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3 Investing Truth Bombs

July 17, 2023
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FinMeUp
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FinMeUp

Three misconceptions that beginner investors often fall victim to. Lets clear the air.

Investing is a massive field. Here are three common misconceptions that beginner investors often fall victim to. 


Share price = Company size

Basic logic tells us that R10 per share is a small company and R1,000 per share is a big company. However, the price of a share tells us little about the size of a company. The size of a company, also known as its market capitalization, comes down to the share price AND the number of outstanding shares in the market. 

E.g. Company As share price is R15 and Company Bs share price is R50. On the surface, Company B looks much bigger than Company A. But lets consider the number of shares outstanding.

Company A shares outstanding = 1,000. Company B shares outstanding = 200.

Given this information, Company A has a market cap of R15,000 (R15 x 1,000 shares), whilst Company B only has a market cap of R10,000 (R50 x 200 shares).

MTNs share price is R144 per share, whilst Thungelas share price is R320 per share. MTN, however, is roughly 6.2 times bigger than Thungela at a market cap of R272B versus Thungelas market cap of R44B.

 

Buying a full share/ cryptocurrency

Basic logic tells us that R10 per share is cheap to buy, but R1,000 per share is too expensive to buy. Have you ever heard the following: I dont have enough money to buy Bitcoin or Ethereum, so I will rather buy XRP. 

Investing platforms make it possible for investors to buy fractions of shares/cryptocurrencies. For example, 0.005 Bitcoin or 0.2 shares of Thungela are completely possible. So next time, if you only have R200 and you want to buy Bitcoin, know that you can buy Bitcoin and you dont have to buy A Bitcoin.

 

Buying a share just before the dividend payout

Basic logic tells us to buy a share just before a dividend is paid out. Why is it a bad idea to buy a share immediately after company has declared a massive dividend? Because paying a dividend influences the valuation of a company.

For example, Company A is worth R5,000,000. Management declares a dividend of R800,000. If R800,000 leaves the business, it means the company is now worth only R4,200,000. If a dividend is paid, the share price has to adjust downwards to reflect this outflow of cash.

Thungelas recent dividend of R60 per share is a perfect example. If you buy Thungela at R300 per share, you will receive a dividend of R60 per share. BUT, the share price will drop by the dividend amount, which means your net gain is R0. 

Furthermore, you will have to pay 20% dividend tax on that R60, which means you actually lose money buying the dividend, as they call it in the industry. 

Check out Soul Financials TikTok for more information on this:  https://twitter.com/soulfairy3/status/1560217809921114116?s=21&t=A8kzRP1YBkf9Mqtxlu2ZZA

 

Quick Recap

  • Share price alone tells us little about the size of a company. Market Cap, which equals share price x shares outstanding, reflects the size of a company.
  • You dont have to buy a full share or cryptocurrency. Fractional investing is completely possible.
  • Dont buy a share after a dividend is declared. The share price will drop by the dividend amount, plus a 20% tax will have to be paid.

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