Understanding How Investing Really Works
Understand what investing really means, from owning stocks to how funds work to the difference between active and passive investing.
What We Mean by Investing
In this guide, we focus on stocks, commonly called equities, because they are the most common way people invest for long-term growth. When you buy a stock, you are buying a small piece of a company. As the company grows and becomes more valuable, the value of your share grows as well.
How Your Money Actually Gets Invested
When you invest your money with an asset manager, such as a bank or investment firm, it is usually placed into a fund.
A fund is a large pool of money collected from many investors. That pool is then invested in a basket of shares from different companies. Instead of you having to pick individual shares yourself, the companies fund does the work for you.
Understanding Active vs Passive Funds
Active funds are managed by people who aim to outperform the market. They try to achieve this by analysing companies, studying the economy and deciding which shares to buy or sell. This is the type of fund where you likely already have most of your money invested.
Passive funds take a different approach. Instead of trying to beat the market, they aim to match its performance. They do this by following an index, which is simply a way of grouping companies to show how that part of the market is doing. Companies in an index are weighted by their market value. This means that in a JSE index, a large company like Standard Bank carries more weight than a smaller company like Spar.