Investing in the Share Market

Investing in the share market

Many Australians have an active interest in the share market, and most of us are already holding stocks either directly or through our superannuation fund in some of Australia’s largest companies.

The ability to trade stocks has never been easier. Recent market events however clearly illustrate the dangers associated with entering into these markets without a level head and a planned approach. New hybrid products and geared investment strategies only add complexity and volatility to these markets.

Investors should also consider that the Australian equity market only makes up about 2% of the overall global market and thus may not meet all their financial objectives in delivering growth in times when the domestic market may be depressed.

Shares (commonly called equities) can be a sound long-term investment but are very risky as an investment in the hope of making a quick short term gain. Before investing in shares, you should understand and explore the benefits and risks.

Some of the benefits of investing in shares are:

    • Potential for good growth in the value of the asset over time (capital gains)
    • Potential income from dividends,
    • Potential income can be after-tax income (franked)
    • Lower tax rates on long-term capital gains

Risks of investing in shares:

    • Share prices for a company can fall dramatically, even to zero, depending upon markets and what’s occurring within the company
    • If the company fails, you are the last in line to be paid, so you may not get any of your money back
    • There is little consistency in the performance of shares over the short term (unpredictable), shares will go up and down from month to month, and the dividends may vary

Any investors deeply concerned about the risks associated with share market based investments should perhaps focus on less volatile income generating investments. While these investments may not necessarily offer the promise of sizeable future capital growth, they nonetheless have a lower potential to lose capital value, and can pay reasonable returns in the form of regular income.

Ways to invest in shares

Buying shares directly

You can buy individual shares through your adviser, an online trading account, a full service broker, or from the company itself when it offers shares through a public offer (float). You have control over the shares you buy and sell. However you or your adviser must be prepared to put in the time and effort to monitor the stocks and the market, and to make buy or sell decisions.

Buying shares via an active managed fund

In a managed fund your money is pooled together with those of other investors. A professional fund manager then buys shares and other assets on your behalf with the goal of meeting the funds objectives (mandate). This might include the goal of realising particular income outcomes or to achieve specific investment outcomes.

Managed funds are also a convenient way to access markets beyond Australia and to gain access to the expertise of fund managers with their specialist skill sets. It also means that someone else is responsible for the buy and sell decisions on behalf of investors.

Buying shares via an index managed fund

An index managed fund resembles an active managed fund however it is a type of managed fund that buys shares to mirror a particular share market index. The funds’ performance will therefore closely track that of its relevant index, both in downward movements as well as up.

Buying shares via an Exchange Traded Fund (ETF)

An Exchange Traded Fund (ETF) invests in a basket of shares that make up an index such as the ASX100 Index. An ETF allows you to diversify your portfolio across numerous market sectors without having a large amount of money to invest and the ETF can be traded just like any other share. They are not necessarily ideal if your investment amounts are small due to a stock broking fee on each contribution.

Buying shares via a Listed Investment Company (LIC)

A Listed Investment Company (LIC) uses money from investors to invest in a range of companies and other assets. It pays dividends from its earnings and hopefully its shares increase in value over time. They may be less suitable if investing small amounts regularly, again due to the stock broking fees on each contribution. As a listed investment company the LIC share price may not exactly reflect the value of its investments.

Investing in shares requires careful consideration and a clear understanding of the risks as well as the potential gains; to learn more speak to a Lifespan financial adviser in your area.