What is an ETF?
AN ETF BREAKDOWN
ETF stands for "exchange traded fund" which tells us a bit of what it is - so yes it is a fund and yes it is traded on an exchange exactly like a share is. The difference between an ETF and a normal share though is that a share typically just gives you exposure to one company - ie. if you buy shares in MTN you are exposed only to MTN. However, ETFs are made up of a basket of assets (most often shares) - so when you buy an ETF, it is almost the same as you buying all of the shares that are in the basket.
ETFs are generally constructed so that they replicate the performance of a specific index. For example the Satrix 40 ETF replicates the performance of the JSE Top 40 Index - the aggregate performance of the 40 largest companies listed on the JSE. Larger companies carry more weight than smaller companies in the index, so when they move up or down, they generally have a bigger impact on the fund price.
What is an index?
So lets say we have 3 companies - XL Ltd, ABC Ltd and DEF Ltd and we want to
construct an index that replicates the share price movements of these 3 companies. To make it easy, lets say that XL is worth R50m and the other 2 are worth R25m each. In total they are worth R100m. On this day we can say the index which tracks their movement has a value of 100.
The next day, the values of these companies change as their share prices change. Let's say that after the market closes, XL is now worth R45m, ABC is worth R27m and DEF is worth R30m. In total they are now worth R102m. This means the index now has a value of 102. XL was initially 50% of the index (R50m/R100m) but as it lost value, it became only 44% (R45m/R102m). Companies weightings in the index will fluctuate over time as they become bigger or smaller relative to the others in the index.
What do I own when investing in an ETF?
You will own shares or units in the fund itself. The fund then owns shares in the underlying companies which are part of the index. So if you are invested in the Satrix 40 ETF through Franc, you own units in the fund. The Satrix 40 ETF will own shares in Naspers, Standard Bank, MTN etc and its share price will move up or down as the share prices of the shares it owns move up or down. Indices are rebalanced quarterly which is when the weightings are updated. This also means that sometimes companies fall off the index and are replaced by companies that have become larger than them over the quarter. As the companies pay dividends, the fund collects these and pays out to unit holders over the course of the year. Franc reinvests these dividends for its investors.
Why are ETFs good?
Diversification - investing through an ETF can give you
access to a diversified portfolio of assets even though you are buying just
once. Have a look at this article to learn about the benefits of having
diversified investments. You also don't need to try pick what individual shares
to buy - this can be time consuming and risky if you don't know what you are
doing! Low cost - ETFs are generally low cost because they are
passively managed. This means that the shares held by the fund just have to
follow the composition of the index and there aren't people who are employed to actually pick what shares the fund should hold (this is called active
management and these products are generally more expensive as these fund
managers are not cheap to employ!). Transparency - given you will know what index the fund is
tracking, you will always know what shares the fund is holding. Any cons?
Trading costs and spread - depending on who you buy your ETFs through, there can be trading costs incurred on your trade. If you are buying and holding for the long term these are less important as you only incur when you are buying or selling (they are once off costs). You should also be aware that when you are buying or selling, the price you will trade at will have to match with someone on the opposite end - ie. if you are buying, someone must be selling. Smaller ETFs can have large gaps between what a buyer wants to buy at and what the seller wants to sell at (bid/offer spread). This can sometimes be a hidden "cost" as you could end up paying a higher price or selling at a lower price but can be avoided if you stick to the larger more liquid ETFs like the Satrix 40.
What is it tracking? - not all ETFs are good, a major part of the appeal is what index the fund is tracking and how well it actually tracks the index. ETFs can also be high risk, for example if you invest in a gold ETF, it will go up or down with the gold price which can be very volatile! Sebastian PatelSebastian is an investment actuary with more then 15 years of financial services experience. Outside of Franc he likes sports, traveling and trying out new wines (as long as they're Shiraz!)Missed the last blog? Catch up nowHow to Save for Your Next Trip to Bali (or Anywhere Really)Travelling has always been in Thobi Rose's blood. However, becoming an adult she realised that when traveling you need to plan for the financial impact.7 Debt Traps and How to Avoid ThemLike all traps, debt traps are tricky to get out of so it is best to avoid them altogether. That's why this article is about common debt traps and how to avoid them.
So, Those Markets Hey...Q1 '21Last quarter the markets continued their historic rise. This article is a simple breakdown of the Top 40 JSE listed companies Q1 for 2021.Click here to start investing
HOW TO ANALYZE STOCKS..
While picking a brokerage and a of couple stocks to get started are key on your investment journey, understanding how to actually read a stock or stock chart is just as vital.
But, how do you read stocks? And what are some easy takeaways that can make investing more simple and less confusing?How to Read Stocks
Reading stock charts, or stock quotes, is a crucial skill in being able to understand how a stock is performing, what is happening in the broader market and how that stock is projected to perform. Knowing the basics can help investors make better decisions and are a vital first step in getting into and understanding investing.
Stocks have quote pages or charts, which give both basic and more detailed information about the stock, its performance and the company on the whole. So, what makes up a stock chart?What Is a Stock Chart?
A stock chart or table is a set of information on a particular company's stock that generally shows information about price changes, current trading price, historical highs and lows, dividends, trading volume and other company financial information.52-Week High and Low
The 52-week high and low are key metrics when looking at the trajectory of a stock in a given period (in this case, one year). The 52-week high and low show the highest and lowest prices at which the stock traded in that time period, although they don't often show the previous day's trading price.Ticker Symbol
The ticker symbol is the symbol that is used on the stock exchange to delineate a given stock. For example, Apple's ticker is (AAPL) - Get Report on Nasdaq, while Snapchat's ticker is (SNAP) - Get Report on the New York Stock Exchange (NYSE). The ticker is usually found under a column titled "ticker," or, in some cases, right next to the name of the stock in parentheses.
However, while some tickers look a lot like the company name - like Microsoft and MSFT - (MSFT) - Get Report , not all companies' tickers do, so be sure to make sure you are looking up the right company when searching for tickers.Dividend per Share
Not all companies pay out dividends - which are essentially small payouts of company profits to shareholders. But for the ones that do, the dividend per share - or the annual dividend payment per share for investors - will be represented on the stock chart.Dividend Yield
The dividend yield, then, is the percentage return on that dividend, and is calculated by dividing the annual dividend by the current stock price.P/E Ratio
The P/E ratio, or price-to-earnings ratio, is a key metric when looking at a stock chart. The P/E ratio is found by dividing the current stock price by the earnings per share for the past year (four quarters).Day High and Low
The day high and low simply show the highest and lowest prices at which the stock traded throughout the day, from market open to market close. However, the day high and low may not be the open and close prices - those are separate figures.Open Price
The open price is simply the price at which the stock opened trading on any given day.Close Price
The close price is perhaps more significant than the open price for most stocks. The close is the price at which the stock stopped trading during normal trading hours (after-hours trading can impact the stock price as well). If a stock closes above the previous close, it is considered an upward movement for the stock (and will impact things like candlestick charts, which we'll get to later). Vice versa, if a stock's close price is below the previous day's close, the stock is showing a downward movement.Prev. Close
The prev. close, or previous close, is the price at which the stock closed the previous day (24 hours before).Net Change
If a stock is "up for the day" or "down for the day," it has to do with the net change. The net change in a stock is a dollar value change from the previous close price of the day before. A positive net change will have the stock "up," while a negative one will have the stock be considered "down" for that day.How to Read a Stock Chart
A stock chart is a little different than the basic information on a stock - stock charts include charting, or plot lines, which represent the price movements of the given stock. While you can customize how the chart is drawn (once you get more advanced), price lines are generally represented in a line or mountain chart form. The thin line represents the price movements over a given period, generally six months or one year. If you are working with an interactive chart, you can set the chart to different time frames, from five years back to one day.
However, when actually reading and interpreting a stock chart, there are a few things you should do to start.1. Observe the Price and Time Axes
Every stock chart has two axes - the price axis and the time axis. The horizontal (or bottom) axis shows the time period selected for the stock chart. This can generally be customized to show anything from a year time period (or even multiple years) to a day.
The vertical (or side) axis shows the price of the stock. These two axes help plot the trend lines that represent the stock's price over time, and are the framework for the whole stock chart.2. Look for the Trend Line
This should be pretty obvious, but a good bit of the information you can glean from a stock chart can be found in the trend line.
Depending on the type of chart you're looking at, you can choose different chart styles including the traditional line, mountain, bar, candlestick and other chart styles.
Line charts simply track the price movements of a stock using the last price of that stock.
Bar charts take the highest and lowest prices of the day plus the closing price of a stock to chart its trend.
Candlestick charts look a bit more complex, but typically use clear or green boxes to indicate periods when the price of the stock closed higher (bullish) and red or pink boxes when the stock closed lower (bearish) than the previous day. The candlestick chart uses the stock's open, high, low and close prices to chart trends. For candlestick charts, the open and close prices are the most important when determining if there was upward or downward momentum for the stock.
In general, a simple line chart will be able to give you basic information about the trend of a stock. But it's not the only important metric to look at.3. Identify Trading Volume
In addition to just the trend of the stock's prices, the stock's trading volume is another key factor to look at when reading a stock chart.
The volume is generally indicated on the bottom of the stock chart in green and red bars (or sometimes blue or purple bars). The key thing to look out for when examining trading volume is spikes in trading volume, which can indicate the strength of a trend - whether it is high trading volume down or up. If a stock's price drops and the trading volume is high, it might mean that there is strength to the downward trend on the stock as opposed to a momentary blip (and vice versa if the price moves up).4. Identify Lines of Support and Resistance
Still, another important aspect to examine on a stock chart are lines of support and resistance. Whenever a stock trades up or down, it generally falls within what are called support and resistance lines. Essentially, the support line is a certain price that the stock generally doesn't drop beneath - it "supports" the stock upward and keeps it from trading below that price given market signals. Conversely, the resistance line is a certain price that the stock typically doesn't trade above - it "resists" the stock pushing through that top price.
Stock prices generally bounce between these support and resistance lines, but if the stock pushes through the resistance line, that previous resistance line becomes the stock's new support line, and the stock may go higher from there. However, the opposite is true if a stock dips below the support line.
Tracking support and resistance lines is important in predicting or understanding the overall trend of a stock, and when it might go down or up.
There are plenty of other slightly more complicated ways and metrics to look at when reading a stock chart, so it is important to educate yourself on technical analysis to get the most of the stock's information when investing. But, what else can you glean from a stock chart in general? Stock Chart Information Stock charts may also have additional information about the company and the stock's historical performance. Earnings per Share (EPS) Earnings per share, or EPS, can be found on many stock charts, and is a good indicator of how well the company is doing. EPS measures the
here are plenty of other slightly more complicated ways and metrics to look at when reading a stock chart, so it is important to educate yourself on technical analysis to get the most of the stock's information when investing.
But, what else can you glean from a stock chart in general?
Stock Chart Information
Stock charts may also have additional information about the company and the stock's historical performance.
Earnings per Share (EPS)
Earnings per share, or EPS, can be found on many stock charts, and is a good indicator of how well the company is doing. EPS measures the
amount of net profits a company has earned per share of their stock. For investors, EPS essentially represents the portion of the company's profits that their shares have a stake in.
A company's EPS is generally among other information on its stock chart, and is updated every quarter after the company reports earnings.Market Cap
A company's market capitalization is calculated by multiplying the company's total number of shares outstanding (shares of stock the company has issued to the public) by the current share price of one share of stock.
Most stock charts include this information. Most stock charts include this information.1 yr Target Est
While slightly less common on a basic stock chart, the 1 year target estimate is an analyst estimate of what one share of stock will be worth in one year. However, because analysts tend to have different (sometimes drastically) estimates, it is generally not considered a solid metric to use when reading a stock chart.
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