Overview
The Johannesburg Stock Exchange (JSE) is the oldest of its kind in the subcontinent that was established in 1887 by Benjamin Minors Wollan after the first gold rush experienced on South African soil. The JSE was established to facilitate the drastic increase in trade that followed the discovery of gold in the Witwatersrand.
Mining and financial companies were formed after the discovery of gold and investors subsequently needed a central entity to gain access to primary capital in South Africa. During the 1890s, mining continued to grow, and it was reflected in the economic boom that drove the JSE to new heights at the time.
By 1963, the JSE had joined the World Federation of Exchanges and during the years it grew and expanded, leading to its physical location changing several times over the years. By 2005, the JSE demutualized, and it was listed on its exchange.
JSE Components and Sectors
The JSE uses an Industry Classification Benchmark (ICB) according to which listed companies on the main board are categorized. The overall JSE is divided into 10 industries, 9 subsectors, 41 sectors, and 114 subsectors.
The Industries listed on the JSE are as follows:
- Oil and Gas (J500)
- Basic Materials (J510)
- Industrials (J520)
- Consumer Goods (J530)
- Healthcare (J540)
- Consumer Services (J550)
- Telecommunications (J560)
- Utilities (J570)
- Financials (J580)
- Technology (J590)
Types of Stocks Explained
Stock market investment is one of the most important pathways to building wealth in modern times. While there are two main types of stocks namely common and preferred stocks, they are not the only components in the stock market. The comprehensive and complete list of types of stock includes:
- Common Stock
- Preferred Stock
- Large-Cap Stock
- Mid-Cap Stock
- Small-Cap Stock
- Domestic Stock
- International Stocks
- Growth Stocks
- Value Stocks
- Cyclical Stocks
- Non-Cyclical Stocks
- Safe Stocks
- ESG Stocks
- Blue Chip Stocks
- Penny Stocks, and several others.
Common and Preferred Stocks
Common and preferred stocks are two of the main type of stocks that people typically refer to. Common stocks allow investors to have partial ownership in a company proportional to the number of stocks that they own, with shareholders receiving a proportional share of the value of remaining assets if the company is liquidated or goes bankrupt.
Preferred stocks provide shareholders with preference over common shareholders and allow them to get back a certain amount of money if the company is liquidated. In addition to this, preferred shareholders will receive dividends before common shareholders.
Large-, medium-, and small-cap stocks
Stocks are divided according to the total worth of all shares combined, also known just as market capitalization. Companies with the most market capitalization are referred to as large-cap stocks while mid-and small-cap stocks represent smaller companies.
Large-cap stocks are considered a safe investment option because these companies are well-established and show great potential for consistent future growth. Medium- and small-cap stocks, however, are riskier, but they can have a high return on investment if the companies experience rapid and significant growth.
Domestic and International Stocks
Stocks can be categorized according to where they are located. Shares of companies that are based in South Africa are considered domestic stocks while all others from companies located abroad, for instance, the United States, China, Australia, and so on, are international stocks.
Growth and value stocks
When investors build their investment portfolios, they tend to look for companies that are experiencing rapid increases in sales and profit margins. These investors are classified as growth investors and while growth stocks are riskier, they feature significantly higher potential returns.
Value investors seek companies whose shares are inexpensive. Value stocks are conservative investments, and they represent mature, well-known companies that have grown into reputable industry leaders with not a lot of room for further growth and development.
Cyclical and Non-Cyclical Stocks
National economies follow cycles that relate to contraction and expansion, with typical periods where prosperity, as well as recession, can be experienced. Some businesses in South Africa can have more exposure to broader business cycles than others, which is why investors refer to these stocks as cyclical.
These stocks will include manufacturing, travel, and luxury goods sectors because the economic downturn will influence the ability of consumers to purchase goods quickly. However, when the South African economy is strong, there are frequent rushes of demand that can influence these companies, and their shares, positively.
Non-cyclical stocks are also referred to as secular or defensive stocks because of their lack of demand swings. A perfect example of non-cyclical stocks is that of grocery stores because there is consistent demand regardless of influential factors.
When there are dips in the overall stock market, non-cyclical stocks tend to perform better, and this can be seen during times when there is national and global distress. For instance, many grocery stores saw stable performance during the Covid-19 pandemic while others saw an increase in demand.
Safe Stocks
Safe stocks refer to those that see small price movements up and/or down when they are compared in context with the overall stock market. These stocks are referred to as low-volatility stocks and they are found in industries that are less susceptible to changing economic conditions.
ESG Stocks and Investing
Environmental, Social, and Governance Investing and subsequent stocks refer to a specific investment philosophy that focuses on the three components that it represents. ESG Investors consider companies that are actively involved in social responsibility practices.
Blue Chip and Penny Stocks
These stocks are judged according to perceived quality whereas blue-chip stocks feature companies that are industry leaders and who have strong reputations. These companies may not offer higher returns, but the stability in their share performance makes them attractive.
Penny stocks, on the other hand, are the shares of low-quality companies that have inexpensive share prices. These stocks typically fall prey to schemes that can drain the investment of those who are not aware of such dangers.
Functions of the JSE
Like other stock markets and exchanges, the JSE has a list of functions that it performs and while its primary purpose is to offer a platform where businesses can raise capital, it is also where investors and traders can buy and sell shares.
In addition, the JSE performs other functions, including the following:
- It serves as a link between publicly traded companies and investors.
- It offers a safe market where securities can be bought and sold.
- It prevents fraud and safeguards investors by maintaining a highly regulated environment.
- It encourages new short- and long-term investments.
- It provides a venture capital market to the open market.
- It serves as a benchmark for the overall South African economy.
- It provides small investors with an ideal platform where they can invest in the South African economy.
What drives the JSE?
Stock prices in the JSE are driven by seller supply and buyer demand and the factors that drive the prices of shares can be broken down into three main components namely fundamental factors, technical factors, and market sentiment.
Fundamental Factors
In an ideal market model, prices would be determined solely by fundamentals which can refer to two things namely an earnings base, or the earnings per share (EPS), and a valuation multiple such as the P/E ratio.
Key fundamental factors that influence share prices include:
- The level of the earnings base is indicated through the EPS, Cash Flow per share, and dividends per share.
- The anticipated growth in the overall earnings base.
- The discount rate is considered a function of inflation.
- The perceived risk associated with the stock.
Technical Factors
Technical factors refer to external circumstances and occurrences that influence the supply and demand of shares. These factors can indirectly affect the fundamental factors while others have a direct impact.
Technical factors include the following:
- Inflation
- The economic strength of the overall market and peers
- Substitutes relate to other assets such as corporate bonds, government bonds, commodities, and so on.
- Incidental transactions relate to shares being bought for reasons other than the intrinsic value of the share.
- Demographics
- Trends
- Overall liquidity
- News
Market Sentiment
Lastly, Market Sentiment refers to the market participants’ psychology, which can be individually, or it can apply collectively. Market sentiment is characteristically subjective, biased, and obstinate. Market Sentiment is also the topic of a new field of behavioral finance.
FAQ
When does the JSE open for trading?
The JSE is open from Monday to Friday from 9:00 am until 5:00 pm, South African Standard Time (SAST)
What is the purpose of the JSE?
The main purpose of the JSE is to provide a platform where primary capital can be raised. This is done by redirecting cash resources into productive economic activity. This allows for the South African economy to grow while employment opportunities and wealth creation can be ensured.
How does the JSE protect investors?
The JSE is self-regulating, and it also oversees the activities of brokers and listed companies to ensure that their activities are legitimate, fair, and transparent.
Who regulates the JSE?
The JSE is regulated by the Financial Sector Conduct Authority (FSCA), the main market regulator in South Africa that supervises the JSE.
What trading mechanism is employed by the JSE?
The JSE uses a broker dealing accounting (BDA) system which is used for clearing and settlement.
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