Thinking about investing in shares? Not sure where to start? It may seem confusing, but buying shares (aka stocks) can be fairly easy, surprisingly enjoyable and steadily profitable.
Sharemarket investment is ideal for “long term investors, who have preferably paid off their home, who want an income off their money, who are prepared to hold onto their investment for the long term and want to get a better rate of return than they can get elsewhere,” says Simon Hepple, Executive Financial Adviser at Westpac Private Wealth.
Why invest in shares?
Reason 1: You can own a small piece of something big. If you fancied buying Westpac, you’d need to fork out around $80 billion; but you can own a tiny piece of it for less than $40. Shares let you own a fraction of a larger business and share in its success.
Reason 2: Shares make money.
Shares grow your wealth in two ways: 1) when the value goes up (though it can also go down), and 2) from dividends, which are tiny portions of the company’s profits.
Reason 3: It doesn’t cost a lot to get started.
You can start investing in the sharemarket with a small sum of money. It’s possible to begin with as little as $500, but “I wouldn’t recommend investing with any less than $10,000,” Hepple says.
Not peanuts, but it wouldn’t get you very far investing in property.
Reason 4: You can sell them quickly if you need some cash.
Shares are highly ‘liquid’, which means you can easily access the value of your shares at any time. This is one reason people invest in shares even when they have a KiwiSaver account or a property portfolio. You can’t access your KiwiSaver funds until you’re 65 (with a few exceptions) and it often takes months before you get the money from a property sale, but an independent share portfolio can be cashed up in a matter of hours.
What do you need to know before you buy shares?
“The main reason people go into shares over other assets is the relatively low barrier to get in,” Hepple says. “What keeps people out is a lack of knowledge.”
In general, Kiwis don’t know how the market works, what to invest in, or how to tell whether a company is over- or under-valued. New Zealanders were put off the sharemarket after the disastrous crash of 1987, “but the market then and the market today are two different beasts.”
For a first-timer, the most important aspect to understand is the risk factor. Shares aren’t as risky as we generally perceive them to be, but they are riskier than term deposits and property.
You can buy shares in a risk-minimising way that makes them relatively safe, spreading your shares across businesses, industries, and even countries. (There are countless high-risk strategies, but you need to know what you’re doing, and even then you’re running the gauntlet.)
For a first-time investor, Hepple recommends a managed fund, “especially with a smaller amount of money – that way you’re not buying one individual stock, but it’s spread across a number of different companies.”
While the value of a single stock could be wiped out by a company collapse, having a range of companies in various industries makes this less of a problem.
Even with a low-risk approach, you’re playing the long game. You should assume your money will be invested for 10 years or more; don’t invest a house deposit you’ll need in five years, for example. Put it in a term deposit instead.
How to get started
If you have at least $10,000 and you want to make a foray into the sharemarket, talk to an investment advisor or sharebroker. Good luck and happy trading.