FUND: Typically a mutual fund. The fund is open in the sense that its size depends upon its
success in selling units. This is in contrast to an investment trust where shares can only be acquired if there
is a willing seller.
OPEN ORDER: An order still pending on the books to buy or sell security, but not yet executed. An open
order will remain in effect until it is either executed or cancelled, or for a period of two weeks, at that point it
lapses. If orders are required to remain open for more than two weeks, they can be placed "GTC" (good till
cancelled).
P.
PAPER PROFITS: The difference between what a share was bought for and its current market price.
Another term of this is "market appreciation". There is a potential danger in this figure, because it may not be
possible to sell the shares at their market price.
PAR VALUE: The price for that a share was first sold to the public. Normally, the market price quickly
exceeds the par value as the company grows and makes profits. The objective of the par value is to enable
the "asset base" of the company to be clearly established at its inception so that no illegal erosion of the
base can take place.
PARENT COMPANY - see HOLDING COMPANY
PARTICIPATING PREFERENCE SHARES: Preference shares that participate in the profits beyond a fixed
percentage. For example, they might receive an additional 2 % if the ordinary dividend is above 8%, or they
might get, over and above their normal fixed percentage, 10% of the ordinary dividend.
PENETRATION: A technical analysis term referring to the situation where one graph crosses over another.
For example, a closing price graph "penetrates" its 13-week moving average. It is also used to refer to the
situation where a price breaks through a support of resistance level.
Q
QUOTED SECURITIES: This term is interchangeable with the word "listed" and refers to any security that
has been accepted by the stock exchange in accordance with their listing requirements.
R.
RALLY: A temporary upturn in the price of a share or index or other data stream that occurs during an
overall bear trend. The opposite of a correction.
RAND AVERAGING: The technique of averaging the price paid for shares bought on several different
occasions at different prices. For example of 1000 shares of a certain company are bought at R7 per share
and then later another 1000 are bought at R6. then the average price paid for all 2000 shares is R6,50. If
you misjudge the bottom of a share's price cycle and buy in too soon, you can reduce you average cost by
buying in further at a lower price.
RANDOM WALK THEORY: A theory that assumes that the share market is very efficient and that it
accurately discount the future intrinsic value of shares, exactly allowing for the level of risk involved.
Investors are assumed to have perfect information and to behave in such a way as to always maximise their
profits. The idea is that the current share's price will oscillate randomly around its "real" value in such a way
that the past prices have no predictive relationship to the future. Clearly if this theory applies, then technical
analysis, that used past price patterns to predict the future, is useless.
RATE OF EXCHANGE: The rate at that one country's currency may be exchanged on the open market for
that of another. Exchange rates between currencies vary considerably as countries' economies are seen as
strong or weak in relation to one another. A self-balancing tends to occur if one country's currency becomes
too strong; then its goods become relatively more expensive to import, and it tends to build up a current
account deficit, that then leads to its currency becoming weaker, and vice versa.
RATIO: The relationship between two figures from the financial statements, designed to show the
profitability or effectiveness of management within a company. Ratios have no absolute significance, but are
only relevant for comparisons over the history of the company or between companies in the same sector.
S
SCRIP: Share market jargon for share certificates.
SECONDARY MARKET: The market made up of share transactions that do not involve the company that
issued the shares concerned. The primary market is where companies sell their shares to the public to raise
capital.
SECONDARY SHARE: A share of company that is well-managed and has good markets, but does not have
the financial muscle or history of profits of the blue chips. These are sometimes referred to as “growth”
stocks, because they have the potential to become blue chips at some future stage. You should expect a
secondary share to double its market price within the next 2 to 3 years, and for this reason they form an
important middle area in your portfolio between blue chips and speculative shares.
SECONDARY TREND: A trend in a share’s price or other indicator that occurs during a primary bull or bear
trend, but is much shorter - usually between 2 and 8 months. Taking advantage of secondary trends is far
more difficult than riding the primary trend.
SECTOR: A grouping of all shares in the same industry, usually represented by a sector index.
T.
TAKE-UP PRICE: The price at that shares subject to a rights issue must be bought. Normally this price is
below the market value of the share, so that the rights themselves have a value. If the rights are not taken
up then they fall away and cease to exist.
TAKE-OVER: The situation where one company makes an offer for some or all of the shares of another
company. The offer to existing shareholders is usually pitched at a price well above the existing market
price, to persuade shareholders to accept the offer. Many investors select companies that may be ripe for a
take-over (some classic indications: the company’s market price is well below its net asset value, it has
recently cut or passed its dividend, and it has a large assessed tax loss that could be used by another
company) and then wait. For example, Wispeco shares were standing at 20c in 1978. In November 1979
Medcor made a take-over offer pitched at 70c per share, that was 16c above the latest market price before
the offer was announced.
TAKING A VIEW: This phrase has two meanings. Firstly, it can refer to an investor taking a bullish or
bearish view of the market depending on whether he believes it will rise or fall - usually this would be
reflected in his transactions. Secondly, it can refer to the length of time that one intends to hold as share for shares can be bought with a short, medium or long-term view.
TAX HAVEN: A financial centre that offers a more favorable tax environment than is enjoyed locally.
TECHNICAL ANALYSIS: The analysis of group investor behavior, as reflected in the patterns of share
prices and volumes, indexes, exchange rates and other indicators. More commonly known as “charing”, this
consists of carefully examining share price graphs to establish patterns that can then be used to give buy
and sell signals.
TECHNICAL INDICATORS: Statistical information about the behavior of the market as a whole. Such
indicators have nothing to do with economics or share valuation, but are highly useful arithmetical
expressions of demand and supply forces on the market.
TECHNICAL RISK: As opposed to fundamental risk. This refers to the degree of unpredictability of the
share’s price pattern. The most predictable price graph is a straight line; to the extent that a price graph
deviates from this it becomes unpredictable, and therefore risky. Technical is therefore measured by the
share price’s volatility.
TICK: A short horizontal stroke on a bar graph, showing the price at that the share closed.
TIGHTLY HELD: Shares that are difficult to obtain because the owners are reluctant to part with them.
These shares are easy to sport because they have little or no volume traded. Generally, it is not a good idea
to deal in such shares.
TIME SERIES: A term used to describe a list of usually numerical data accumulated at regular periodic
intervals. The daily or weekly closing price of a share is a time series.
TIME VALUE: That portion of the option premium that pays for the right to be able to exercise the option
over a certain period of time. Time value is calculated by subtracting the intrinsic value from the option
premium.
TIME VALUE DECAY: A term that describes the fact that the time value of an option diminished as the
option approached the expire date. Time value decay follows a negative exponential curve, that is to say
that it is very gradual at first, but builds up momentum until it declines very sharply in the last few days.
TOP: The highest point on a share price or other graph over a defined period.
TRADE-ABILITY: The ease with that a share can be traded. Some shares are free-dealing and highly
“tradable”, others are tightly held.
TREND LINE: A line joining the high points on a bear trend and the low points on a bull trend. When the
price breaks through the trend line this gives a trading signal. Its is probably the simplest, but by no means
the least effective technical analysis indicator.
TRIANGLE: A technical analysis indicator, referring mostly to point and figure analysis where a chart take
the shape of a triangle. The direction in that the chart breaks out of such a formation is said to be the most
likely new trend.
TURNOVER: The first stated figure in the income statement. Turnover consists of the company’s total sales
or income figure.
U.
UMBRELLA BOTTOM/TOP: A formation at the top or bottom of a trend where the trend gradually
dissipates into a sideways market that finally begins to move in the direction opposite to the trend - so giving
an umbrella shape, that is inverted for bear trends.
UNDERWRITING: An agreement to buy all the units of a new issue not sold by a specific day. Banks
typically underwrite the new share issued, thus assuring the issuing company that all shares will be taken
up.
UNIT TRUST: A trust consisting of a management company and a trustee company (usually a bank) that
invests unit-holders’ funds in the share and capital markets for a fee. The public is invited to buy units in
order to obtain capital growth and dividend income. Unit trusts are basically a method for lay-persons to
pass on the management of their money to a management company employing experts analysts. Investors
can invest much smaller sums of money in unit trust than is usually practical when buying shares directly
through a broker. Different unit trusts have different bases in their portfolios that can greatly affect their
overall performance.
UNLISTED INVESTMENTS: A balance sheet item, normally shown by way of a note, and indicating share
investments held by the company in unlisted companies that may be private or public.
V.
VIEW: see TAKING VIEW.
VOLATILITY: The degree to that a share deviates from its average. High volatility is associated with risk,
both fundamental and technical. For example, shares in marginal gold mines are extremely volatile, moving
10% or more in a single day, because their operations are only just profitable or unprofitable so that their
performance is highly geared to the gold price.
VOLUME: The number of shares changing hands during the trading date. In America, this figure is
calculated by adding shares bought to shares sold - in other words, it is effectively double the volume traded
as it would be shown on the J.S.E. In London the volume traded is not disclosed, so that the various
indicators that rely on volume cannot be used. You should keep a careful lookout for exceptional volumes on
a share, because they can give the clue to insider trading and special situations.
W.
WEIGHTING: Sometimes called smoothing, this means artificially modifying a data stream to allow for a
factor that would otherwise be ignored. For example, moving averages are often weighted such that the
most recent prices in the moving average are given a greater weight than older prices. The reason for this is
that with a standard moving average, the most recent price has as much influence on buy and sell signals as
the oldest price. Because the more recent figures are generally regarded as being more significant, they can
be multiplied by a factor greater than 1, while older prices are multiplied by less than 1. Usually, the
weighting factor increases linearly from the earliest price in the M.A. to the most recent. It is possible,
however, to exponentially and weigh moving averages so that the weighting factor increases at an
increasing rate from the oldest to the most recent price.
WHIPSAW: The false technical signals given in a sideways market, causing investors to buy in and sell out
without any profit.
WINDOW-DRESSING: Any act or statement made by a company with the main purpose of projecting an
impression of the company’s affairs more favourable than that warranted by the actual condition, e.g. a
company to create a false impression of price stability. It’s also said to be practised by some institutions who
bid up the prices of shares they own, at the end of their financial year, to boost the value of their portfolios.
WORKING CAPITAL: The money that is tied up in the workings of the company. Usually calculated by
adding the company’s debtors, stock, and cash balances, and subtracting its creditors and other current
liabilities. Most companies try to keep their working capital to a minimum because it ties up money that could
be used for other functions and that is costing interest.
WORKING EXPENDITURE: The actual cost in rands of mining and processing ore in a mine. It is
dependent on a number of factors such as the depth of mining, working conditions, rock temperature, rate of
water inflow, uniformity of the reef, nature of the surrounding rock, and the cost of labour.
REFERENCES
1
Stock Charts.com
2
Technical Analysis from A-Z (by Steven B. Achelis)
3
Technical Analysis 101
4
Arthur Hill on Moving Averages
5
Incredible Charts
6
Your Shortcut to Stockmarket Millions – Thys Bekker
Regards,
Jonathan Tasker
Mobile 082 255 7163
Š Email jonathan@investortraining.co.za
 Office (011) 804-2106
 Fax (011) 804-2106