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Lesson 5
Economic Analysis & the Stock Market
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(To obtain this as a PDF document click here)
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Economics is an entire subject on its own.
Understanding how the economy of a country works is what economic analysis is all about.
There is a vast array of variables that must be taken into account when you try to analyse what makes the economy go - in fact the subject is so complicated that not even the top economic advisors of the world’s leading nations always get it right! The subject of this lecture is not to turn you into an Economics Major, but to help you see what some of the basic variables are, and how their moves can affect the Stock Market.
Every time you look at a newspaper or magazine, or turn on the radio or television, you are given economic information (unemployment figures, interest and exchange rates, housing and car production data, etc.) and in turn are confronted with economic questions. Let’s look at the economic reality that surrounds you by giving some examples of the seven big questions that economists try to answer. Then let’s see how various factors in the economy affect the price of the shares you may wish to purchase or currently own.
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How do people choose what to consume and how to produce, and how are these choices affected by the discovery of new ways of doing things? |
Production, Consumption and Technological Change
About forty years ago, people who wanted to see a film or to see newsreels had to go to the cinema; today they can watch television, hire a video or see it “on cable” - consequently people spend far more time at home. Forty years ago, shop assistants would write down the prices of all the items you bought and add them up using pencil and paper; today they might run a scanner over a series of bar codes and press a button to have the total displayed. Forty years ago, all the parts of a car were mounted by workers standing at an assembly line; today many parts are fixed and checked by robots.
These examples show how new technologies affect both what we consume and the way that we produce goods and services.
This in turn impacts on the profitability of various companies or sectors of the stock market. Forty years ago a company that produced pencils may have been a good investment. However, today a company that just produced pencils would probably not be a good investment.
The remaining 6 questions that economists try to answer also impact on the stock market to a greater or lesser extent.
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What determines people’s incomes and why do some people receive much larger rewards than others whose efforts seem similar? |
Wages and Earnings
On a summer’s afternoon a student spends three hours picking strawberries. For this back bending work she gets paid £7. On the same day, Steffi Graf spends little over an hour winning the women’s singles championship at Wimbledon and wins £216,000.
One evening a music teacher gives instructions to a young pianist who never does any practice. For this unrewarding work the teacher is paid £10 an hour. In the same evening a professional singer has an enjoyable time singing in an opera to a full and appreciative opera house. For this immensely satisfying evening the singer is paid £5,000
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What are the causes of unemployment and why are some groups more severely affected than others? |
Unemployment
During the worst years of the Great Depression, from 1929 to 1933, unemployment afflicted almost one-fifth of the labour force in the industrial world. For months and in some cases years on end, many families had no income other than meagre payments from the government or from private charities.
Unemployment hurts different groups unequally. When the average unemployment rate in the United Kingdom is 5 per cent, the unemployment rate among young people 16 to 19 years old is close to 20 percent. In South Africa the highest rate of unemployment is among the Africans.
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Why do prices rise and why do some countries sometimes experience rapid price increases while others have stable prices? |
Inflation
Between August 1945 and July 1946, prices in Hungary rose by an average of 20,000 per cent per month. In the worst month, July 1946, they rose 419 quadrillion per cent (a quadrillion is the number written as one, followed by 15 zeros).
In the United Kingdom inflation in 1990 was nearly 10 percent. At this rate prices on average would double in around seven years. By 1991 the inflation rate was down to around 5 percent, but at this rate it would still take less than 15 years for prices on average to double.
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Why do governments raise and spend so much money? What happens if they spend more than they raise and what happens if they spend less? |
Governments
Taking the central government along with local authorities there are many governments in the United Kingdom. The EC also has a parliament and forms another level of government. These authorities touch many aspects of life. The EC operates policies for industry - and central government maintains the armed forces, the main roads, the National Health Service, while local governments provide schools, the police, minor roads and fire services. Moreover, all levels of government make laws, and governments regulate matters as diverse as fishing policy, mergers between large firms and pollution levels.
The scale of government activity has increased dramatically over the years in most countries. A century ago the central government in the United Kingdom employed about 50,000 but in recent years it has employed nearly 10 times as many. Government activity costs money and today taxes amount to about 37 percent of every pound earned in the UK.
When Mrs Thatcher became Prime Minister in 1979, the government’s spending exceeded its tax revenues by more than six billion pounds.
Nine years later, the governments’ spending was less than its tax revenues by nearly five billion pounds.
Today, once again, it spends far, far more that it earns (in 2022 it spent 1,120 billion pounds, but only earned 965 billion - 155 billion less).
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What determines the pattern and the volume of trade between nations and what are the effects of tariffs and quotas on international trade? |
International Trade
In the 1950's almost all the cars and lorries on the roads of the United Kingdom were made in the United Kingdom. By the 1990's, domestic car manufacturers had only a minority of the market. Cars are not exceptional. The same can be said of television sets, watches and motor bikes. Central government is very concerned about international trade. It imposes taxes called tariffs, on some imports, and it has established quotas, which restrict the quantities that may be imported, on some others.
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Why are some wealthy while others live in poverty and how does this impact on the environment? |
Wealth, Poverty and the Environment
At the mouth of the Canton River in southeast China is a small rocky peninsula and a group of islands with virtually no natural resources. Nevertheless, this bare land supports more than five million people who, though not excessively rich, live in rapidly growing abundance. They produce much of the world’s fashion goods and electronic components. They are the people of Hong Kong.
On the eastern edge of Africa bordering the Red Sea, a tract of land a thousand times larger supports a population of 34 million people - only seven times that of Hong Kong. The region suffers such severe poverty that in 1985 rock singers from Europe and North America organised one of the most spectacular worldwide fund-raising efforts ever seen - Live Aid - to help them. These are the desperate and dying people of Ethiopia - Numerous decades later their situation hasn’t changed much!
Hong Kong and Ethiopia, two extremes in income and wealth, are not isolated examples. All countries, whether poor or rich, are trying to increase their output and the living standards of their people. However, will increasing world production lead to ever more pollution and cause resources - whether exhaustible like coal or renewable like fish - to be depleted? Or will we be saved by “green” measures such as the United Kingdom’s governments’ aim that a quarter of all household waste should be recycled and the EC’s ruling that 284 Scottish fishing boats should be tied up for eight consecutive days each month?
These seven big questions cover some of the big issues in economics. They are big questions for two reasons. First, they have an enormous effect on the quality of human life. Secondly, they are hard to answer. Fortunately to be a successful investor, you don’t have to come up with the definitive answer!
As an investor, all you want to understand is how the economy, or a change in it can affect a particular company’s (or market sector’s) future performance. Based on that, you can then make the decision to either buy or sell a given share.
The are two different types of economic analysis, namely the “top-down” and the “bottom-up” approach. The “top-down” approach is based on the premise that if we know what is happening with the economy at large, then it must ripple down to the individual companies (ie. if the economy is doing well, then so must the average company). Equally if all the major world economies are booming, then it must be good on average for the smaller economies.
The “bottom-up” approach looks at the prospects for the economy as a whole by first looking at the individual companies, then the industry and then the economy at large. If a whole lot of companies in a certain sector are doing well, then that sector does well, as must other sectors it depends on and/or are dependant on it. As influential sectors of the economy do well, this in turn must improve the economy as a whole. If individual economies are all doing well, then globally everything must also be doing well!
The following discussion will use the “top-down” approach and discuss eight aspects of the economy at large in that context:
Balance of Payments
This is a record of the inflow and outflow of money from a country over a certain period (in South Africa the figures are released for each quarter).
Ideally we would like to have more money coming in than going out which would result in us having a Balance of Payment Surplus.
This can then be used to pay for imports in the future.
The Balance of Payments comprises two separate accounts:
Current Account - this reflects all trade in goods and services between South Africa and the rest of the world plus all transfer payments (which includes tourist payments, dividends and interest).
Included in this account is the Trade Account (imports and exports, but excluding transfer payments).
Capital Account - this is a record of the buying and selling of assets between South Africa and the rest of the world. For example, the purchase of shares by a South African investor in London (with Reserve Bank approval, of course) would be reflected on the “Capital account” as an outflow of funds from SA. The purchase of a factory in South Africa by an American investor would be reflected as an inflow of money on the “Capital Account”.
Usually countries do not aim for a Current Account surplus if a surplus on the Capital Account has compensated any deficit. (It is desirable if that more capital is coming into the country than going out of it).
Gold and Foreign Exchange Reserves
In South Africa we have both Gold and Foreign Exchange reserves. First, the Gold Reserves (all bullion and gold coins in the country) are valued at 90% of the last 10 London fixing prices (this conservative valuation allows for downward price fluctuation). These reserves account for about 60% of the total reserves in South Africa.
The balance of reserves is mainly made up of Foreign Exchange. These comprise of demand deposits (ie. Deposits with banks which can be withdrawn on demand), call money (ie. money which can be “called” on at very short notice), overseas Treasury Bills (short-term Government securities which normally mature in three months), securities of foreign Governments (gilts etc., held overseas) and other forms of relatively liquid foreign currency assets. The foreign currency most commonly used around the world is the United States dollar since it is used as backing for most international currencies.
These Gold and Foreign Exchange reserves (the combined total) are used to pay for the importing of goods and services, to finance capital outflows and various other transactions. When these reserves are running low, the country is less able to fund its imports. If it is less able to pay for imports, this may have serious long-term consequences for the economy because it cannot afford vital capital equipment for industry and the mines. This then slows expansion in the economy in the medium to long term.
Basically, the larger the foreign and gold reserves are, the healthier the economy is. If the reserves dwindle, danger could be on the way.
Exchange Rates
These refer to the rate at which the rand can be exchanged for United States dollars, or any other foreign currency. There are two systems of currency exchange: the “fixed” and the “floating” exchange rate system.
The Fixed system is no longer in operation (ie. exchange rates do not vary, except in times of crisis or when one currency is “revalued” or “devalued”). Currently, the majority of countries operate on a floating exchange rate system where the currency fluctuates from minute to minute driven by buyers and sellers (much like a share on the stock market).
In practice however, the Reserve or Central Bank of a given country will usually intervenes to attempt to stabilise their currency in a trading range. It can either support the currency (by buying it on the open market, thereby making them more scarce, so forcing up the “price”), or allow it to fall, (by buying either dollars making them scarce and so forcing up the dollar price or by selling the countries currency and thus making them plentiful and thus causing the price to drop).
As Gold (which accounts for more than 50% of SA’s export revenue) is sold at a fixed price valued in US dollars, the exchange rate has a very serious impact on the South African economy. This is not the case in most other countries.
As a counties Exchange Rate falls, then it receives more for it’s exports in its local country - thus a falling exchange rate can boost exports and increase profits. However, on the other side, companies importing goods have to pay much more. This will cause prices for non-local goods (and locally produced goods that rely on imported components) to rise, which in turn will increase inflation. As inflation rises, the Reserve/Central Bank should step in and raise interest rates as discussed below.
Interest Rates - What They Mean
The rate at which you are charged when you borrow money is the Interest Rate (on the other hand, should you lend it, it’s what you receive for having done so). As in all financial matters, supply and demand governs the Interest Rate. If a bank wishes to attract deposits (it has a surplus of money to lend), it will discourage depositors and attract lenders by lowering its interest rates. Conversely, raising rates will encourage depositors and discourage lenders.
The prime overdraft rate (or prime lending rate) is the rate at which banks will lend to their best clients. When the economy starts to lift, this is measured by the rate of spending in general. The demand for credit measures this in turn. If the demand for credit is so high that banks are unable to satisfy it, they will raise their interest rates to attract more deposits.
As the prime rate varies, companies with high debt ratios are affected - adversely if the rate goes up and favourably if it goes down.
The Bank Rate, now known as the REPRO Rate, is the rate at which the Reserve or Central Bank lends money to the banking sector to cover any short falls they may have. The Reserve/Central Bank will increase its rate if the rate of spending in the country gets too high (ie. consumers are buying imported goods and the increased level of imports is now affecting the balance of payments). Since the Central Bank lends to the banking sector, it can control the rate at which the banks in turn lend to borrowers.
The Money Market
This is where the discount houses, Corporation for Public Deposits (a government investment body) and the banking sector lend or borrow money in the short-term. The key player is the Reserve Bank which is the government’s banker. The activities of the money market tell us a great deal about the demand for credit, which in turn tells us about the state of the economy.
At the end of each day, all banks are required to match their assets and liabilities. If they have lent more money than they have matching assets for (ie. Moneys deposited, securities, etc.), they must borrow from other financial institutions or the Central/Reserve Bank to cover the shortfall.
The “shortage in the money market” tells us how much credit (known as accommodation) was granted on any one day by the Reserve/Central Bank to the discount houses and clearing banks. If the shortage is great, then there is a high demand for credit. If this persists, short-term interest rates will probably be raised.
Some key interest rates to watch:
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Bankers’ acceptance rate - a banker’s acceptance (BA) is a type of “bill of exchange”. It is a form of short-term lending between two parties that a bank endorses, or in which the bank is a principal. Like most bills of exchange, the credit is granted for three months. So if A sells R200 000 worth of machinery to B, this can be financed by a banker’s acceptance draft. A bill is drawn up requiring B to pay for the goods three months hence and B “accepts” this bill by signing it. However, A does not have to wait for 3 months to receive his money. He can then sell the bill to someone else. This is known as “discounting” - the seller, can take the bill to a discount house which will pay out perhaps R195 000 instead of the original R200 000 (the discount house, instead of charging interest on R200 000 will deduct its fee for discounting up front). The rate at which it charges for discounting is known as the BA rate. So B, instead of paying A the credit of R200 000, pays the discount house. The discount house has paid out R195 000 to A and will receive R200 000 in 3 months from B - its fee is the difference between these two figures. This is also known as the “Liquid BA rate” because these BA’s can be traded and are therefore “liquid”.
Re-discount rate - the discount house can then take that BA to the Reserve Bank and “re-discount” it. The discount house paid A R195 000 on credit of R200 000 - the Reserve Bank may then pay the discount house R197 000. The rate at which the Reserve Bank re-discounts the BA is the re-discount rate. So B, instead of paying the discount house the R200 000 he owes, will now pay the Reserve Bank. By increasing the rate at which it re-discounts bills (such as BAs, but also Treasury bills, negotiable certificates of deposit, Land Bank bills etc.,) the Reserve Bank can control the level of other rates in the economy. If, for example, the Reserve Bank paid only R196 000 to the discount house, the discount house would have to increase the rate at which it discounts BAs (ie. The BA rate). This raises the cost of short-term credit overall in the economy and it may become too expensive for some traders to carry on certain types of business.
Treasury Bills - these are short-term government securities, usually also three months in duration. They are very similar to BAs with the main difference being that they are issued by the government to institutions. They are issued in amounts which vary from R10 000 to R5 million. They are a form of short-term government financing. The rate at which TBs are discounted is known as the TB rate. When a discount house re-discounts the Treasury Bill at the Reserve Bank, the rate at which this is done is known as the bank rate. The Treasury Bill rate is the discount rate at which TBs are issued.
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Other Interest Rates - in the capital market where gilts (government loan stock) are issued and later traded, the rate of return on these investments is known as interest rates. The long dated government stock, R2030 (shown here) and the Eskom ES42 (expires 2042) are the most commonly referred to gilts, and are used as a general barometer of the South African market.
Measuring Economic Growth
Economists measure the growth in the economy by looking at the “Gross Domestic Product” (GDP), which is defined as the total value of all goods and services produced in the economy over a predetermined period (usually one year) measured at current prices.
As South Africa has a fairly large “informal” business sector that cannot be monitored, its GDP figures are not totally reliable. However, it is fair to assume that this omission is fairly constant from year to year so although the actual figure may not be correct, the percentage change (up, down or constant) is representative of the whole economy.
The Gross Domestic Expenditure (GDE) is the total value of spending on final goods and services in SA over a predetermined period. The spending is by households, business and government. This includes spending on imports, which the GDP figure does not, but it does not include exports (since these are sold outside SA).
Private Consumption Expenditure (PCE) is the spending by households on final goods and services over a given period.
Gross National Product (GNP) - this is our GDP less factor payments (where factor payments = market price - indirect taxes + subsidies, if applicable). The GNP is not as important as the GDP.
Inflation
Inflation is the rate at which prices increase. Inflation goes up when the cost of goods increases. The cost of goods will increase when the cost of producing them increases (ie. they are fully or partially imported and/or the machinery needed to produce them is imported, and then the exchange rate weakens) or if there is insufficient supply of goods to satisfy the demand (there is more money in circulation in the economy because banks are freer about granting credit, and this extra money chases the same amount of goods and services).
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In South Africa the official measure of inflation is the Consumer Price Index (CPI).
This figure is released each month and shows by how much a certain basket of weighted commodities (bread, milk, meat, petrol, electricity, etc.) have increased in price since the previous year.
Each country will provide this data based on the local economy.
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From the RSA-CPI chart it can be seen the inflation ranged between 2% and 8% during 2020 to 2022, falling to less than 5% during 2023.
However the devastating effects of inflation can be seen in the graph opposite where an item that cost on average 750 in 1985, cost 9500 30 years later (1170% increase - a factor of 12 times the price).
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The CPI figure is given as a percentage and reflects the percentage increase of goods from the previous year (ie. a CPI of 7.4% for December means that items cost 7.4% more in December this year compared with their cost in December last year). However, the increase in the price of many items is far greater than the CPI value. This is possible since the CPI is an average of some 670 products and services (from your bond repayment rate to the price of a tube of toothpaste) all of which have been weighted based on how much of each item people buy and how often they buy it. During 1996, the CPI varied from 5.5% to just over 9% in South Africa, however, 519 of the 670 items used to compile it increased by more than 20% - 46 decreased in price and 5 remained the same.
Money Supply
Money supply is the amount of money in circulation in an economy. The growth in the level of money supply has a number of different measurements and related terminologies as described below:
M1(A) - this is all notes and coins in circulation, plus cheque and transmission (ie. savings accounts) accounts with banks, building societies and the Post Office.
M1- this is M1(A) plus demand deposits with banks.
M2 - is M1 plus short and medium term deposits with banks, building societies and the Post Office plus “share” investments with the building societies and Post Office.
M3 - M2 plus all long term deposits with banks, building societies and the Post Office.
M3 is the broadest definition and is the one generally used to measure the increase in the level of money supply. The government now sets targets for money supply growth using monetary policy.
Monetary Policy - the term given to the means by which the Reserve Bank controls the level of money supply in the economy (ie. increasing the discount rate to restrict credit growth).
Fiscal Policy - This is the taxation policy. If it increases taxes, it increases government revenue, but depresses the economy. If it reduces taxes this will stimulate economic growths. If people are taxed at 100% of their income, they will stop working (entire point of working has been removed!). If there is no tax, the government receives no funding and stops functioning (impossible to discern the difference!). At a reasonable rate of taxation, people will, despite taxation, feel inclined to earn more because they can see a real return. This will increase the productivity of the country and therefore the tax receipts will increase without having to increase taxation.
Conclusion
Economics can be as simple or as difficult as you need to make it. The study of the country as a whole is called “Macro-economics”, while the study of the individual parts that make up the country (eg. a company or a product) is called “micro-economics”. In both cases, as with the stock market, it is supply and demand which governs the levels of all the components (eg. money supply, inflation, interest rates, etc.).
The best share decisions will be those made in the light of the current economic conditions. Always make a rough economic analysis of the country before you finalise your personal stock market decisions.
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| Personal Financial Planning |
One reason why so many investors do not make money (or why they lose money), is their lack of a clear vision of what they are trying to do. Planning is critical to investment. Without proper planning, investment often degenerates into speculation.
Therefore, you need to identify clearly your medium and long term objectives in precise terms. You must also ensure that they are realistic for you in your circumstances. Remember that your needs are unique. It is essential to carefully determine the returns you require, your attitude to risk and consequently how much risk to be assumed, your time horizon, the flexibility and liquidity necessary, your tax position and many other factors.
Despite inflation eating away at your money, savings is still the only way to provide for the future. These should be carefully structured and allocated to the following categories:
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Sufficient cash readily available to cover emergencies - preferably the equivalent of a few months’ pay (or living costs).
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Medium-term savings to finance a holiday home, a new car or a foreign holiday - whatever your medium-term goals are.
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Sufficient retirement savings to ensure you enjoy your later years and the extra leisure they afford. You want to make sure that you do not have to eke out an existence in a run down single room flat.
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As a general point, anyone wishing to make a start in the stock market should set aside 10% of monthly income for this purpose. If this 10% is treated as a monthly living expense and is allowed to accumulate, it quickly translates into a meaningful investment portfolio.
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| Structuring Your Portfolio |
As the old adage goes, “Never put all your eggs in one basket”, so goes the advice for your portfolio. You need to develop an investment strategy that will create a balanced and diversified portfolio. If you limit the major part of your investments to quality shares, you will greatly reduce the risk of financial loss. Prices are, and will always be volatile - spreading your investments reduces this risk. No one sector of the market (eg. gold, mining financials, industrials, etc.) will always be the ultimate investment area - assess all major socio-political and economic events and their potential effects on the various sectors and plan accordingly.
Your portfolio basis should consist of a core of high quality, financially strong shares that have a proven management team that have achieved a consistent track record. If desired, include a small number of high-risk (and correspondingly higher than average potential) shares, remembering that the greater the potential gain, always the higher the potential loss. Try to identify emergent “growth” companies which are characterised by entrepreneurial skills, innovation, unique products etc. as these will provide excellent gains in their initial years.
Modern Portfolio Theory
An optimal combination of assets in a securities portfolio in order to produce the highest possible return for a given level of risk or the least possible risk for a given level of return.
The emphasis is not on how the securities will perform in isolation but rather how they will perform in combination.
An Efficient Portfolio Hypothesis
The concept here is to limit the number of decisions you have to make and concentrate on getting these fewer decisions right.
You will want to confine yourself to a relatively few, easy to understand companies. Choose companies whose investment risks you can judge with a reasonable degree of accuracy.
Remember that luck has nothing to do with a successful portfolio. The investor who “makes it” has spent the time to acquire sufficient background knowledge to appreciate the significance of various chart patterns. He has spent time researching the company and understands the implications of the statistics he has gleaned. As with any endeavour in life, the more you put in, the more you get out!
Share Selection Points to Remember
When you select a share that you consider worth investing in, it should satisfy the following:
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It should have achieved consistent earnings and dividend growth, a satisfactory return on capital employed and a satisfactory debt to asset ratio.
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The chairman’s statement over the years should have echoed a reasonable amount of optimism which subsequent results have borne out.
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It should operate in a trading area which is not subject to excessive cyclical pressure.
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If the share has not shown any reasonable growth in the past, don’t automatically assume that it will make up for lost ground now - there are probably sound (but maybe hidden) reasons why nobody else has touched this share.
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Sometimes “good” shares that have made greater losses than their sector mates during a decline without any sound fundamental basis for such, recover from their greater oversold state and hence produce some of the best gains when the market turns.
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If the market has been falling and has now started to rally, the shares that faired best during the fall (ie. fell the least) will probably have the greater strength during the rise (ie. go up the most).
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There should be sufficient shares in public hands to ensure that trading is always possible. It is of no use to you if you identify a great buying opportunity, and then cannot profit from it!
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| Tax Implications of Share Dealings |
Simply put, if someone is making money, the Government where he resides would like a portion!
Depending where you are located, generally, if you “Invest” in the stock market, your capital gains are not taxed, or are taxed at a nominal rate. If you “Trade” the market, you must pay tax on your profit. Thus, considerable confusion exists in the minds of the average stock market investors as to how the Government Tax Authorities is going to treat him personally. What is an Investor? What if an investor makes an occasional trade -does this endanger his tax status and thus invite taxation of all their capital gains? For most, however, the greatest questions undoubtedly arise out of a basic misunderstanding of the principles involved.
The investor must state his intention upfront and then make sure that his actions can be justified in terms of his stated intentions.
To help you access your situation, note the following basic principles of the taxation systems.
An investment of a capital nature is one which the investor embarks on with some degree of permanency to hold for the production of income. Therefore, if you buy with the intention of receiving dividends from your shares, this is clearly an investment of a capital nature. You will want to show that your intention in buying this share was not for its share price growth potential. Rather you bought it because of the great potential for the dividend from this share to grow.
Each year, you will be taxed on your gross income. “Gross income” is defined as “the total amount, in cash or otherwise, received by or accrued to or in favour of such people during such years or period of assessment”. In other words, income need not be in the form of cash and it need not be received as of the end of the tax year - it need only be accrued - in order to be considered part of the total taxable income for the year. Dividends from shares are thus usually taxable.
If you have purchased some shares that you have held for just a short period (the Government may consider anything under 5 years as short-term) and then sold you will need to be able to prove that you sold these shares due to reasons beyond your control and that any capital profit made was incidental. Your reasons for selling may be because of an unforseen personal need for funds or because the shares dividend growth/returns failed to live up to expectations.
The Tax Authorities will then decide that the profit made from the sale of shares during the year(s) in question is income or capital. When you do this, the Authorities will look at the investor’s history of share dealing. He will notice how long the investor generally held a share, what dividends were received and what profits were made from the sale of the shares. The Authorities may decide to tax the profits from one share transaction, while exempting others. The problem here is that although the law is clear, it is very difficult to apply with certainty.
However, if you intend to trade the market actively, safeguard your long-term investments by separating them from your short-term holdings. Maintain two separate portfolios and/or accounts with your broker. If warranted, obtain professional assistance from those qualified to give such.
While the average share market investor clearly indulges in the occasional trade and in the strictest sense becomes liable for tax on any profits he makes in respect of that trade, in practice he is usually left alone by the Authorities. This often depends on the size of the portfolio in question as there is greater financial incentive to try and prove “trading” in a successful multi-million dollar portfolio (you may be the unlucky one!).
However, what is often overlooked is that if your are taxed you on any profitable transactions, you are in turn entitled to off set any losses you might have made. Any expenses you may have incurred (be it for stock market tuition, computer software, telephone calls to the stockbroker, bank etc. concerning share dealing, stationery, and any other item where it can be proved that these expenses were incurred in the generation of share market income) can also then be first deducted from your profit. Like most things in life, when it comes to taxation, find out all the rules and then adjust the way you play to most profitably fit in with the rules.
You are now familiar with how the economy works and how it can affect the stock market. At this stage you have all the needed knowledge and should be totally ready to get out there and start investing.
However, there is much more to the Financial Markets than what has been discussed so far. There are many other techniques or disciplines of technical analysis than have been covered so far. None of these are totally necessary for you to know about immediately when deciding if you would like to invest, what to invest in, and the exact timing to do it in. Nevertheless, your knowledge of the market would be incomplete without at least a basic awareness of these.
In the last two lessons, these areas will be discussed just briefly as each one could be an entire course on its own.
As an investor, you need never venture into these markets, however, they have their place and after the next lesson, you will know if there is a place for them in your investment strategy.
First, we will look at the Gilts and Options Markets along with the rising Crypto-Currency side in Lesson 6.
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(You can also obtain this Lesson as a PDF document from our Services Menu, or click here)
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