A key reason I started Her Money Matters is to educate women on investing.
I want to explain investing concepts in simple, easy to understand language. Today we are going to look at what shares are.
Let’s get started.
What are shares?
Imagine you are driving home after work. You are low on petrol, so you pull into Caltex to fill up your car.
You briefly consider ordering some KFC or maybe a pizza from Dominoes and a cold Coca Cola, but instead you drop into your local Coles to buy a bottle of a2 milk, an Ingham’s roast chicken and some Bega cheese. Then you drop into Pet Barn to buy a new toy for your pet.
Once you get home, you settle down with a glass of Wolf Blass shiraz and jump online to check your bank balance with ANZ bank, but end up being distracted on carsales.com.au searching for your dream car and then on Flight Centre’s website search for your dream holiday.
You need a new TV so you look online to see whether Harvey Norman, JB Hifi or Kogan.com have the best deal.
What do all of these products have in common? The companies that produce them are all listed on the Australian Stock Exchange. And this means that you can buy shares in them.
Shares are sometimes called equities, securities or stocks, but I prefer to call them shares – because you are buying a share in that company.
Even though it may only be a small share, when you buy shares in a company, you are buying a stake in that business and the opportunity to make a profit when the company does well.
You become a shareholder in that company.
Okay, that makes sense, but how do you make a profit from shares?
When you buy an investment property, you can make a profit two ways – from the capital growth (how much the property increases in value over time) and/or the rent you receive from the property.
Shares are the same – there are two ways you can make a profit.
- Instead of getting rent, you receive dividends. Dividends are a payment from the company you have invested in. When a company makes a profit, it may choose to distribute a portion to its shareholders through dividend payments. Not all companies pay dividends nor are they required to. If a company does decide to pay a dividend, they will typically make a public announcement the size of the dividend so you know how much you will receive.
- Just like a house, shares can rise in value over time. You may be able to sell them for more than you bought them, with the difference in those prices known as your capital growth. For example, if you had bought 20 shares in Flight Centre this time last year, you would have paid $687.80, but today they are worth $929.20. This increase in value is called capital growth.
As a rule, the larger, well-established companies (think big banks, insurance providers, supermarkets and telecommunications) are generally more likely to pay dividends than smaller, newer companies.
You also need to remember that just like share price growth, past dividend payments are no guarantee of future ones.
Hmm, this all sounds a bit risky to me…
All investing is a trade-off between risk and reward.
Buying shares has historically given a better chance of making your money grow over a long period than other investments, but with that potential higher return comes a higher risk. Shares are considered to be the most risky of the asset classes.
If you want risk-free or very low risk investing, you should put your money into a bank account. But your returns (particularly with the record low interest rates) will also be low.
Let’s look at what you would have earned if you had invested $1,000 this time last year.
Initial investment (as at 24 October 2016)
||Value one year later (as at 24 October 2017)
||High interest savings account at 2.60% for one year
||Shares in the ASX
As you can see, shares have provided a higher profit over the last year.
You do need to remember that the price of shares can fall as well as rise, which means you could lose money especially in the short term. The price of shares can go up and down each day – this is called volatility.
But if you are a longer term investor, and you hold your shares for a number of years, the market should continue to trend up.
But what if the share market crashes?
The share market will crash or correct at some point. But then it recovers and continues the upwards trend.
You need to think about this as an investment over the longer term. Any crashes or corrections will even out over time.
But I am not an investing expert. I have never done this before and I’m not sure I would be good at it.
You weren’t an expert the first time you rode a bike or drove a car either. But you had to start somewhere and you learnt over time.
Even just reading this post is increasing your investment knowledge.
I have two pieces of good news for you.
First up, small investors (like you!) have an advantage over professional money managers. Small investors invest in companies they believe in and deal with every day.
I did this with The a2 Milk Company earlier this year. I found a2 milk as it made me feel less bloated that normal milk. I became interested in the company and read more about their history and their research in developing the milk.
In total, I have bought 415 shares in a2 milk which cost me $1,601.50 (including purchase fees).
As of today, these 415 shares are worth $3,050.25.
There is no fancy investment technique. I just bought shares in a company whose product I believed in.
And the second bit of good news?
Research shows that women tend to make better investors than men. We are more likely to hold shares over the longer term, and we make less trades. We also save more before investing. Which brings me to my last point.
Under no circumstances should you consider investing in shares until you have:
- Paid off your bad debt (such as your store or credit cards, and your car loan) AND
- Saved three months’ worth of your salary in savings as your Safety Net.