Financial Advice Blog

Simple guide to the share market

We interact with companies on the share market every day, but actually investing in them is much less understood. Here is a simple guide to understanding what it's all about.

With all the talk centered on the property market, investing in the share market seems to be less on people’s radars. Out of the two primary growth investment vehicles, shares are less understood. As consumers, we deal with companies on the stock market daily. Locally examples include the big banks, Woolworths, Coles and Telstra. Internationally, well-known examples include Facebook, Google and Apple. We interact with these companies as much as property, yet actually investing in them is much less understood.

When you’re buying a share, you’re buying a small piece of a company. You’re entrusting a team of people to run the company for you (and the other shareholders) much in the same way as you trust your property manager to keep an eye on your property. The key differences being that a good management team can steer a company towards better than market returns. Steve Jobs is an excellent example of a CEO that helped to make a company (Apple) a market leader.

One of the major benefits of investing in the share market is that, unlike property, shares are both divisible and liquid. This means you can elect to sell just a few of your shares at a time when it suits you, rather than your entire portfolio. Depending on your type of share investment, the money can often be in your account within a few days. On the other hand, a property cannot be easily divided up or sold quickly. This is an important consideration when building your investment portfolio as there will be stages in your life where you need more flexibility with your assets.

Typically the income produced from a well-diversified share portfolio is likely to be consistent. Unlike a tenant who rents a property, companies tend not to miss dividend payments. Further, if you have a number of shares in your portfolio, the frequency, amount and timing of your dividend payments will level out. A company can choose to alter the dividend it pays, however it’s unlikely that the majority of your shares will do this. As a result, when you’re looking for consistent income, shares could prove to be much more stable than property.

One of the biggest challenges with building up a share portfolio is selecting which shares to buy. This is the same for any asset from shares, to property, antiques, artwork or vintage cars. You can buy based on the perceived value, the expected long-term growth, the income stream, a mixture of these, or a variety of other factors. If you haven’t purchased shares before, it can be quite daunting.

While often touted as the best way to enter the market for beginners, managed funds offer just as much choice and variety as the share market itself. There are hundreds of managed funds that just invest in the Australian stock market, and hundreds more that offer combinations of shares and other assets such as property and bonds. Again it’s easy to get paralysed by choice, and a quick scan of the internet will bring up a variety of opinions. However, don’t be put off. You can easily build a simple, blue chip portfolio of quality shares through a stockbroker or a financial planner. There are pros and cons for investing directly versus through a fund, so it’s important that you explore these.

You can elect to buy and hold some quality shares for the long term or you can trade in and out. But keep in mind that the more transactions you’re doing, the more risk you’re taking because shares fluctuate a lot and it’s easy to get your timing wrong. It’s a good idea to decide on an approach and stick with it. If your stocks are not performing as well as you’d expect, look into why and try to refine them, rather than continuously change what you’re doing.

Investing in the share market should form part of an overall long-term investment and wealth creation strategy. As with all investments, you should consider your goals and what you’re trying to achieve from the investment.

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