There are many ways to invest your money and build your wealth and for most people that wealth will be allocated between two asset classes: shares and property. Deciding where to invest to maximise your return can be quite confusing.
For people just starting out, buying an investment property requires a lot of time, effort and money.
As an alternative, you may have considered investing in shares and wondered if it was the right thing for you because Investing in shares for beginners can seem daunting. Just understanding the language and terminology can take some time to get used to for example. On the other hand, there are many investors who are very comfortable with large shareholdings and who even prefer them over property as an asset class.
However, finding yourself a good financial investment adviser to help navigate through the confusion is often a wise decision.
We thought we would give you our take on using shares as a financial investment to grow your money as a deposit in preparation for a property purchase.
What are shares?
When you purchase shares you are, in effect, buying part-ownership of a company. If the company performs well you may receive the benefit by increased share price, called capital growth or by income paid in the form of a dividend or even a combination of both. A dividend is payment by the company to its shareholders normally as a share of profit. However, if the company performs poorly your shares can decrease in value and you may receive no dividends either.
Therefore the value of your investment depends on the health of the business you are investing in so it’s important to research and compare before you invest.
If you are going to choose your own shares, a good place to start is with the S&P/ASX 50, a list of Australia’s top 50 companies, commonly known as ‘blue chip’ companies. Blue chip companies tend to be long established, stable companies that suit investors looking for steady returns with less risk.
You can buy or sell small amounts quickly through a licensed broker. Brokerage fees for organising a trade usually constitute a fixed fee or a perhaps a small percentage of the value of the shares traded.
Shares usually provide a better return than a low risk Bank deposit account or Term Deposit which many people see an alternative investment.
Income or growth?
You should have an understanding of what you want from your shares. Are you looking just for capital growth to help build your deposit or do you need regular income? If earning a regular income is important, then you could look at companies that have a track record of paying high dividends and in general these tend to be the larger companies on the ASX. Smaller companies are often focused on growth, so they would more likely reinvest their profits into the business, rather than paying dividends.
Capital growth means that a share has increased in value however, shares can also lose value, so investors should carefully monitor the performance of their portfolios.
It is important to do your research though and choosing which shares to buy and tracking their performance gives you a sense of control that can be very satisfying. Having said that, you will have to keep up to date with your selected companies’ performances.
What’s the risk?
There is risk involved in any investment in shares, listed or otherwise. For instance, if you concentrate your investments in single sector with a small number of companies, you can be exposed to more risk of losing money due to a fall in the share price of those companies or even specific market events impacting on that particular sector. Spreading your investment across different sectors and different types of companies is one way to reduce this risk.
Generally, shares are considered growth investments and they can give you strong returns over time however, as with any investment, higher returns usually involve higher risks. So, before you invest in shares please consider what would happen if you were to lose some or all of the money you’ve invested.
Can you afford for that to happen? The answer to that question should alert you to the risk level appropriate to your investments.
People invest in shares with the objective of generating wealth – either through potential share price growth, via income paid as dividends or a combination of both.
Shares can be bought and sold on ASX’s share market. Also, you don’t need large amounts of money to get started – you can buy as little as $500 worth of shares.
As with any investment, shares also carry risk and investors need to understand the consequences of these.
Does investing in shares sound complicated to you? Don’t worry, you’re not alone and availing yourself of financial investment advice would be perfectly sensible in this situation. A financial investment advisor can provide direction and confidence in your investing.
Getting the right asset allocation for the appropriate stage of your financial life is critical. Determining what suits you is best sorted through a conversation with a professional. We suggest you discuss your situation with one of our Financial Planners today.