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Module 3 - Part 2/2: Factors to consider before investing

April 16, 2024
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EasyEquities
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EasyEquities

Factors to consider before investing.

Welcome to the EasyEquities Mentorship program, where we make investing EASY for you!

We have prepared 6 modules that we will post on FinMeUp over the month of July.

The modules are intended to give investors the necessary knowledge to start their investing journeys.

Lets get into it!

The factors that we will discuss today are:
Inflation rate
Tax
Liquidity
Volatility

Inflation rate

Inflation decreases our purchasing power. As discussed in previous modules, inflation at 6% means that if investors earn less than 6% returns on their investment they are, in truth, losing money.

Therefore, the return on investment should be higher than inflation. If an investor achieves 10% returns in a given year and inflation was 6%, then the investor made an actual return of 4%.
From 2002 through to December 2021, the average inflation rate in South Africa was about 4.96%.

Liquidity

Liquidity refers to how easy it is to convert your shares into cash.
Cash is regarded as the most liquid asset class and shares are slightly less liquid. Shares with low liquidity will be harder to convert into cash.The real estate market is generally less liquid than stock markets.

Taxation

A good investment will yield good after-tax returns. Income tax implications must be considered to ensure a high net after-tax return.

Investors pay dividend tax (dividends are paid out to investors from Company profits) and capital gains tax (Capital gains are the profits investors make after selling a stock).
A capital gains tax event will occur when an investor sells shares. Individual investors will get a yearly rebate of R40 000.

The dividend tax rate in South Africa is 20%. This means that if an investor earns R50 from dividends, they will pay R10 in dividend tax.

Volatility

Volatility refers to a stocks tendency to change quickly and unpredictably. The level of volatility can determine returns. Volatility contributes to the uncertainty of short-term investments. That is why it is often better to stay invested for longer periods.

Different sectors have different levels of volatility. For example, the technology sector ranked fourth in S&P Global's list of sectors with the most volatility. The healthcare sector ranked seventh and the energy sector ranked first.
 


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