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Demystifying investment jargon: The terms you need to know

The financial planning and investment world is filled with technical jargon that can often hinder first-time investors. Craig Turton, certified financial planner at Easy Equities, explains some of these terms.

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1. What is index or passive investing?

Index or passive investing is a strategy whereby the fund aims to replicate or track a certain index. Examples of index tracking are the Top40 fund where the fund tracks the 40 largest funds on the JSE or the MSCI World which tracks a global equity index. This type of investing is based on algorithms plugged into a system. There is very little or no human involvement in this type of investing. Thus, making it a low-cost way of investing. This is one of the benefits of a passive investment structure.

2. What is active investing?

In contrast to a passive investment, an active fund has a fund management team that manages and monitors the investment. In design, a fund managers role is to outperform an index and mitigate certain risks. A fund manager can change positions according to their mandate. They use their qualifications and expertise to manage the fund. An active fund usually trades more regularly, and this does come with higher fees.

There is a big ongoing debate in South Africa as to which style of investing gives the better returns. I believe a combination of passive and active will bode an investor well for long term investing.

3. What is offshore investing?

Investing offshore has really become a popular choice amongst investors in the last 10 to 15 years. There are a few factors here. It has become much easier to invest your money globally now with the use of technology. The world has become smaller in terms of accessibility, but the investment space has become larger for investors.

Investing offshore means that you convert your rands into an overseas currency, like US dollar, euro or pounds and find a market to invest in. Markets can be in the US, Europe, Australia etc. You can get now get access to these markets which is exciting.

We all know diversity is key when investing, by going offshore you are diversifying into different markets, countries, companies, governments etc.

The only downside is essentially the cost to move your rands into another currency. But for me, that’s a cost I am willing to pay for the diversification.

If you are in control of your debt, have an emergency account and are saving for retirement locally then I would suggest that you start looking at offshore options.

4. What is the difference between a money market and a capital market?

From an investor’s perspective, money market is an investment that offers interest which would include bank deposits, debentures, treasury bills or call accounts. It is a low-risk structure that offers interest on your funds invested. A money market account can be used for your emergency fund or shorter-term savings.

A capital market would refer to the equity market or bond market where there is a longer-term view, more volatility, and potentially higher returns in the long term. The key with capital markets is long term investing, for example, retirement savings or investing in company shares on the JSE for the next 10 years.

Money market and capital are two very different markets and need to be planned for carefully in terms of your finances.

5. What is dividend withholding tax?

This is a tax that is paid by the owner of a dividend. When a company declares a dividend, the beneficial owner will be liable for dividend withholding tax at a rate of 20%. It is withholding as the tax is paid by the company making the distribution. The owner of the dividend is responsible for making sure the tax is paid by the entity paying the dividend.

6. What is capital gains tax?

CGT becomes payable when you make a profit from selling an asset that you own. The tax is calculated on the profit and not the actual sale amount. An example of an asset would be a property or a share in a company. Individuals, companies, and trusts are all required to pay CGT.

You pay the CGT within the tax year you sold the asset.

CGT is at a rate of 40%. This does not mean you pay the 40% tax though. The 40% gets added to your income tax and then taxed according to your own tax rate and tax liability.

The good news is that individual taxpayers get a few exemptions. We have an annual exclusion of R40 000 of capital gain and on a primary residence we have a R2 million exclusion. Check out this article to help with a CGT calculation. Thank you TaxTim!

7. Books you would recommend for new investors? 

  1. Rich Dad Poor Dad – Robert Kiyosaki (This is our CEO’s first choice)
  2. Reminiscences of a stock operator – Edwin Lefevre (For the more sophisticated share trader)
  3. How to invest like Warren Buffett – Alec Hogg (Great tips for all investors)
  4. The intelligent investor – Benjamin Graham (Great tips all round)
  5. Manage your money like a F*cking grown up – Sam Beckbessinger (For the beginner investor)
  6. How much is enough? – Andrew Bradley (For those thinking about retirement)
  7. Become your own financial advisor – Warren Ingram (For your DIY investors)
  8. You’re Not Broke, You’re Pre-Rich – Mapalo Makhu (Excellent book for all South Africans)

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