Investing in shares
Shares generally allow you to buy a part of a company. As a shareholder, you can share in the company's performance in the form of profits which can be distributed to you as dividends and/or capital growth if the value of your shares increases.
Investing in shares has the potential to provide the following benefits:
| Benefits of investing | Explanation |
|
Outperformance compared with other investments over the longer term |
While past performance is no indication of future performance, history suggests that Australian shares have outperformed other types of investments over the longer term*. |
|
Diversification |
There are more than 1,900 companies from a wide range of industries listed on the ASX. By diversifying or investing in a range of companies (otherwise known as stocks), you can reduce your risk by spreading your exposure across a wider variety of investments. Well established companies with historically stable performance are known as blue chip companies. You may choose a blue chip company in the expectation of greater reliability or security, or consider shares in one of the more speculative stocks if you are prepared to take greater risks with your capital for the potential to make greater returns. |
|
Liquidity |
Shares can generally be bought and sold quickly. When you sell shares you generally have access to your money within three business days. Other types of investments can often take longer to sell and convert to cash. Investing in shares does carry some risk as the market can rise and fall and individual stocks can under-perform relative to the market. Investing in shares should generally be regarded as a longer term investment. |
Investing in shares - getting started
Before investing in shares, you should ask yourself a series of questions to ensure this type of investment is right for you. Some of these questions are:
-
What do you want to achieve from your investments?
-
Do you want a return in the form of income or capital growth?
-
Are you prepared to risk some of your investment capital for the opportunity to make higher returns?
-
Do you need additional security?
A financial adviser can help assess your current financial situation and set your financial goals for the future. Then, when you are clear about what you want to achieve, you may wish to consider using a full service broker or trade online yourself.
An investment in shares can start from as little as $500 plus brokerage costs. Generally investors would start with an investment of $2000 due to the overall cost of transaction.
| Reasons to invest | Explanation |
| Investing for capital growth |
Capital growth occurs when the value of your investment increases, (the market price of shares that you own rises above the price you paid for them). Most people who invest for capital growth aim to build their wealth over time and protect themselves against inflation. They may not be concerned with the level of dividend income they are likely to receive from their investments in the short term. If they are in a high marginal tax bracket, they may prefer not to receive any dividend income at all. |
|
Investing for income |
The main source of income from shares is dividends. Most people invest for income to supplement their income from other sources and to support their lifestyle. Many retired people live off the dividend income from their share investments. If the dividends are fully franked (paid out of company income that has been taxed in Australia) this form of income can be very tax effective. |
|
Combining capital growth and income |
As the amount of dividends per share paid by many companies may increase over time, it can be a good idea to start investing for income before you actually need it. To make sure the value of your investment is not eroded by inflation, you are well advised to invest simultaneously in a carefully selected group of companies that also provide capital growth. |
| The importance of diversification | You may wish to consider investing in a number of asset classes to offset your risk of incurring a substantial loss, or receiving an insufficient return in any one area. By diversifying your investments across a number of asset classes, you reduce the risk of losing your money and increase your chances of making substantially more money. |
*Source:ASX Website - "Benefits of investing in shares" as at 27/11/06
Any advice on this page was prepared without taking into account the objectives, financial circumstances or needs of any particular person. Before acting on the advice you should consider the appropriateness of the advice having regard to your particular objectives, financial circumstances and needs. Where the advice relates to a financial product, you should obtain and consider the Product Disclosure Statement relating to the product before making any decision in relation to the product. To the maximum extent permitted by law, NAB and companies in the National Australia Bank Group expressly disclaim all or any liability which may arise out of the provision to or use by the recipient of this information and any other person.
