Why Invest In Shares
Why buy or invest in shares?
Buying a share is, in effect, buying a part of a company. You share
in its profits and, as the company increases in value, the value of
your investment grows too. Shares provide investors with the
opportunity to increase their capital and receive dividend income as
part owners of companies.
In New Zealand, there are approximately 100,000 companies. Nearly all
are 'private companies' (i.e. not publicly available for investing in),
while only some 140 or so are 'public companies', listed on the
New Zealand Stock Exchange (NZSE).
Buying listed shares is relatively
easy and has become a favoured way for many investors to share in the success
of major companies.(Shares are often called equities).
What are the rewards?
Investors expect to be rewarded for investing their money and that
reward must also compensate them for any risk in the investment. Rewards
for share investors usually come in two forms:
Most distributions from companies take the form of dividends. These are
usually paid half yearly. If the company is paying New Zealand tax, credit
for that tax is passed on to the investor through the imputation system
therefore dividends can provide a very effective source of income with
low or no tax.
As they become more successful and profitable, companies
have the potential to reward their owners by increasing dividends. This
means the income from a sharemarket investment will normally grow over
time, helping to protect against the effects of inflation.
The payment
of dividends is the most predictable aspect of investing in shares.
The other reward for investing, capital growth through increasing share
prices is not so predictable. Less than 10% of the NZ registered
Sharemarket companies with the NZSE would be considered good short or medium
term investments.
See our Suggested Investment Portfolio for a list of
the very top companies.
Who are buying shares?
In New Zealand, some 16% (350,000) of the adult population owns shares
in companies listed on the NZSE. Over the past ten years, the listing of
a number of new companies (e.g. State Owned Enterprises, Power companies, and others has created large numbers of shareholders, many owning shares for the first time. While some chose to cash in their shares, a significant percentage have retained them.
Most of these share investors buy shares in the top companies and are
obtaining annual gains in excess of 30% and for many this is a tax free
investment.
What are the advantages of share
investments?
Investors have a direct interest in the fortunes (or otherwise) of
companies and therefore the wider economy.
" In recent years, investors have recognized the huge opportunities to
be gained in shares and have increasingly sought to include the top
companies in their portfolios.
" By including listed shares in a portfolio, you can benefit from
long-term capital growth, as well as regular tax-effective income and
other short-term gains.
" Because you can buy and sell at virtually anytime, you have
flexibility and freedom to manage your investments as your circumstances
change.
" The sharemarket is most likely to provide investors with far
superior performance compared with other investments.
How to buy shares
In New Zealand only a licensed share broker can act on your behalf in buying
or selling shares and the names of these are listed in the yellow pages of
your telephone book.
How to control the risks?
The main risk associated with shares is 'volatility'. Prices rise and fall
in value according to influences such as the economy, and business and world
and local events. Therefore, no one can tell in advance what a particular
share return will be in the future. There are no crystal balls available.
However, you can manage volatility in two ways:
Diversification.
Spread your shares across a number of different companies in different
industries.
Remember the old adage, 'don't put all your eggs in one basket'.
Time in the market.
Reduce the risk by holding your shares for a reasonable period of time, at
least 3 months or more. On average, every one year in four will show a down
turn for the New Zealand sharemarket but the majority of top companies will
ride through this.
How do you decide when to buy and sell?
You may want to keep an eye on all your investments, to see how they are performing.
However, trying to buy and sell at exactly the right time is fraught with danger
unless you have the time and expertise. For most investors, the best strategy
is to 'buy and hold'. This means investing in good quality shares for at least
three months. Profits can be made buying and selling shares over shorter periods
of time, but this is closer to speculation or gambling rather than investment.
If you have a diversified holding of good quality shares, you will find that
price falls in some shares will be more than offset by price rises in others.
As long as you remain committed to your investment over a reasonable period of
time, you should experience overall growth in your total share holding.
Lastly
It is good advice to check your final decision with an advisor. We are not
financial advisors but providers of information. If you are accepting a
sharebrokers advise check the companies being recommended in our Quick Essential
Facts section and against the companies listed in our Suggested Portfolio and if
they are not as good make them justify their advice. Be careful a broker may be
acting for a client selling a large package of mediocre shares but the broker
receives no commission until he finds buyers for them and he may just have you
in mind for one of them. Before buying checking the performance of the company
in our quick essential facts section can give you a huge advantage.
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For comments/ enquiries Email:
manager@co-info.co.nz;
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