🏢 What Is an Equity Share?
An equity share represents a unit of ownership in a company. By owning shares, you become a shareholder—part-owner of the business.
💡 Why Do Companies Issue Shares?
To raise capital for:
- Daily operations
- Business expansion
- New projects and innovation
🎁 What You Get as a Shareholder
- Part Ownership: Your stake grows with the number of shares you own.
- Dividends: A share of profits (if declared by the board).
- Voting Rights: Influence major decisions like electing directors.
- Reinvested Earnings: share in the ultimate benefits flowing from reinvested earnings
- Liquidation Proceeds: Share in assets if the company dissolves.
🏦 How Share Trading Works
Shares of listed companies are traded on stock exchanges, for example the JSE (Johannesburg stock exchange). You can’t trade directly on the JSE as an individual. Instead, you need to open a share trading account with a registered/authorised financial institution or platform (like Easy Equities). Once your account is funded, you can specify which shares you want to buy and how many.
However, the transaction isn’t instant. A trader or automated system matches buyers and sellers on the exchange. Because share prices fluctuate continuously based on supply and demand, the final price you pay may differ slightly from the price you saw when placing your order.
The trader earns a fee through the spread—the difference between the buying and selling price. You may notice a small drop in value immediately after purchase because your shares are valued at the spot price, not the purchase price.
Other costs include securities transfer tax and platform fees. But if you’ve chosen a strong company, these initial costs are usually outweighed by long-term gains from dividends and share appreciation.
It’s smarter to invest for the long term than to speculate. Speculation—trying to “buy low and sell high”—can backfire due to fees, taxes, and unpredictable price swings. Choose well, hold steady, and let your investment grow.
🧪 Try It Yourself: Open a Demo Account
If you're curious about investing but not ready to commit real money, you can open a free demo account with Easy Equities to explore how the equity market works. It’s a safe way to learn by doing—without financial risk. You can use my referral link to sign up here.
This platform allows you to buy fractional shares, making it accessible even if you're starting small. It’s a great first step toward building your financial future.
🧾 Types of Shares and Instruments
| Type | Description |
|---|---|
| Ordinary Shares | Residual claim on profits after all obligations have been met. Benefit from retained earnings. |
| Preference Shares | Preference share holders are creditors of the company. They are entitled to dividends before ordinary share holders. Often structured with features like cumulative, redeemable, or convertible. |
| Deferred Shares | Typically awarded to founders. Dividends paid after conditions are met. |
| Debentures | Fixed-interest loans to the company. Less popular due to interest-based taxation. |
🏛️ Primary vs Secondary Market
| Market Type | Description |
|---|---|
| Primary Market | Where companies issue new shares. We refer to it as Initial public offerings (IPOs). |
| Secondary Market | Where investors trade existing shares. |
📊 Why Invest in Equities?
- Potential for higher returns (capital growth + dividends)
- Diversification across asset classes
- Inflation hedge
- Ownership and influence in companies
⚠️ Risks to Consider
- Volatility: Prices can swing sharply in the short term.
- Potential for Capital Loss: You may lose money.
- Time Horizon: Because of the volatility, equity is not ideal for short-term investments. Your investment horizon must be 5+ years to consider equity.
Investors should assess their risk tolerance and conduct thorough research on the companies they invest in. They must further make sure this aligns with their objectives. It is important to diversify.
💰 What dretermine share prices
🔄 Market Forces
- Supply & Demand: If demand for a specific share is less than supply, the share price will likely fall. And if demand is more than supply, the share price will likely increase..
- Business Cycles: Prices rise in upswings and fall in downswings.
- Psychology: News and rumors can sway investor sentiment.
🧮 How Are Shares Valued?
1. Discounted Cash Flow (DCF) techniques
Estimates intrinsic value based on future cash flows.
📐 Gordon Growth Model
The Gordon growth model assumes dividends grow at a constant rate:
Value of share = DPS / (k - g)
- DPS = Dividend per share expected one year from now
- k = Required rate of return
- g = The constant growth rate
📐 No Growth Model
The no growth model assumes constant dividends:
Value of share= E / k
- E = Earnings
- k = Required rate of return
2. Relative Valuation models
Compares shares using ratios like:
- Earnings per share (EPS)
- Earnings per share is generally considered to be the single most important variable in determining a share's price.
- This is the profit attributable to the holder of one ordinary share.
- EPS = Total earnings / the number of shares outstanding
- Number of shares outstanding refers to the total number of a company's shares currently held by all its shareholders, excluding shares held by the company itself. This number is found on a company's balance sheet.
- Price Earnings ratio (P/E)
- Price Earnings ratio = Share Price / Headline earnings per Share
- Shows how many years of earnings are needed to match the share price.
- Lower P/E often signals undervaluation—but not always.
A negative P/E means the company is making a loss.
- Earnings Yield
- Shows the yield percentage at the current share price.
- This is the Inverse of price earnings ratio:
Earnings yield = Earnings per share / Share Price x 100
- Dividend Yield
- Calculates the cash dividend per share, paid to share holders, expressed as a percentage of price,
- Dividend Yield = Dividend per share paid in the last year / Share Price x100
- Shows income return on investment.
⚠️ Different sectors require different benchmarks. Compare apples with apples.
3. Asset-Based Valuation
Estimates value as: Assets – Liabilities = Intrinsic Value.
This is useful for asset-heavy businesses.
💡 Fund Fact: From Paper to Pixels
Before electronic trading, the Johannesburg Stock Exchange (JSE) operated a physical trading floor where stockbrokers gathered to shout out buy and sell orders—a system known as open outcry. Brokers would negotiate prices face-to-face, and transactions were recorded manually, often with chalk on large boards. Shareholders received physical share certificates as proof of ownership.
This changed in 1996, when the JSE closed its trading floor and adopted the Johannesburg Equities Trading (JET) system. Today, all trades are processed electronically through STRATE, South Africa’s central securities depository. Ownership is now recorded digitally, making trading faster, safer, and more efficient
🧠 Final Thoughts
Valuation models are tools—not guarantees. Use them with judgment, sector awareness, and a long-term mindset. Historical data helps, but markets evolve. Stay curious, stay diversified, and keep learning.
🧪Weekly Challenge
Visit the Moneyweb website: 🔗https://www.moneyweb.co.za/tools-and-data/daily-indicators
✅ Find the top 5 performing sectors.
💸 Find the top 10 Dividend watch. See how much these companies pay per share (in cents)
🔄 Also find the top 10 of the top 40. See how much the share prices of these companies changed for the day. Click on at least two of these companies to see more detail.
- See the graph. You can click on the time periods on the right-hand side to see how the company did over the selected period (7 days, 30 days, 90 days, 6 months etc.)
- See the consensus forcast on the right-hand side. Is the analysts' consensus buy, hold or sell.
- Look below the consensus forecast. See if you can find the EPS, P/E ratio and Dividend yield. Do you remember what each of these values mean?
- Also see what other information you can find on this page. (Latest news, company peers, Latest SENS announcements, Income statement, balance sheet).
You can explore the 'Click a company page' 🔗https://www.moneyweb.co.za/tools-and-data/jse-search to see what other companies are listed on the JSE
Enjoy!