Why Should I Invest in Shares

If you are reading this beginners guide, it’s most likely that your savings are currently in a term deposit (like an INGDirect deposit) or just sitting in the bank.

The theory behind investing your money is simple and a lot better for you than letting it sit under the mattress. In fact, hiding your money under the mattress actually makes you worse off, as inflation (remember your grand parents saying how they could buy a kilogram of lollies for 1cent in the 1940’s? That is because $1 now buys less than $1 in 1920 as the price of good and services rises) eats away at your savings.

What is a share?
So before you go spending your money in shares, you are probably wondering, what is a share? When a company wants to “go public”, they float their shares on the stock exchange (Australian Stock Exchange (ASX) in Australia) which raises “equity”. By going public, the company is selling a piece of their company to you. So when you buy a share, you own a proportion of the company, this is the “equity”. In return, the company takes your money and uses it to invest in their own projects, so the company can make money and sometimes pay a dividend or other benefits.

The share market in recent years has boomed. Returns on the ASX200 (which is the top 200 companies listed on the stock exchange have been as good, if not better than most other investments (such as bonds) in the long term, but more about returns later. Also, almost half of all Australians own shares because of the rewards, but with the rewards comes risks. To be a good investor, understanding the risks in the investment is the key to being a good investor. This is so that your purchase is a bargain and fewer unforeseen events occur to derail you from achieving your investment goal.

Why invest in shares?

When you look at the richest people in the world or the BRWs rich list, time and time again there is one characteristic most these people share. They own their own business. While it is possible to be rich by inheritance or lottery winnings, the chance of that happening to the regular joe is highly unlikely.

Now what has this got to do with shares? well, everything. Owning shares allows you to own quality companies. For example, if you had shares in the Commonwealth Bank, Telstra or BHP, you are a shareholder and therefore a part owner of the the company. When these companies earn money, so will you (in the form of capital growth & dividends).

How much do you need to invest?
So how much do you need to start investing in shares? You can enter the market with as little as $500, however with this amount, brokerage cost (This is the cost you pay your broker to buy/sell shares, with discount brokers such as comsec and e*trade this can be as low as $19.95 - $29.95 per trade) will eat away a chunk of your money. Most people say it’s best to have around $10,000 so that you can have a relatively diversified portfolio of 5 shares with $2000 invested in each.

If you don’t have enough for this, it’s probably better to invest in a managed fund. As suggested above, when you are a first time investor, it’s probably a bad idea to put all your eggs into one basket. Manage funds allow you to diversify your investments for as little as $1000, though $2000 is more ideal.