Finance FAQs edition 1: JSE | Working Capital | Emerging Markets

• Global, South Africa
• Emerging markets, Johannesburg Stock Exchange, JSE, Working Capital
• April 19, 2020

People use financial terms all the time, but rarely have a proper understanding of them. Simple terms aren’t always so simple.

There’s no such thing as a stupid question, but people are still nervous to ask.

From time to time, I’ll deal with a set of unrelated topics or questions in the finance world.

Feel free to submit ideas for questions!

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Do stockbrokers work at the Johannesburg Stock Exchange (JSE)?

Generally, no. This is a common misconception.

The JSE provides an efficient marketplace for people to trade financial instruments (e.g. shares). The JSE is a platform through which brokers execute trades with each other on behalf of clients.

The brokers work for stockbroking companies that are independent of the JSE, although they are referred to as JSE Members.

Think of the JSE as your local food market. The food represents the companies being traded and the vendors represent the stockbrokers.

Fun fact – the JSE itself is a public company that is listed on the JSE!

You can find a list of stockbrokers here: https://www.jse.co.za/findastockbroker

What is “working capital”?

Working capital is the lifeblood of any business. It represents the short-term assets and liabilities, which together give you a view of how liquid the business is.

What on earth does that mean?

Let’s take a simple example: a small shop that sells some goods for cash and some on credit.

The shop needs cash to pay day-to-day expenses and to buy inventory. It receives cash from customers, but this is delayed where sales are made on credit.

A shop in a strong liquidity position would have the following characteristics:

• A high cash balance in the bank
• Enough inventory in the shop to drive sales, but not too much inventory
• Most sales on a COD basis or on credi,t but payable within a short period of time e.g. 30 days

The opposite position would be a low cash balance, too much (or obsolete) inventory and sales on credit over an extended period. This kind of situation can lead to a business going bankrupt purely through running out of cash, even though sales may appear to be good.

Are “emerging markets” the same as “Third World countries”?

There is overlap, but no.

Third World countries are nations that were not aligned with either the United States or the Soviet Union. The term arose during the Cold War and is therefore a political definition.

People often comment on how poor Third World countries are. This is a misunderstanding of the definition, as the strict historical definition includes wealthy countries like Sweden and Switzerland!

In contrast, emerging markets are economies that have a specific set of characteristics. The MSCI Emerging Markets Index tracks stocks in 27 countries. The BRICS countries (Brazil, Russia, India, China and South Africa) are all included, but so are the likes of Argentina, the Czech Republic, Saudi Arabia and Taiwan.

Emerging markets are countries that are on the path to becoming developed countries. They have lower per capita income than developed markets (i.e. each resident is poorer on average), but have liquid capital markets with strong levels of trade. They have regulatory bodies and institutions and usually have rapid growth, although South Africa breaks that part of the definition.

In case you’re curious, the step below an emerging market is a frontier market, which is too small, risky or illiquid to be considered an emerging market. Examples would include Bangladesh, Cyprus and Sri Lanka.