INVESTING IN SHARES
An investor in shares has no guarantee of the amount of return (profit) they may get from their investment. They need to predict the likely return and make decisions about what to buy based on those predictions.
Some investors study the share market over long periods, becoming familiar with trends and developing an acute understanding and sensitivity that allows them to minimise risk and optimise the likelihood of maximum profit. Some investors will use financial experts (e.g. Managed funds) to invest in shares for them. If you do not have a good current knowledge of the stock market, it is probably best to use an expert in this way.
Shares which have a history of good returns will usually be a relatively safe investment, but nevertheless, there is still always an element of risk.
Spreading investment over a variety of different types of shares is a common way of minimising the risk involved in this type of investment. Studies have shown that averaged annual returns on international shares after inflation throughout the second half of the 20th century were between 6 and 9%.
Clearly, in a low inflation climate, share investment can be good if risk is minimised by maintaining a diversified portfolio of carefully selected investments.
How is money made through shares?
There are two ways:
1. Capital growth
If a company performs well, its shares will increase in value and be able to be sold for a profit. Unfortunately, the reverse also applies. If a company performs poorly, its shares decrease in value.
2. Dividends
When a company makes a profit, the shareholders of that company, being part owners of the company, are entitled to a share of the profit. Companies distribute these profits to their shareholders routinely; the proportion of profit being paid out in relation to the proportion of shares which each shareholder owns.
RECOMMENDATION: ONLY INVEST IN SHARES WHICH YOU UNDERSTAND
Even if it is contrary to professional advice!
Investment Check Points
Before embarking on any investment, satisfy yourself that you talk only to professional, licensed, independent investment advisers rather than merely insurance agents who generally are no more than selling agents with a list of products for insurance companies. Beware, too, of friends who think they know something about investment.
- Be confident of your investment adviser's track record and training.
- Ensure that all the investment portfolios suggested to you are in writing, and set out the income expected from each investment and the commission level being paid on each product to the adviser.
- Resist hard sell and propositions involving promises of high returns which carry high risks.
- Do not buy anything from those who approach you by telephone or who knock on your door without a prior appointment.
- Spread your investments over several managers and products.
- Have sufficient cash available to carry you through unexpected emergencies, such as the loss of a job or time off through illness.
- Monitor your investments periodically, at least six monthly, to ensure your portfolio has the right mix of investments for current economic conditions.
- Ask too many questions of your advisers about recommended investments, rather than too few.
- Take your time making decisions; never be rushed into signing.
- Be familiar with the cooling off periods on financial contracts you sign and look at them again before the cooling off period expires.
