Investing in shares can be a fun, rewarding journey if you’re across the fundamentals. Check out these basic investing principles (like how shares work) before kickstarting your investing journey.
The following information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.
Does the mere thought of investing in shares make you feel a little overwhelmed?
You wouldn’t be the first person to start looking into the share market only to then retreat to more familiar territory (term deposits, property). It’s a lot to get your head around and can be pretty tricky to navigate.
We’re hoping to change that with a deep dive into the basics of investing – explaining the how and why of this complex system in simple terms, starting with the shares themselves.
The usual perception
If Hollywood films and get-rich-quick schemes are anything to go by, you’d be led to think investing in shares is all about taking outlandish risks and yelling across the trading room floor while wearing an expensive suit.
It’s somewhat distorted our perception of who the everyday investor really is: a mother saving for her kids’ future, a young professional wanting to be part of the trends transforming our world – everyday people looking to build sustainable, long-term wealth.
There’s no shortage of myths such as these surrounding investing (particularly internationally) but before you consider debunking them, let’s first consider what it actually means to invest in shares.
What are shares
The Oxford Dictionary defines shares as ‘one of the equal parts into which a company’s capital is divided, entitling the holder to a proportion of the profits’.
While shares simply represent a unit of ownership, there are varying degrees. For instance, if a company has 100 shares and two of them are yours; you own 2% of the company.
The same rule applies for publicly listed companies like Amazon. If you buy shares in the retail giant, you own a chunk of the business.
Although your stake in the company won’t warrant you giving Jeff Bezos a call (CEO of Amazon) to demand faster shipping, it will hopefully generate long-term investment returns.
Shares, stocks, stock market
Just as you start to build up your investing lexicon, you’ll come across words which look similar, are used interchangeably or might even mean the same thing. It’s hard for a seasoned investor to keep up with all the terms and jargon, let alone a first-timer.
Now you know what shares are, it’s worth understanding how they fit within the broader investing ecosystem by covering other concepts which also happen to begin with S.
The term stock is typically used to describe a company trading on a stock exchange (the place where shares are bought and sold); whereas a share represents a unit of that stock. For instance, you might buy 100 shares of the stock, Alphabet (Google’s parent company).
The stock market is a more general term referring to the gathering of buyers and sellers, and the place (physical or digital) where they congregate to trade is one of the various exchanges such as the NYSE (where Apple, Facebook and Google are listed).
How can you make returns from investing in shares?
There are two major streams for generating returns from shares:
- Growth: the value of your shares goes up provided the company is performing well i.e. meeting or beating market expectations.
- Income: you are paid regular dividends (income) in cash; usually on the condition the company is profitable.
Each investment return type has its own unique upsides and downsides; figuring out which one is best comes down to your individual circumstances – investment horizon, risk appetite, financial situation and plenty of other factors.
How can you start investing in shares?
While investing in general can seem quite daunting, once you’re armed with knowledge and the confidence that comes with it, getting started with shares is relatively simple.
Here are two ways you could go about it and a key question to ask yourself:
1. DIY investing
You can fly solo and buy/sell shares through a broker. It’s all on you to decide which of the tens of thousands stocks to buy, the price you’re willing to pay and how many shares you’ll purchase.
Once you’re an active shareholder, you’ll want to keep a close eye on how the company and share price is performing so you know when you should sell your stake (shares).
A sound strategy is needed to help guide your decision-making and safeguard your potential returns.
If you opt for the DIY investing path, be sure to remain vigilant about the booming but volatile stocks a friend is raving about or someone said led to their early retirement.
Always do your investing homework (you’d be surprised how fun it can be) first and find out what the company’s future growth prospects look like before placing your bets on the latest hot tip.
2. Leave it to the pros
If you’re time-poor or aren’t ready to take the leap by yourself just yet, allowing seasoned investors do the grunt work for you might be an appealing option.
Stock markets aren’t the most rational environments, which is why share prices can vary drastically from day to day. When you invest in managed funds you don’t experience the same level of stress as you do when buying and selling shares on your own.
Why? Firstly, managed funds don’t sweat the daily fluctuations of share prices. They’re inherently diversified from being made up of a whole portfolio of shares to reduce your risk and build long-term wealth.
Secondly, the funds are professionally managed so all you have to do is pick one and a fund manager or investment team does the rest – less incessant stock price checking and more learning, investing and growing.
It’s crucial to weigh up the costs associated with investing in a managed fund versus being self-directed as fee structures vary between both traditional and fintech providers.
We’re a fintech that’s taken traditional funds management and transformed it into a completely online, tech-enabled but human-managed service, which is simple and hassle-free. Take a look at our pricing here to see how we’ve made fees more affordable, fair and transparent.
3. Keep it local or head overseas?
The 2017 ASX Investor Study revealed ‘75% of shareholders hold only Australian shares’.
Only 15% of participants surveyed have exposure to international companies and the global trends they’re driving.
The market capitalisation of the world’s top 4 technology stocks (Apple, Alphabet (Google’s parent company), Microsoft, Amazon) alone dwarfs that of every Australian company listed on the ASX combined.
While the Australian stock exchange is dominated by the ‘big four’ banks, telcos and oil and gas giants, stock exchanges abroad are brimming with innovative companies fundamentally changing the way we live now and in the future.
You’ll know whether to invest locally or internationally when you think about where revenue growth, innovation, and megatrends are occurring.
What kind of returns can you expect?
Investing in shares with a long-term mindset is critical for weathering any stock market storm. If you’re after 30% returns in 3 months (very rare) you would likely be making very speculative share investments and risk losing most, if not all of your money.
Unfortunately, as with most things in life, even the best performing fund managers can’t tell you with absolute certainty what your forecasted investment returns will be.
Anecdotally, I can tell you that during my time as a seasoned investor working at large investment firms overseas or for multi-billionaire families, the usual annualised return expectation sat between 8-10%.
This expectation was based on a 5 to 10-year timeline of investing in quality, growing companies that aren’t likely to go bust.
You might have a different return expectation, but bear in mind the higher the number, the more likely you are to chase speculative companies with share prices which may plummet at a moment’s notice.
You can access our performance track record here to see how returns can vary across different periods.
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